Financial Decision Making Report: Skanska plc Analysis - Finance

This report delves into the realm of financial decision-making, emphasizing the crucial role it plays in business operations, using Skanska plc, a multinational construction and development company, as a case study. It explores the importance of accounting and finance functions, highlighting their impact on organizational performance, including fund raising, asset investment, and stakeholder returns. The report analyzes Skanska plc's financial statements and provides a detailed examination of various financial ratios, such as net profit margin, current ratio, debtors collection period, and creditor collection period, to assess the company's financial health and performance trends between 2018 and 2019. It also covers accounting techniques such as marginal analysis and capital budgeting. The report concludes with recommendations for Skanska plc to improve its financial performance, including expense reduction, revenue enhancement, and management of collection periods. Furthermore, it emphasizes the significance of financial planning and the efficient management of financial resources within an organization.

Financial decision
making

Table of Contents
Introduction-................................................................................................................................................3
Task-1..........................................................................................................................................................3
Task 2-.........................................................................................................................................................8
Ratio Analysis-........................................................................................................................................8
Conclusion-...............................................................................................................................................11
References-................................................................................................................................................11

Introduction-
This report is based on financial decision making. Decision making plays an important role in
business. Financial decision making can be done on the basis of the financial performance of the
company. Financial ratios help in measuring the financial performance of the company. Ratios
give information about liquidity, profitability, efficiency, solvency and many more. Company
can take decisions on the basis of these financial tools. These decisions can be for long term or
short term. There are various functions that are performed by financial decision making such as
fund raising, asset investment and distributing return to stakeholders. In this report, Skanska plc
is analyzed. It is a multinational construction and development country. Headquarter of this
company is in Sweden. It was founded by Rudolf Fredrik Berg in 1887. In starting company
manufactured only concrete related products. This company is quickly converted into
Construction Company. Within 10 years company received its first international order. Company
contributed in building roads of Sweden, offices and housing and power plants. Company is
listed on Stockholm stock exchange. In mid-1950 company moved to international markets.
Task-1
Importance of accounting functions-
Accounting plays an important within the organization. Accounting gives information about the
income and expenses of the company.
 Accounting records all the transactions related to money. These financial records are very
important for the company in decision making, fund raising etc.
 Financial records helps in making all the due payments on time and also tracks and
process receivables.
 It also plays an important role in payroll of the employees. With the help of financial
record it can be tracked that all the employees are getting paid on time or not. It also
takes care about the government taxes are filed or not.
 Financial records help in making financial reports such as income statement, balance
sheet and cash flow statement.
 Accounting also helps in financial controls. Errors can be avoided; accountant can track if
there is any fraud or theft.

 Accounting helps in preparation of budget. Making budget is tedious work. Finance
department makes budget according to financial records. Budget is less accurate.
 Performance measurement of employees can be done by accounting functions.
 Expenses can be controlled by these records.
 Financial planning is very necessary for the organization. It is difficult to survive without
financial planning. With the help of financial accounting planning can be done.
Finance functions-
It can be defined as planning, directing and controlling financing activities within organization.
Investment of money and fund raising can be done on the basis of the financial planning.
Planning can be done on the basis of the financial statements. Financial statements also help in
making investment decisions. Investment decisions are taken by company for growth Purpose.
Role of accounting within organization-
Accounting is very important for organization. Profit and loss, income and expenditure can be
tracked by accounting. By accounting, financial information can be provided to the investors,
management and government. It is very essential for investors to know the company’s financial
performance. With the help of accounting three financial statements can be generated-
 Income statement- It tracks expenses and income of the company. Improvements can be
done accordingly for reducing expenses and increasing profit.
 Balance Sheet- Balance sheet provides clearer picture of company’s financial
performance.
 Cash Flow Statement- It is a bridge between the income statement and balance sheet.
Cash generation capacity of the company can be measured by cash flow statements. It
also gives idea about how much money has been spent till now.
Hence, it can be said that accounting plays vital role for organization so that company can
manage its expenses accordingly.

