Financial Decision Making Report: Analysis of Skanska PLC - BM414

This report delves into the realm of financial decision-making, focusing on the application of management accounting techniques within Skanska PLC, a multinational construction and development company. The report begins with an introduction to financial decision-making and its importance, followed by an overview of Skanska PLC's background and key practices. The main body explores the role of various management accounting techniques such as financial planning, analysis of financial statements, standard costing, budgetary control, and marginal costing in planning, control, and decision-making processes. An evaluation section critically analyzes the application of these techniques within Skanska PLC, highlighting their impact on the company's operations. Furthermore, the report calculates and interprets key financial ratios, including return on capital employed, net profit margin, current ratio, debtors collection period, and creditors collection period, for the years 2018 and 2019, providing insights into Skanska PLC's financial performance and identifying potential causes for changes in these ratios. The conclusion summarizes the key findings and emphasizes the importance of efficient managerial accounting techniques for the company's success.

Financial Decision Making

TABLE OF CONTENTS
TASK 1............................................................................................................................................3
INTRODUCTION.......................................................................................................................3
MAIN BODY..............................................................................................................................3
EVALUATION...........................................................................................................................5
CONCLUSION............................................................................................................................6
TASK 2............................................................................................................................................7
RATIO CALCULATION............................................................................................................7
1. a Return on capital employed and its importance (100)..........................................................8
b. Performance of SKANSKAPLC by comparing results and positions of 2 years (150)..........8
2. a Net profit margin and its importance....................................................................................9
b. Comparing results and position SKANSAPLC on the basis of net profit...............................9
3. a What is current ratio and its importance for company..........................................................9
b Position of SKANSAPLC on the basis of results of current ratio............................................9
4. a. What is average receivable days or debtors collection period...........................................10
b. Results and position of SKANSAPLC between 2 years with appropriate causes of changes
...................................................................................................................................................10
5. a. Creditors collection period.................................................................................................10
b. Performance of the company between two years..................................................................11
CONCLUSION..........................................................................................................................11
REFERENCES..............................................................................................................................12

TASK 1
INTRODUCTION
Financial decision making is basically a process whose responsibility is taking all the
decisions which are related to the stockholder’s equity and the liabilities of the company along
with the issue of bonds. The funding of the company is also decided by the financial situation of
the company along with the characteristics of the finance source. The decisions related to the
finances are concerned with the long-term assets use which is useful in the very important
process of production. The financial decisions must be accurate as profit is earned by selling the
produced goods (Honggowati and et.al., 2017). There are various financial functions which
include the acquiring and utilising of funds which are required for performing efficient
operations. In order to run the things smoothly in the organisations, financial functions are
considered as the lifeblood of business (Nitzl and Chin, 2017). Skanska plc. is a multinational
construction and development company based in UK and headquartered in Sweden. The
company deals in commercial property development, residential development, infrastructure
development, Public private partnerships and many more other areas. It is considered as the
world leading project development and the group of construction which aims at building for the
improvement in the society (Skanska, 2021). The company not only performs its operations in
Sweden but in many other countries like Europe, United States etc. It has more than 33,000
employees working all over the world and more than 5,000 employees in UK which made it a
leading player in the construction market of UK (Skanska is building for a better society, 2021).
The financial operations in the company need to be accurate as it affects the overall business and
the country’s economy (Accounting and Finance, 2021). The report will shed light on the
financial functions and the management accounting techniques in decision making process of
Skanska and will also calculate and describe the financial ratios of the company by critically
analysing the performance in two years.
MAIN BODY
Role of management accounting techniques
There are various techniques of management accounting which plays a major role in
managing the overall finances of the company like Skanska plc. Some of them are as follows:
Financial planning
3

