BM414 Financial Decision Making Report: SKANSA plc Expansion Analysis

This report analyzes the financial decision-making process for SKANSA plc, a UK-based construction company considering expansion into Europe. It begins by emphasizing the significance of finance and accounting functions, detailing their roles and duties within the company, including money management, payroll, reporting, and financial control. The report then delves into a ratio analysis, calculating and interpreting key financial ratios such as return on capital employed, average receivable days, and average payable days for 2018 and 2019. The analysis reveals a decrease in profitability, highlighting the need for strategic financial planning to improve performance. The report concludes with recommendations for SKANSA plc to enhance its financial position and make informed decisions for future growth.

FINANCIAL DECISION
MAKING

INTRODUCTION
Financial decision making is being referred to as a process through which the company
decides for a specific decision out of the different alternatives available to the company. There
are many different situations wherein the company has to decide from various types of
alternatives being available to the company. The present study is based on company SKANSA
plc which is a construction company which is situated in UK and initiated its operation in the
year 1984. Now the company is planning to expand its operations in Europe as well. Hence, the
present study will outline the financial decision that whether it is profitable for the company to
expand in other country or not.
TASK 1
Evaluating the significance of finance and accounting function along with duty and role within
SKANSA plc
For the success of any of the company the most essential aspect is that they must have an
effective system of accounting and finance which will assist the company in managing their
work (Oyewo, 2017). The accounting is being defined as the process through which the company
records all the financial transaction and post them into ledger in order to create trial balance and
from it make the profit and loss account. This accounting is very essential for the success of the
business as with help of this only the company comes to knows that whether they have earned
the profit or suffered loss. Hence, for the success of the business it is essential that they must
effectively makes the use of the accounting practices as this will improve the working efficiency
because when the company will come to know that it is earning profit then employees will be
motivated more to work in much better and effective manner.
In addition to this the finance is also the most essential aspect for the success of the
business. the major reason for this is that when the finance will not be appropriate within the
company then this will reduce the operating efficiency of the company. This is particularly
because of the reason that for every work to be accomplished the finance is the one this which
company need to have in abundance. The reason beneath this fact is that when the company will
not be having appropriate and enough finance then this will have a great impact over the working
of the company to a great extent (HAMEEDI and et.al., 2021).

The major importance of the use of accounting and finance within the company is that it
assists company in evaluating the performance of the business. the important reason for this is
that when the company will be having effective and sound accounting system then this will
improve the operating and working effectiveness of business. the major reason behind this fact is
that when the company makes use of effective accounting and finance management then this
always result in better and effective operations of the business (Li, Chen and Qiao, 2021). The
major reason pertaining to this fact is that accounting assists the business in recording all the
financial transaction in proper manner and this will assist the company in evaluating the
transaction in effective way and post them in ledger in proper manner.
Along with this another major importance of using and complying with accounting and
finance is that it ensures that all the statutory compliance has been followed. Hence, this is due to
the fact that when the company will follow the effective accounting principles and policies then
it will ensure that the business is taking place in accordance with law and order and hence all the
compliance have been followed in the same and effective manner.
In addition to this, when the company ensures and complies with the accounting and
finance in proper manner then this assist company in creating budget and future projections in
effective and efficient manner. This is particularly because of the reason that when the company
effectively follow all the accounting principles then it is easier for them to make some projection
and budget for the future which will provide a guide to the employees that how they have to
work. The major reason underneath this fact is that when the company will undertake the use of
the budgeting then they will have an idea that how they have to work in future and how this will
affect the working of the company in the near future.
Moreover, this compliance with the accounting and finance of the company assist in
better and effective financial planning. This is particularly because of the reason that with help of
effective accounting the company can plan for the future in better and effective manner. Hence,
this will assist the top management of the company to ensure that the working of the company is
taking place in effective and correct manner. Hence, the proper accounting will assist company
and top management in effective financial planning for the business to be successful.
Furthermore, this will also help business in making proper and effective decision for the
growth and success of company. The fact beneath this statement is that when the company will
have proper accounting and finance then the company will be having a proper base and this will