Role of finance within organization-
Finance helps in managing money of the company. Financial managers must have idea about
how much money is needed, when investment should be done in order to make profits and how
requirements of financing can meet. Money should organized in such manner so organization can
meet its goals.
Accounting and finance duties within organization-
Accounting duties-
 Accounting helps in reduction of cost, maximization of profit and revenue enhancement.
 Accounting department is responsible for preparing accounts and tax returns.
 Payroll management and control over expenditure and income can be done by accounting
department.
 Financial accounting helps in making financial reports. It further helps in forecasting,
planning. Financial statements can also be made with the help of financial reports. These
statements helps financial manager in making decisions related to finance.
 Analysis of risk can be done by accounting.
Duties of finance-
Finance department is very crucial for organization as it helps in fund raising, managing funds
and investment planning in assets. Financial resources can be managed in an efficient manner by
finance department. Financial control over resources is also important in order to support the
activities related to business. Duties of finance department are-
 Bookkeeping helps in recording day to day financial activities of the business. It gives
information about day to day expenses and profit.
 This department is responsible for managing cash flow. Cash inflows and outflows are
recorded. This department is also responsible for ensuring that enough cash is available
for meeting its daily requirements.
 Forecasting and budgeting is very important and very risky. Finance department has
responsibility of predicting future. Budgeting and forecasting gives idea about financial
condition of the company.

 Analysis and selection of new investments is done by this department. Existing assets and
investments are also analyzed.
Structure of financial statements-
Company mainly uses dour types of financial statements. Which are as follow-
 Income Statement
 Balance sheet
 Cash flow statement
 Shareholder’s equity statement
Income statement-
Income statements give information about earnings of the company. It is totally focused on
expense or net income of the company. Investors can easily gain idea about company’s
profitability by it. Financial managers of company track expenses and income of the company by
using this statement. Net income can be calculated by subtracting revenue from cost of goods
sold.
Balance Sheet-
Balance sheet is divided into two parts assets and liabilities. Asset part covers all the assets of the
company like plant, machinery, cash etc. On the other hand, liabilities side cover all the debts
company has. It includes long-term debt, short-term debt etc. It helps in knowing financial
position of the company. Managers can check liquidity of the company by using balance sheet.
Cash flow statement-

This statement shows that if there are any changes in balance sheet and income statement then it
directly affects the cash and cash equivalents. It breaks the analysis into three parts.
Cash flow statement is divided into three parts-
 Cash flow from operations
 Cash flow from investing
 Cash flow from financing
Company can measure its cash position and cash generation capacity in order to pay its
obligations and fund its operating expenses. It is complement of income statement and balance
sheet. There are two methods of calculating cash flows- direct and indirect method.
Statement of shareholder’s equity-
It is issued by company as part of balance sheet. It is a financial document. When total assets
subtracted by total liabilities then, it is known as shareholder’s equity.
Accounting Techniques-
Company uses different accounting techniques to achieve its objectives or goals-
 Marginal analysis is one of the techniques that is used by company. By this technique
company can analyze additional benefit and additional expenses on same activity.
 Capital budgeting technique is most useful for company. It can take investment decisions.
Such as- purchasing new machinery or investing in projects. These methods can compare
different projects and gives idea which project is more profitable. Several methods are
used in capital budgeting like net present value, IRR and payback period.
 Forecasting or budgeting can be done by analyzing trend. Company uses its historical
data and then analyzes the trend. Company’s performance can be analyzed by trend
analysis.
Accountant role in the organization-

 Accountant of the company is responsible for long term and short term planning.
 MIS means management information system. Handling data and preparing various
reports using data.
 Finance controlling is also work of accountant. Various reports are made on cash and
fund flow analysis . These reports give idea about cash flow of the company.
Task 2-
Ratio Analysis-
Skanska Plc Ratios
2018 2019
EBIT 750 975
Capital Employed 3825 5850
Return on capital employed= EBIT/Capital
Employed 0.20 0.17
Net Profit 600 675
Net sales 4800 6000
Net Profit Margin = Net profit/Net sales 0.13 0.11
Current Assets 1515 2070
Current Liabilities 645 2220
Current Ratio = Current assets/current liabilities 2.35 0.93
Debtors 900 1200
Net sales 4800 6000
Debtors collection period = Debtors/Net sales*365
68.44
Days 73Days
Payables 570 2100
Net Purchase 2700 4800
Creditor collection period = Creditors/Net
Purchase*365 77.06Days
159.69Day
s
Ratio Interpretation-