The main aim of the company is to earn as much profit as they can. This is possible only
when there is sound and proper financial planning. This is considered as the act in which the
financial activities are decided in prior for achieving the business objectives. These include
deciding the long term and short term financial objectives (Andrei, Gâlmeanu and Radu,, 2018).
This also involves formulating the financial policies for achieving the maximum return on the
capital employed. These deal in determining the amount of capital required, governing the
determination, distributing the income, determining the optimum level of investment etc.
Analysing of financial statements
The important financial statements include the profit and loss account and balance sheets.
These helps the management of the company in knowing the rate of growth of the business
concerns in Skanska. This analysis can be done through the common size statements,
comparative financial statements and the ratio analysis. It also helps in presenting the
information which can help the investors, creditors and the business executives.
Standard costing
This technique helps in establishing the standard costs under the most effective and
efficient operating conditions and compares the actual with the standard, calculating and
analysing of the variance for knowing the reasons and pinpointing the responsibility for taking
the remedial actions so that the adverse things can be eliminated (Sohrabi, 2017). This helps in
controlling the cost. The management comes to know about the reasons to differentiate these
costs and then make decisions.
Budgetary Control
The management account of the company makes use of the budgetary control to plan and
control the various business activities. This is the most important technique which directs the
business operations in appropriate and desired direction which means it helps in achieving the
satisfactory return on the investment which is made by the company.
Marginal costing
4

This technique of marginal costing is used by the management accountants for making
various financial decisions of the company. Along with this the break even analysis is also used
for controlling the cost as well as maximizing the profit. This can also help the company for
fixing the selling price, selecting the best sales mix, using the scarce raw materials or the
resources in the best possible way, accepting and rejecting the bulk order and the foreign order,
taking any decision and many more other functions. This technique is based on the variable cost,
fixed cost and the contribution (Appelbaum and et.al., 2017).
Statistical and Graphical techniques
These graphical and statistical techniques are used by the management accountant for
making the information more presentable and meaningful which helps them in making the
decisions easier and quicker. The various statistical and graphical techniques used are investment
chart, master chart, linear programming, statistical quality control, chart of sales etc.
EVALUATION
Managerial Accounting is also known as cost accounting or management accounting is
basically a branch of accounting which deals in identifying, measuring, analysing and
interpreting the information related to the accounts which helps the managers in making
operational decisions. Skanska plc. can be facilitated by this as it focuses on the reporting and
coordinating of the financial transactions of the company to the outsiders such as lenders and
investors. This is more focused on the internal reporting of the company for aiding the decision
making. The fifth largest construction company in the world i.e., Skanska plc. is making use of
the managerial accounts techniques for analysing various events and the operational metrics for
translating the data into various useful information. This is then used by the management of the
company for making various decisions in the decision making process (Myllynpää and Hanosh,
2018). The main aim of these techniques is to provide detailed information related to the
operations of the company by analysing the line of products separately, facilities, operating
activities etc. Skanska deals in residential properties, constructions etc. where a minute mistake
can lead to loss of data as well as capital. This is why it is must for the company to use the
techniques of managerial accounting very efficiently so that the large amount of data can be
managed and used for performing various operations. The professionals at this company are also
5

much experienced so that they can help in contributing towards a better society. Also, the
company makes use of the past experiences and the lessons which are learned on the previous
projects to deliver the best possible results (Doktoralina and Apollo, 2019). The main reason
behind this is the sound financial practices at Skanska plc. The management of the company use
these techniques like marginal costing, ratio analysis, statistical analysis, inflation accounting,
reporting communicating etc. Skanska plc. uses these techniques among which the inflation
accounting is used to ensure the maintenance of original capital under the fluctuating price
conditions which can be referred as inflation. This also impacts the financial statements of the
company. The reporting communicating technique is used by the company for communicating
the desired financial information related to the financial statements to the clients which helps in
making right decisions at the right times and also helps in determining the future courses of the
actions. Skanska also prefer presenting the information of the constructors, expenses,
contractors, brokers, capital and many others in the forms of statistics and graphs through the
statistical analysis technique which makes the financial reports more meaningful along with
developing comparative studies (Vítková, Chovancová and Veselý, 2017). The various statistical
techniques include the time series data, measure of dispersion, correlation and regression etc.
facilitates the management accountants of the Skanska plc. Company. This is also evaluated that
the financial planning technique is also used by Skanska Company to formulate the financial
policies which helps in financial proceedings to contribute towards better society.
CONCLUSION
The above section concluded about the various management accounting techniques which
are implemented by the management accountant for supplying the required desired information
to the management. These techniques help in discharging the various functions like planning,
organising, directing, staffing and controlling the various financial operations of the company.
The above task also described some of the major techniques of the managerial accounting which
can be used by the company to manage the large amount of data and finances which can help in
analysing the profitability of the company. The Skanska company is not only the best
construction company in various countries like UK but also one of the leading contracts having a
responsible and inclusive business which helps in building better society. This is observed that in
order to maintain the profitability and the position in the market, the financial accounting and the
6

