BM414 Financial Decision Making: Ratio Analysis & SKANSKA PLC Review

This report provides a financial analysis of SKANSKA PLC, focusing on the importance of accounting and finance in decision-making. It evaluates the company's performance by calculating and commenting on key financial ratios for the years 2018 and 2019, including Return on Capital Employed, Net Profit Margin, Current Ratio, Average Receivable Days, and Average Payable Days. The report discusses the causes, reasons, and effects of changes in these ratios, offering recommendations for improvement. It emphasizes the roles and duties of accounting and finance within SKANSKA PLC, such as recording transactions, preparing financial statements, monitoring performance, conducting audits, forecasting risks, and communicating financial information.

FINANCIAL DECISION
MAKING SKANSKA PLC

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Evaluation of the importance of accounting and finance along with its roles and duties within
SKANSKA plc............................................................................................................................3
TASK 2............................................................................................................................................6
Calculating the ratios of two years..............................................................................................6
Commenting on the performance of SKANSKA PLC mentioning causes, reasons and effects
for the changes in the ratios........................................................................................................7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial decision-making is defined as the ability through which manager takes decision
relating to financial alternative of company. Financial decision-making is very significant in
which the company takes decision by financial information. The company has vital plans
regarding future which is required by managers to take decisions relating to financing mix such
as all types of expenditure and incomes. SKASKA PLC. Established in 1982 and it's headquarter
is in U.K. The company manufacture and developing products. Company earned its reputation in
terms of unique quality, value and price of company. The current report purpose is outlining the
importance and duties of accounting and finance which helps in assisting for better decision-
making. The company will use its information regarding the financial planning like controlling
budgets. It plays a crucial role in terms of decision-making and forecasting future planning by
the help of financial statement of company.
TASK 1
Evaluation of the importance of accounting and finance along with its roles and duties within
SKANSKA plc
For the company to be successful it is very crucial that the business must effectively
undertake and manage finance. The reason underlying the fact is that without finance no work
can be accomplished. In addition to finance, it is also very crucial for the business that they
implement effective accounting practices (Valaskova, Bartosova and Kubala, 2019). The
accounting is essential within the business as it help company in identifying the financial
performance. Any business works to earn profit and this can be identified with help of
accounting only. Hence, both accounting and finance is crucial for working of SKANSKA plc.
Importance of accounting and finance
 Evaluation of performance- this is the major importance of both accounting and finance
as it aims at evaluating the financial performance of the company. the reason underlying
this fact is that finance and accounting result in calculation of profit or loss incurred by
the company. hence, this will assist SKANSKA plc in evaluating actual performance of
company.
 Assistive in decision making- with help of effective accounting and management of
finance, SKANSKA plc is in position to take proper decision for development of

company. the reason underlying this fact is that with help of proper accounting
information company can get an actual picture of financial position. Hence, this is
assistive in taking proper decision for growth of business.
 Avoiding legal complication- in case the company is not following proper accounting
policies then it might result in some legal complications (Yue, Gizem Korkmaz and
Zhou, 2020). Hence, in order to avoid this, SKANSKA plc effectively makes the use of
all accounting principles and practices in effective way. Also, the company manages the
finance in such a manner that there is no shortage of finance.
 Making budget- the accounting assist SKANSKA plc in making budget which in turn
helps in proper estimation of all income and expenses. This in turn result in providing
base or guidance to the employees that how to plan the strategies to attain the budget.
Thus, this will result in proper working of all business activities and with respect to the
budget.
 Effective internal and external communication- with help of function of accounting the
company is in position to effectively communicating the performance. the reason
underlying this fact is that the accounting information need to be communicated with all
the users of accounting. Hence, proper use of accounting results in providing of base to
communicate to all interest parties that internal and external users.
 Development of strategies- based on the outcome of accounting information the company
can take effective decision for better working of company. the reason underlying this fact
is that company with help of accounting come to know the profit earned or loss incurred.
Hence, this provides for a base to the company that how they can effectively improve the
business strategies in direction of growth.
 Controlling cost- with help of different cost control techniques under accounting,
SKANSKA plc can identify the business areas which involves high cost. Hence, this will
assist company in controlling the cost in proper and effective manner (Mousavi and Lin,
2020). Using the various techniques like variance analysis, capital expenditure techniques
and other company can control high cost areas of company.
 Management of cash- this is another crucial importance of accounting and finance as this
assist the company in managing cash. The finance relates with inflow and outflow of cash
and accounting involves recording each and every transaction where cash is involved.

