Financial Decision Making Report: Accounting, Finance, and Ratios

This report provides a comprehensive analysis of financial decision-making, focusing on the case study of SKANSA PLC. The report begins with a critical evaluation of the significance of accounting and finance duties, roles, and functions within an organization. It delves into the specific responsibilities of the accounting department, including financial management, statement preparation, inventory tracking, cash flow analysis, and payroll management. The roles of the accounting department, such as financial accounting, financial statement preparation, and financial planning are also examined. The finance department's duties, including bookkeeping, cash flow management, budgeting and forecasting, advising on long-term financing, tax management, and investment management, are also discussed. Furthermore, the report includes a financial analysis of SKANSA PLC, using key financial ratios such as the current ratio, return on capital employed, and net profit ratio, providing insights into the company's financial performance over two years. The analysis highlights trends and implications of these ratios, offering a holistic view of the company's financial health and decision-making processes.

FINANCIAL DECISION
MAKING
1

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Critical evaluation of significance of accounting as well as finance duties, roles and functions:
.....................................................................................................................................................3
TASK 2............................................................................................................................................6
Financial analysis of Skansa PLC with significant ratios:..........................................................6
2

INTRODUCTION
Financial decision making can be defined as a procedure of evaluating information that is
related to finance and interpreting it with a motive of enhancement strategies
incorporated in firm for achievement of financial goals. This report consists analysis of
financial decision making incorporated in SKANSA PLC. This organization was started
in 1984 and is based in UK. It is a construction company that pertains plans for
expanding its operations to other countries in Europe with the time span of ten years
(Barth, Papageorge and Thom ,2017).This report consists evaluation of functions, roles
or duties in relation to finance and accounting activities of an organization. Further,
financial ratios of SKANSA PLC are computed. Overall, financial performance of
company is interpreted in this report.
TASK 1
Critical evaluation of significance of accounting as well as finance duties, roles and functions:
Accounting Department: As name states, this department provides services related to
accounting,. In other words accounting affairs are handled by it/ Accounting involves activities
such as reporting and summarizing of financial transactions. It is a key or required function in
business, irrespective of the size of an organization. This department enables firm to record its
financial information which can later be utilized for efficient decision making. Hence,
department of accounting plays a crucial role in a organization
Functions as well as Duties of Accounting Department:
 Manage finances: It is a duty of accounting department is to record financial
information. It keep track of transactions related to finance, hence, it is responsible for
incorporation of effective financial management in SKANSA PLC (Black, 2019).
 Financial statements: It is a duty of accounting department to prepare financial report or
statement. This statement serves as an indicator of financial status of company, which is
further utilised for incorporating effective decision making process and preparing budgets
for future operations. Also, financial statement plays a crucial role for attracting investors
in company. (Sprenger, 2017)
 Tracking inventory status: Accounting department is responsible for tracking the status
of inventory in an organization. Evaluation of inventory is essential for analysing the role
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turnover period of inventory which serves as an indicator of company sales. As, if the
inventory turnover is high it indicates that stock of company is sold frequently which is a
good sign for an enterprise and vice versa (Copur, 2015).
 Cash flow analysis: This department keeps record of cash collected by company as well
as cash paid. It helps in evaluating the cash flow of an organization. Tracking and
monitoring of cash flow plays a vital role as it pinpoints availability of cash in an
enterprise which ensures fluency in its day to day operations.
 Payroll: It indicates record keeping and verification of pay data, such as, wage
deductions, salary payment, payment of bonuses, commissions, etc. Accounting
department ensures that adequate payment is made to staff members. It also monitors
vacations or sick leaves granted to employees. Accounting department also ensures
deduction of income tax or social security and employment tax from salaries of working
staff, which have to be paid to government.
Roles of Accounting Department
 Financial Accounting :This is concerned with all the normal working of the Accounting
Department like maintaining the payables, receivables and other accounting transection
this function the most basic function of an organisation as it helps in keeping an eye on
the transaction of the business that are occurring on the day to day basis as well as it
helps in understanding the position of the business in terms of cash assets and liabilities.
The key person in this role is the senior accountant and his assistants and mainly headed
by the Chief financial officer of the organisation.