 Return on capital employed- It can be defined as capability of company of generating
additional benefits by using available capital. It is used to check financial performance of
the company with respect to debt. Ideal ratio is between 10% to 20%. In case of Skanska
Plc. In 2018 ratio is 20% and in 2019 it is 17%. It means additional profits earned by
company in 2018 is higher than 2019.
 Net profit- It is profitability ratio. It can be defined as total income generated by
company from sales after cutting all the expenses. In the year 2018 is 13% and in 2019 it
is 11%.Net sales in 2019 is higher than 2018 but production cost in 2019 is very high
that’s why there is less profit margin in 2019.
 Current ratio- It is liquidity ratio. It helps in measuring the capability of company in
paying its short term obligations. Ideal current ratio is 2:1. Current ratio must be two. If
current ratio is less than two them company may face problems in meeting its short term
obligations. Skanska plc’s current ratio in 2018 is 2.35 and in 2019 it is 0.93. It means
company was able to pay its debts in 2018 but in 2019 it might have faced some issues in
meeting its short term obligations.
 Debtors collection period- It can be defined as Company’s ability to collect receivables
from debtors. If two months free credit given by company then company should collect
within 90 days. In 2018 company collected receivables in 68.44 days in 2019 it is 73
days. Company received late payments from customer it means it can affect cash flow of
the company.
 Creditor collection period- It can be defined as number of days taken by company in paying its
debts. Company should pay its debts within 1-2 months else it is not considered as trustworthy
company. This thing can affect goodwill of the company. In 2018 creditor collection period is
77.06 days in 2019 it is 159.69 days. In 2019 company took more days in paying its debts.
From the above calculation it is observed that company performed better in 2018 when it is
compared to 2019. In order to improve financial performance company should do following
changes-
 Reduce expenses- Company needs to focus on reducing its expenses. Expense in
2019 is higher than 2018. If operating expenses can be reduced then it automatically
increases the profit margin. Company should reduce the marketing expenses and
other operating expenses.

 Enhancement of revenue- Revenue generation is very important for company.
Company needs to focus on increasing its revenue by using different marketing
programs and quality.
 Average collection period- Company should set a collection period in order to
maintain its goodwill. Company should set an average collection period and then try
to meet its standard. This further helps in maintaining trustworthiness. Management
of goodwill is very important for company it is an intangible asset. It is associated
with purchase of one company with another.
Changes in ratio-
 Liquidity of the company depends on its assets and liabilities. If there is change in current
assets and current liabilities then it leads to change in the current ratio. When it comes to
Skanska in 2019 there are more liabilities that’s why current ratio is less in 2019.
Company should focus on reducing liabilities.
 Operating expenses include marketing cost, administrations cost, rent and wages.
Company should reduce all these costs in order to make more profit. Company can
improve its financial performance if it puts continuous efforts on reducing its expenses.
Company should focus on quality improvement of product or service. It leads to increase
in revenue.
 Profit generation from sales in 2019 is responsible for lower profit margin. In 2018 sales
was lower compared to 2019 but profit generation from sales was quite higher when it is
compared to 2019.
Impact on company-
Financial ratios work as mirror to company. It measures company’s financial performance.
Comparison of the company can be done with its past performance or similar industries. Change
in ratio puts impact on company.
 Financial Situation- Various changes of companies are changed which creates overall
impact on the company. Company can compare its performance. Comparison helps in
improving its financial conditions.

 Change in profit- Profitability ratios are measurement of company’s profitability.
Company can check if it is earning expected income or not. Less profits means higher
expenses. Company witnessed low profits in 2019.
 Inventory- Inventory plays crucial role in company. When quick ratio is calculated it
excludes inventory. It does not include inventory as most liquid asset. It is also known as
acid-test ratio. Selling inventory at urgent basis is not possible. This is why quick ratio
excludes inventory.
From the above observation, it can be said that ratios are very important for the company. It
checks financial health of the company and financial manager can give suggestions accordingly.
Conclusion-
From the above report, it is observed that financial decision making is very crucial for
organization. It is responsible for taking decisions related to liabilities and stakeholder’s equity.
Bond issue is also comes under financial decision making. Company should set objectives before
decision making and it should also be analyzed that company can bear that risk or not. Financial
ratios are key factor in measuring company’s financial performance. Management accounting is
very important for organization. Various financial reports can be made with the help of financial
records. Financial ratios help in comparison with past performance of the company. It also helps
in comparing the companies of similar industries. Hence, it can be said that right decisions help
in overall growth of the company.
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