Hence, this results in optimum utilisation of the cash so the business grows and develop
in proper and effective manner.
Basically accounting is summarizing, recording, classifying the information in the books
of accounts which provides the financial information. With the help of financial information, the
firm can better itself by taking correct decisions and assist in decision-making and forecasting
the financial statements (Bangma and et.al., 2017). With the help of accounting information
SKASKA PLC. Can improve itself and remove errors and mistakes.
Roles and duties of accounting and finance
With help of importance, it is clear that both accounting and finance is crucial for the
success of SKANSKA plc. Hence along with the importance, major role and duties performed
under accounting and finance for SKANSKA plc are as follows-
 Recording of transaction- the major role or duty performed under accounting is the
recording of each and every financial transaction within books of accounts
(Ramachandran and Kakani, 2020). This is the major duty of accounting as it aims at
recording all the financial transaction in the books of accounts. Further with help of
recording financial transaction, ultimate profit or loss is being calculated for the
company.
 Preparing the financial statement- preparation of final accounts is also a role of
accounting and without this accounting is not possible. The reason behind this fact is that
in case the company does not know its final statements then accounting is of no use.
Hence, this is the major role of accounting and finance in improving business
performance of SKANSKA plc.
 Monitoring the performance- this is another duty performed under accounting and
finance of monitoring and evaluating the performance. With help of accounting the
company calculates the profit or the loss and on basis of this, business performance is
monitored. Hence, this provides information relating actual working position of the
company.
 Audit and assurance- along with this, another role of accounting is audit and assurance.
This is essential for SKANSKA plc as it assist the company in auditing the books of
accounts to identify the errors and compliance with all principles (Rimmel, ed., 2020).

Hence, this is assistive to the company that they must effectively analyse the books of
accounts such that all problems can be identified.
 Forecasting and risk analysis- with help of accounting information manager of
SKANSKA plc can also predict or forecast the future projections. This is pertaining to
the fact that with help of accounting information manager can analyse past information
and can decide for the future projections.
 Communicating the financial information- another role of accounting and finance within
the business is communicating the information with interested users. The reason
pertaining to the fact is that aim of accounting is to calculate the profit or loss and
communicate to the users (10 reasons why accounting is important, 2021). Hence, this
involves the making of the financial reports and printing it so that other users can
evaluate the information and take their own decisions.
 Comparative overview- this is another duty of accounting and finance as it provides a
base for the comparison. This comparison can take place within the company itself that is
comparing current year performance with past year. On the other side, the comparison
can also take place between two competitors as well. Along with this, SKANSKA plc can
also compare its performance with the industry average as well. this will provide an
actual and real position of company within the competitive market.
 Advisory role- the accounting also plays a role of advisory as it converts the performance
of the company in quantitative information. Hence, with help of these number the
manager of SKANSKA plc can effectively advice on improving the performance of the
company. The reason underlying this fact is that when the factual information is present
then managers can comment on performance of company.
Thus, with the above analysis of the discussion it is clear that the use of accounting and
finance is very important and crucial for business. the reason underlying this fact is that when the
accounting and finance is proper then it will provide true and actual position of the company.
Hence, for SKANSKA plc it is very crucial that accounting and finance is effectively managed
within the business so that profitability can be increased.

TASK 2
Calculating the ratios of two years
particular formula 2018 2019
Return on capital employed EBIT/capital employed 0.20 0.17
EBIT 750 975
Capital employed 3825 5850
Net profit margin Net profit/net sales*100 12.5 11.25
Net profit 600 675
sales 4800 6000
Current ratio Current asset/current liabilities 2.35 0.93
Current asset 1515 2070
Current liabilities 645 2220
Average receivable days
Average receivable days/Net
Credit Sales*365 68 73
Average accounts receivable 900 1200
Net credit sales 4800 6000
Average payable days
Average Payable days/Total
credit Purchase*365 77 160
Average accounts payable 570 2100
Total credit purchase 2700 4800
Commenting on the performance of SKANSKA PLC mentioning causes, reasons and effects for
the changes in the ratios.
Return on capital employed.
It measures how systematically a company is using its capital to achieve goals and
profitability. With the help of above mentioned table company can measure the performance of