 Preparation of the Financial statements :The major role that is played by the
accounting department in the organisation is to prepare the financial statements of the
company as the financial statements plays the major role in getting the financial aid for
the business all the banks and other lenders look at the financial statements before giving
the financial aid for the business all the other stakeholders also are keenly interested the
financial statement of the business as before in investing in the business investors look at
the financial statements and all other stake holders look at the financial statements
(Eberhardt, de Bruin and Strough, 2019).
 Financial planning: Although the planning is considered as the work of the management
as all the major decision related to business but when it comes to financial decision the
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accounting department also helps in the taking the financial decision regarding taking
loans paying out dividends maintaining cash balance and stock and any other decision
related to finance are taken by the accounting department as the accounting department as
all the decision related to finance of the business are taken by the accounting department
as it has all the idea about financial need of the business and they can make better
decision.
Finance department- In this department, there is the need of the finance team for making
budget and allocation of the cost for the specific product and they also work for reducing the cost
of the specific products in efficient manner because it is the lifeline of the business, it is the main
source to run the entity, it also help in estimated the revenue and expenses. It helps in providing
the funds needed in the working of the business for the short term and long term funds. It has
widened instruments used in this which are investment decisions, dividend decisions and
financial decisions. They also cover the interrelationship between company and its funds.
Through this all working capital and fixed capital is met. They help the entrepreneur in making
decisions about the investment in buying fixed assets such as dividend distribution. They also
take decisions regarding for the cash management and flow of funds. In the SKANSA PLC, there
is the use of the finance team for making decisions regarding their investment and expenses
(Finkler, Smith and Calabrese, 2018).
Duties of the finance department
Book keeping- it is the most important duty of the finance department because it involves day to
day activities analysis, interpretations of the company financial transactions and there is record
of all expenses and sales of the products. In SKANSA PLC, finance team record all transactions
in the books of accounts as per double entry book system (Forbes, 2015).
 Management of cash flow- It is the duty of the finance department for the
management of the cash inflow and cash outflow. Through this they understand
the funds requirement which is require for day to day operation. In context to
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SKANSA PLC, they give the proper record for the debtor that money is received
in time or creditors that money is paid to them in time or not.
 Budgets and forecasting- In this finance department help in preparation of the
budgets and take feedback for the financial of the company from the investors.
Through this they can easily fulfil the needs of each department and reduce their
cost for making good budget and forecast over long term (Füllbrunn and Luhan,
2015).
 Advising and sourcing long term financing- It is the duty of the finance team to
focus on the long term finance at the lower cost to maintain the profit level in the
company. In SKANSA PLC, finance team give suggestion to the owner for invest
in other business or not to get good returns in short time.
 Management of taxes- It is the duty of the finance department to manage the tax
which company is paying, they have to develop good relation with the authority
for any conflict arise. In SKANSA PLC, there is the implementation of tax matter
done in the set policies.
 Management of the company investment- The another duty of finance
department is to manage existing assets of the entity. They give more focus to
manage the current assets in such a way that it give profitability. In SKANSA
PLC, they give more importance to liquidity than the fixed assets.
 Financing reporting and analysis- In this function of the finance department is
analysing and interpreting the financial data on regular basis, this include funding
of all sources and reserves available for future use. In SKANSA PLC, they
measuring and contribute to the growth of the organization by reporting in regular
basis (Harrison, 2016).
TASK 2
Financial analysis of Skansa PLC with significant ratios:
Current ratio: Current ratio refers to the liquidity ratio which measures firms ability to pay its
short term liabilities with its current assets. It also refers to working capital ratio because it
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contains current liabilities and current assets. Current liability are debts that business require to
pay its creditors and investors. For example, wages and salaries, tax payables, creditors etc.
Current assets refers to which business are expected to covert into cash in accounting period. For
example, cash and cash equivalents, stock, debtors etc. Current ratio shows firms ability to pay
its short term liabilities. Higher the current ratio shows firms has efficiently manage its
resources.
Current ratio
Particulars 2018 2019
Current assets 1515 2070
Current liabilities 645 2220
Result 2.35 0.93
It's the return which is expected by the firm from the capital invested by firm and it shows the is
adverse in 2019 because in 2018 return on capital employed is 15.69 which is decrease
(Hirshleifer, Jian and Zhang, 2018).