managerial accounting of the company must be appropriate and efficient. The above report also
evaluated the ways in which the company uses the various managerial accounting techniques
such as standard costing, budgetary control, marginal costing, decision making, revaluation
accounting etc. This is how, the report overall focussed on the use of efficient managerial
accounting techniques which led to the rapid success and growth of the companies like Skanska
plc. in UK.
TASK 2
RATIO CALCULATION
There are various ratios which need to be calculated according to the data collected from the
company. The ratios are considered as the best tool to control and plan the costs. This is also said
to be the technique which is used by the management accounting of the company such as
Skanska plc. to plan and control the different activities of the business unit. This also helps the
management in achieving the appropriate return on investment. This also proves to be useful to
measure the solvency, liquidity, profitability and the firm’s management efficiency (Myllynpää
and Hanosh, 2018). This is also useful to the prospective investors, internal management,
outsiders, creditors etc. The various ratios of the construction company Skanska plc. are
calculated as below:
Calculation of Ratios 31-DEC-2018 31-DEC-2019
Return on capital employed = Operation Profit ×100
Capital Employed
750/2325*100=32.25% 975/2850=34.21%
Net Profit Margin = Net Profit×100
Sales Revenue
600/4800*100=£12.5 675/6000*100=£11.25
Current ratio = Current Assets
Current Liabilities
1515/645=2.3 2070/2220=0.93
Debtors collection period = Trade Receivable ×365 900/4800*365=68 1200/6000*365=73
7

Credit Sales
Creditors collection period = Trade Payables ×365
Credit Purchases
570/2700*365=77 2100/4800*365=160
1. a Return on capital employed and its importance (100)
This is a profitability ratio which helps in measuring the ways in which profits can be
generated by the company by the capital employed when the net operating profit is compared to
the capital employed. This ratio also helps in assessing the profitability and the capital efficiency
of the company. This ratio is also used by the stakeholders, potential investors and the financial
managers to analyse the company for making investments (Meriç, Kamışlı and Temizel, 2017).
This is the profitability ratio which analyses the financials of the company for the profitability
performance. The components used to calculate this are capital employed and the earnings before
interest.
b. Performance of SKANSKAPLC by comparing results and positions of 2 years (150)
This can be analysed after calculating the return on capital ratio (ROCE) of Skanska plc.
that in 2018 the ROCE was 32.25% while in 2019 it was calculated as 34.21%. This shows the
amount of operating income generated for each dollar of the capital invested. The favourable
ROCE is higher which means that the more profits are generated on per dollar of the capital
employed. This was observed that ROCE in 2019 is greater than that in 2018 which means the
company is earning higher profit as compared to what they got in 2018. The profit is seen in
2019 because the company started delivering innovation in the projects which increased the trust
in the clients and customers. Another reason is also sustainability on which the company is
focussed on, which attracted more number of customers to deal related to construction and the
property. The company become more focussed on the betterment of the society which helped in
increasing the client base thereby leading to increased ROCE in 2019.
8