the organization. The returns made by company with the help of resources is return on capital
employed. In the year 2018 and 2019 capital employed of SKANSKA PLC. was 0.20 and 0.17, it
indicates higher ROCE is always more favourable. (Shahriar and et.al., 2021). If a company
capital employed is less than 2%, it is not appropriate. Thus, this shows company ROCE was bad
in 2019 and does not create efficiency because of low capital employed. It is advisable, by
reducing costs company can improve ROCE. The company must work on margin and volume to
develop business cycle. To improve company overall productivity and profitability, firm must
increase sales. It is suitable for company to notice profit and loss statement/balance sheet to
analyse working capital. The capital employed should be double the current rate of interest at the
very least. Monitoring areas having excessive sale or inefficient costs company can improve
capital employed. It is recommended to improve inventory management and debt financing
process. A perfect combination of all above mentioned tips can lead to a better return. This study
shows the shareholders the value of firm and measures net profit. Company must change
packaging to reduce cost of goods sold and labour costs.
Net profit
With the help of Net profit calculation, company can measure net income and it also
indicates the financial standing of a firm. In the year 2018 and 2019 firm report shows 12.5 and
11.25 NP thus, SKANSKA PLC. is able to effectively control its cost in 2018 in comparison to
2019 Because of high expenditure, net profit in 2019 is lower than previous year. It is suggested
to company, find cheaper sources for raw materials this will increase their net profit. By
managing merchandise costs, a company can increase sales price. Hence, this comes under
quantitative factors. It is suggested to company focus on strategic innovation by adopting various
existing ideas and techniques. If a company works as a team than it is possible to increase profit
margins for business. It is advisable to company, classify quality products to boost revenues. By
removing unprofitable services from the financial accounts leads to areas of improvement.
Regularly reviewing overhead expenses is a simple way to develop profit. Eliminate useless
purchases in the company will automatically reduce direct costs. It is also beneficial for company
to create a loyalty program for regular customers. It includes various schemes like cash back
facilities, exclusive sales, reward points which can be converted into cash, extra discounts and
free products.
Current ratio

this analysis shows whether the company is able to cover its short term obligations or
not. This calculation measures business liquidity it means if the ratio is less than 1 than business
has liquidity problems. This table further, evaluate that SKANSKA PLC. has Problem in
managing working capital. In the year 2018 and 2019, CR is 2.35 and 0.93, it indicates the
company has liquidity problem in 2019 which is bad. This study says the higher the current ratio
the more capable an organization is of paying its debt. The financial statement of company
analysis past performance, leadership and average of industry. It is advisable to company that
they should work on conversion cycle of accounts receivables. Early payments to creditors can
save cost which leads to profitability. It is suggested to company that they must sell unused fixed
assets because money is unnecessarily blocked. It is recommended, company should always try
to cut down on hard cash and keep the money in bank accounts. Bank offers various facilities
like transfer money from current account to another account. Further, it is advisable to review the
profitability on each and every product. This study is mainly focused on ''higher the better '' rule
to increase current ratio.
Average receivable days
This calculation helps the company to find how long it takes to clear accounts receivable.
Cash inflow can be generated through receivable days because it affects future cash flow. With
the help of this, company can measure efficiency to collect short term payments. In 2019,
company took 73 days to collect outstanding invoices which is not good as compared to 2018.
This puts an extra burden on company and increases the expenses which is not good. It evaluates
the profitability and liquidity of the organization (Carpenter and et.al., 2021). On the other hand,
this ratio analysis shows a rise in receivable days increases the chances of short term capital
requirements and leads to low profitability. Thus, this will affect company in various way like
increases amount of time and business operational efficiency. This table further shows lower
days are good for company and can collect cash earlier. Hence, use this amount for future
requirements for continuous business.
To improve receivable days’ company must work on past due receivables. They must
contact the customer on the very first day that a payment is late. Further, it is also suggested, to
improve a payment plan with the agreement of both the parties. Later, it is advisable to company
discuss with bank about cash management tools to avoid late payments. Bank offers a wide range