Return on capital employed:
Return on capital employed refers to financial ratios that used in assessing company’s
profitability and efficiency of capital for achieve profitability. It allows firms to generate profits
from its capital. The return on capital employed helps in understanding how much profit it
generates, each rupees on its total capital. Higher the capital employed means high return
company achieves. It is calculating by dividing the net income before interest and tax by its
capital employed. This is profits makes by investment made by company in its activities.
Return on capital employed = Earning before interest and tax / Capital employed
It allows company to get more investments from investors because of its higher capital
employed.
Return on capital
employed
Particulars 2018 2019
Net profit 600 675
Capital employed 3825 5850
Result 15.69 11.54
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As per above report it shows current ratio of the company that shows as decrease in ratio in 2019
by 0.93 that was 2.35 in year 2018 it can be reason by less sale in the year 2019 (Kimmel,
Weygandt and Kieso, 2018).
Net profit ratio: Net profit ratio refers to profitability of company upon its sales. It is equal to
percentage how much firms net income generated by its revenues. The Net Profit Margin also
known as the “Profit Margin” or “Margin Profit Rate” is a financial measure used to calculate the
percentage of profits a company makes from its gross revenue. It measures the total profit a
company earns per dollar of revenue. The equitable income equals the total profit (also known as
total income) divided by total profit, expressed as a percentage.
Complete sale includes both Cash Sales and Credit, on the other hand, net profit is a residual
interest benefit i.e. total profit before interest and taxes. The total amount of benefit contributes
to obtaining the total profit earned compared to the income earned by operating (Resta, 2016).
Net profit margin
Particulars 2018 2019
Net profit 600 675
Sales 4800 6000
Result 12.5 11.25
As per the above data it shows net profit of the company for the year 2018 and 2019 that was
decreased by 11.54 in year 2019 and 15.49 in 2018 it can be reason for more expenses and less
gross profit for the year. Ideal is 10% but it decreasing by 2018 its means firm not using its
resources properly (Lichtenberg, 2016).
Debtors collection period: Debtors collection period refers to the period of collection of
payments from debtors. It shows firms efficiency in order to collect payment from customers
how company makes policies for collection. Higher the collection period shows lower efficiency
and lower collection period shows higher efficiency of company. An average collection period
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shows the average days to convert its business receivables into cash. It is important because it
helps company to better understanding of efficiency for collecting money. Lower the collection
period leads to firm has enough cash to pay its short term debts.
Average collection period = Average debtors / net credit sales * 365
Average receivable
days
Particulars 2018 2019
Account receivables 900 1200
Annual total sale 4800 6000
Result 68.44 days 73 days
Creditors collection period: Creditors collection period refers to firms efficiency in order to
pay its liabilities that shows firm has enough cash. Lower period of time shows increasing
efficiency of firm that it has to pay late to suppliers and investors so that it can maintain cash in
the business. It is useful for business to maintain its activities so that it can generate sales that
leads to increase in profitability. It is calculated by dividing average creditors by net credit
purchase and multiplies by 365 days. It shows firms solvency in order to pay its payment to
creditors for its credit purchase. Higher period shows firms bank balance higher so that it can its
daily activities with its resources (Nigam, Srivastava and Banwet, 2018).
Creditors collection period = Average creditors / Credit purchase * 365
Average payable days
Particulars 2018 2019
Account payables 570 2100
Cost of goods sales 3900 5250
Result 53.35 days 146 days
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As per the above data it shows creditors collection period for the year 2018 and 2019. More
creditors’ period is beneficial for the firm because firm has less more liquidity and it can raise
and expand its business (Zaleskiewicz and Traczyk, 2020).
CONCLUSION
From the above report it can be concluded that financial decision making refers to a
process of analyzing financial data or financial information of an organization and interpreting it
for the purpose of improving effectiveness of decision-making process. This procedure helps in
enhances the strategic formulation of an enterprise. There are various functions, duties and
responsibilities incorporated with the department of finance as well as accounting. Further, for
the purpose of analyzing the financial statement of company, method of ratio analysis is utilized.
It helps management of an enterprise to overview the financial status of company and study its
profitable sector.
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