help the company to take better and effective decision for the business (Abbasi and et.al., 2019).
In addition to this when the company will be having more of the better accounting system then
this will assist the company in taking better and more relevant decision for the better working of
the company in effective and efficient manner.
There are many different types of role and duties of the accounting and finance department.
These duties and roles of accounting and finance department of SKANSA plc is as follows-
 Money out- this is the role wherein the company makes the payment to all the bills and
other expenses which are being taking place within the company (Boiarko and
Hrytsenko, 2020). This is the top most priority of the company that they will ensure that
all the payment which is due to other parties are being made on time.
 Money in- this is a duty which ensures that all the income which are expected to the
company are being processed on time. This is done in order to ensure that all the payment
is being done on time so that income of the company increases to a great extent.
 Payroll- this is a duty of the accounting department that all the payment to the employees
is being done on time so that their dues are clear on time. This is done in order to ensure
that the payment is being done on time to the employees in terms of their salary and no
payment is being left due for payment.
 Reporting- this involve the duty of the accounting department towards the proper
reporting of all the key facts and figures within the different reports created by the
accounting department. This report involves the making of the P & L account, cash flow
statements and the balance sheet are being prepared.
 Financial control- this is another major duty or role of the accounting department of
SKANSA plc wherein the company is obliged to control all the financial activities of the
business. This is done in order to reduce the errors and fraud and theft from the working
of the company so that business can run in successful and effective manner.
Hence, in the end it can be said that all these duty and role of the accounting and finance
department is essential to be followed (Zavadskas and et.al., 2018). The reason underlying this
fact is that if these will not be followed then this will result in affecting the growth and working
of the business.

TASK 2
a. Calculation of different ratios
Return on capital employed
PARTICULAR FORMULA 2018 2019
EBIT 750 975
Capital employed 3825 5850
Return on capital employed EBIT / capital employed 0.20 0.17
Average receivable day
PARTICULAR FORMULA 2018 2019
Trade receivable 900 1200
Sales 4800 6000
Average receivable days
(trade receivable/ credit
sales)*365 68.44 73
Average payable days
PARTICULAR FORMULA 2018 2019
Average account payable 570 2100
COGS 3900 5250
Average payable days
(average account payable/ COGS) *
365 53.35 146

b. Commenting on the performance of SKANSA plc with help of the above ratios
For the success of the business the most essential aspect is the analysis of the position of
finance of the business. Hence, for this the most essential aspect is to analyse the financial
position of the company with help of the tool of ratio analysis. This is a tool which involves a
quantitative procedure of obtaining the financial position that is liquidity, profitability and
efficiency of the company (What is ratio analysis? 2021). This ratio analysis tool will assist and
help the company in identifying the areas in which company is lacking and the areas which need
to be developed in order to improve the financial position of the company. The above ratios
reflect the following position of the company which is discussed as below-
 Return on capital employed- it is a kind of ratio which relates with the profitability ratio of
the company. This is the most essential ratio which the investors see before investing in any
of the company. This ratio measures the fact that how efficiently the company is using its
capital to generate profit and try to make the return high for the investors. This is
particularly essential because of the reason that if the company will be providing high return
to their capital investors then this will attract more of the investors to invest within the
company as business is providing higher return to the company. In 2018 the return on capital
employed was 0.20 % but it reduced to 0.17 % in 2019. This particularly reflects the fact
that the return on capital employed has reduced as compared to the last year. Hence it can be
stated that the profitability of the company has reduced as the return on the capital employed
has decreased and this in turn reflects that the return to investors has decreased to a great
extent. Hence, for this it is advisable to SKANSA plc that they must try to increase their
operations of the company so that their profit increases and they are able to pay more to the
people who have invested within the company.
 Net profit margin- the net profit is the earning which the company has earned after
deducting all the expenses whether be it direct or indirect expenses. This also includes the
profit after the tax and interest payment. The net profit margin for 2018 was 13 % and this
decreased to 11 % in 2019. This is not a good position for the business as the profitability of
the company has decreased by 2 %. This in turn reflects the fact that when the profitability
of the company has reduced then this means that the indirect expenses for the business has
increased. The major reason behind this fact is that net profit of the company is arrived after
deducting all the indirect expenses from the gross profit and after subtracting of interest and