of cash management service that helps company to improve collections and manage liquidity
cycle. Company must Improve collections process with the help of electronic payments.
Average payable days
this study indicates the time that a company takes to pay its debt and also shows financial
condition of business. A company with a low APD may indicate low utilization of credit period.
Taking too long to pay creditors may result in unhealthy relationship with creditors. (Ke, 2021).
Company must work on decreasing payable period and shortening the amount of time to pay. In
2019, payable days was 160, this shows company is paying slowly to its suppliers. This is Due to
purchase of inventory in large amount of cash, payable days may get affected. To maintain the
healthy accounts payable ratio, company can negotiate payment terms with suppliers to control
average payable days (Moreira Costa and et.al., 2021). Further, it also suggested to company
improving stock control, credit control, offer discounts to reduce payable days. It is beneficial to
Reduce foreign exchange loss in the company while purchasing from foreign country. By
maintaining credit terms and proper utilization of credit period offered by creditors, company can
reduce payable days. Deducting payable periods will help firm to better control on budgets. It is
essential to keep a track records on solvency ratios in the books of finance. By adopting
automate credit control and external credit control, company can work on payable days to
maintain financial position. To filling the debtor/creditor gap, company must adopt invoice and
trade finance.
In the end, overall interpretation and analysis of the performance are provided to
demonstrate the financial situation of the company. It is recommended to identify the three main
financial statements that companies submit in the books of accounts. Managers will use ratio
analysis to measure weaknesses and strengths of the company's financial statement. (Hildebrand
and Bergner, 2021). It is analysed to indicate organizational performance and financial trends.
Thus, it can be helpful for decision-making process in the firm. The organization needs to
evaluate the factors such as price level changes, changes in policies of accounts to interpret all
the above mentioned ratio. Hence, it is said that many small changes can have a compounding
effect on financial position of the company. The report represented degree to which an investor is
utilizing borrowed money. Furthermore, company needs to arrange debt utilization to achieve
targets. Furthermore, the above interpretation should consist of industry trends, changes in price
levels and economic stability of a firm.

CONCLUSION
One of the easiest and most popular ways of measuring the condition of the company is
to compare its current performance with the past performance. The financial decision-making
evaluates the potential of company and management technique to control the organization. The
case study demonstrates knowledge of the finance and accounting role within the SKANSKA
PLC. Along with that reports shows a detailed information about importance of accounting and
finance, its roles and duties with examples. Further, detailed information and interpretation is
determined about calculation of ratios like current ratio, net profit margin and others. The report
gives overall information about causes and reasons for the changes in the ratios. At last, report
suggested some tips to improve ratio analysis to achieve success and operational efficiency.

REFERENCES
Books and Journals
Bangma, D. F. and et.al., 2017. The effects of normal aging on multiple aspects of financial
decision-making. PloS one. 12(8), p.e0182620.
Kerstein, D. J. and Marra, W. C., 2020. The Fundamentals, Functions, and Ethics of
Litigation Finance. NYSBA Membership 2021 Renewal Is Now Open. 33(1). p.24.
Carpenter, J. and et.al., 2021. Choice architecture to improve financial decision making. Review
of Economics and Statistics. 103(1). pp.102-118.
Hildebrand, C. and Bergner, A., 2021. Conversational robo advisors as surrogates of trust:
onboarding experience, firm perception, and consumer financial decision making. Journal
of the Academy of Marketing Science. 49(4). pp.659-676.
Ke, D., 2021. Who Wears the Pants? Gender Identity Norms and Intrahousehold Financial
Decision‐Making. The Journal of Finance. 76(3). pp.1389-1425.
Moreira Costa, V. and et.al., 2021. When more is less in financial decision-making: financial
literacy magnifies framing effects. Psychological Research. 85(5). pp.2036-2046.
Mousavi, M.M. and Lin, J., 2020. The application of PROMETHEE multi-criteria decision aid in
financial decision making: Case of distress prediction models evaluation. Expert Systems
with Applications, 159, p.113438.
Ramachandran, N. and Kakani, R. K., 2020. Financial Accounting For Management|. McGraw-
Hill Education.
Rimmel, G. ed., 2020. Accounting for sustainability. Routledge.
Shahriar, M. S. and et.al., 2021. Financial decision making and forecasting techniques on project
evaluation: a planning, development and entrepreneurial perspective. Academy of
Entrepreneurship Journal. 27(4). pp.1-7.
Valaskova, K., Bartosova, V. and Kubala, P., 2019. Behavioural aspects of the financial
decision-making. Organizacija, 52(1).
Valaskova, K., Bartosova, V. and Kubala, P., 2019. Behavioural aspects of the financial
decision-making. Organizacija. 52(1).
Yue, P., Gizem Korkmaz, A. and Zhou, H., 2020. Household financial decision making amidst
the COVID-19 pandemic. Emerging Markets Finance and Trade, 56(10), pp.2363-2377.
Online
10 reasons why accounting is important. 2021. [Online]. Available through: <
https://theimportantsite.com/10-reasons-why-accounting-is-important/>