tax payment (Liu and et.al., 2020). Hence, it is very essential for the company to have a
good net profit margin as this reflects the profitability of the company which is currently not
good. Hence, it is suggested to SKANSA plc that they either must try to increase their profit
and income sources or try to limit their expenses. This is necessary as if the income of the
company will increase then automatically this will result in the increase in the profitability
of the company. On the other side, when the company will try to limit their expenses then
also, this will result in the increase in profits. This is particularly because of the reason that
profit of the company is the same but the expenses have reduced and this results in better
and increase in the profitability of the company. Hence, this is very important for the
company to increase its net profit margin as before investing in any of the company, the
investor’s first checks out the profitability of the company and if it is not good then people
will not invest in the company.
 Current ratio- this belongs to the liquidity category of the ratio analysis section. The
liquidity is defined as a position of the company that is how much easily the company is in
position to convert its liquid asset into cash. This liquidity is very essential for the company
as if the liquidity of the company is good then it reflects that the company is able to manage
its working capital in effective and efficient manner. in 2018, the current ratio of the
company was 2.35 times but in 2019 it decreased to 0.93 times which is not at all good for
the company. The ideal current ratio is of 2: 1 which means that for paying off one liability
the company must have at least double current assets (Mostafa, Montemagno and Qureshi,
2018). This was good in 2018 as the company was having 2.35 times the current asset for
paying off single current liabilities. But in the year 2019 the condition was worst as for
paying of one current liability the company was not having that much of amount which
equals to the value of current liability. This simply means that if there was one liability then
the amount to be paid was only 0.93 assets for one liability. Hence, this is not at all good
position for the company and will not attract any of the investor to invest within the
company. Thus, it is advisable to SKANSA plc that they must try to effectively manage the
liquidity position of the company. For this it is advisable to the company that they must not
block much of the amount in the inventory as this will limit the cash present with the
company in the inventory and they will not be able to pay off their liabilities.

 Average receivable days- account receivable days is a type of ratio which helps the business
in estimating or calculating the time duration that is how long will it take to clear all the
account receivable of the company. In a business, it is essential for the company to sell the
goods on credit otherwise the business will not run properly. Hence, this average receivable
day will assist the company to know the fact the in how much time the receivable pending
will be cleared off or paid in full settlement. Hence, for SKANSA plc the average receivable
days were 68.44 in 2018 but it increased to 73 in 2019. This simply is not good position for
the company as earlier in 2018 they were receiving the payment from the debtors on an
average of 68 days. But in 2019, the average receivable day increased to 73 which now state
that company will earn the receivable amount after the time frame of average 73 day. Hence,
it can be stated that this is not a good position for SKANSA plc as the average receivable
time has increased and this resulted in delay in the payment. Thus, it is advisable to the
company that they must not sell much on the credit and must ask for the partial payment in
cash at the time of the sale only. Also the company must make the credit period very strict
and the payment must be brought in that time period only.
 Average payable days- this is a formula or concept which measures the fact that how much
number of days a company takes to make payment to its suppliers (Kim and Im, 2017). For
this the company need to manage the average payable period to lowest as this implies that
the company does not make any delay in the payment to its creditors. This is essential for
the company as this will increase the goodwill of the company is they are going to manage
their payment on time. For SKANSA plc the average payable day for 2018 was 53.35 days.
But this increased in the year 2019 to 146 days and this is not at all good position for the
company. the reason pertaining to this is that the 2018 figure reflects the fact that company
was able to manage the payment to the creditor in around 53 days. But this increased to a
great extent and went to 146 days in 2019 and this is not at all good for the company. This is
particularly because of the reason that when the company has increased their time to pay to
their creditors then this will affect the credit worthiness of the company. the major reason
underlying this fact is that now creditors will not sell the goods on credit to SKANSA plc as
now they are taking more time to make payment to the creditors. Hence, this will affect the
goodwill and the market reputation of the company to a great extent as they are taking a lot
of time to make payment to their creditors.

CONCLUSION
In the end the above study concluded that decision making relating to finance is very
important for the success of the company. the reason underlying this fact is that when the
company operates in external environment then there are many situations when they have to
select one of the options from among different alternatives. Thus, the present report also outlined
the fact that financial decision making involves analysis of the financial statements in order to
improve the working of the company. Hence, the report concluded the fact that accounting and
finance plays a crucial role and duty within company. This involves duty like money payment,
collection, payroll and many others.

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Online
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https://corporatefinanceinstitute.com/resources/knowledge/finance/ratio-analysis/ >