2. a Net profit margin and its importance
Net profit is the main key amount that shows effectiveness and success of company. It
refers the amount or profit that company made after all working expenses. In another words it
can be said that it refers total profit of company that it earns by minimizing all expenses and cost.
For knowing success of company and accomplishing goals, it is important to know about net
profit (Amalya, 2018). In regard to importance of net profit margin, it can be said that it helps
investors access as investors make decision about investing amount in company only on the basis
of net profit. If company makes good net profit then company can attract numbers of investors.
b. Comparing results and position SKANSAPLC on the basis of net profit
On the basis of above data and calculation, it can be said that in the year of 2018,
SKANSAPLC made £12.5 net profit margin and in the year of 2019 it made £11.25 profit
margin. So, on this basis, it can be said that in previous or in the year of 2018, this company
made a great success and in 1 year profit margin decreased. On the basis of comparison, it can
also be said that in the year of 2018, this company was successful and it needs to identify reasons
as why net profit margin is decreased. It can also be said that increased net profit margin shows
success and effectiveness of company and lower profit margin indicates that there is poor
management or poor operations.
3. a What is current ratio and its importance for company
In regard to current ratio, it can be said that it refers liquidity ratio that measures ability of
company to pay short term obligations that are due within 1 year because of some reasons. It
helps companies in telling about ways by which it can maximize current assets on its balance
sheet and satisfy current payables or debts (Solihin, 2019). If company pays to debts then it
improves its image in the market and helps company in attracting investors. Overall, it can be
said that it helps companies out to measure short term financial strength of company.
b Position of SKANSAPLC on the basis of results of current ratio
On the basis of above data and calculations it can be said that this SKANSAPLC was
much more capable in the year of 2018 as compared to 2019. In the year of 2018 current ratio of
this company was 0.23 and in the year of 2019, it was only 0.93. On this basis, it can be said that
9

in the year of 2018, it has much capability of paying amount to all debts and improving financial
strengths. The reason behind decreasing current ratio may be decline in inventory, changes in
available cash and backlogs of bills to pay. Decreased cash ratio indicates high risk and on this
basis, it can be suggested to SKANSAPLC that it should focus on increasing sales by providing
qualitative goods and decreasing debts.
4. a. What is average receivable days or debtors collection period
Average receivable days or debtors collection period refers number of days until customers
invoice is outstanding before it is collected by company. In regard to good average debtors
collection period it can be said that company can improve its financial strengths when it has
around 30 days. Lower days indicate effectiveness and tell investors that collection of company
is good. More days of average receivable indicate ineffectiveness and shows incapability of
company of collection (Meriam, Achsani and Novianti, 2017). It also helps investors in knowing
about effectiveness of company’s credit and collection policies.
b. Results and position of SKANSAPLC between 2 years with appropriate causes of changes
On the basis of above data, average receivable days or debtors collection period can be
discussed and in the year of 2018, this period was 68 days. In the year of 2019, debtors collection
period was 73 days. It is discussed above that higher day’s shows ineffectiveness and good
debtors’ collection period is one that has fewer days of collecting debts. So, on this basis, it can
be said that in the year of 2018, SKANSAPLC was much effective than 2019 because in 2018, it
was 68 days in which company can collect amount from debtors. Some causes behind higher
receivable days may include: poor management and poor credit policy. So, on this basis, it can
be suggested that company should focus on improving its management and granting fewer credit
to customers along with focusing on increasing sales.
5. a. Creditors collection period
This is the average number of days which are needed for collecting the receivables from
the customers. This is measured as the interval from the invoice issuance to the cash receipt from
the customer. This must always be low. This is similar to the debtor day which is useful indicator
to assess the liquidity position of a business (Myšková and Hájek, 2017). The low average
10

collection period means the organisation is collecting the payments faster as compared to other
companies. On the other hand, when it is high, this means the company is facing trouble while
collecting the accounts which leads to trouble with the cash flows.
b. Performance of the company between two years
This can be analysed by the calculated credit collection period in Skanska Plc. that in 2018,
it is 77 while in 2019 it grew to 160 which means the company faced more problems in 2019 to
collect the accounts and managing the cash flows. In 2018, this was lesser as compared to 2019
which means the company was able to collect the cash from the customers easily. The company
can decrease these days by defining the credit policies, offering the discounts on the early
payments, rewarding timely payments, discouraging late payments, analysing the report and
many more (Zorn and et.al., 2018). These strategies were not applied by the company in 2019
which increased the collection period.
CONCLUSION
The above section concluded about the various types of financial ratios such as Return on
capital employed, Net Profit Margin, Current ratio, Debtors collection period and Creditors
collection period. This helped in analysing the performance of the company Skanska plc. The
various ratios were defined and their importance of these ratios was highlighted. The
performance of the company was compared by analysing these ratios in 2018 and 2019. This
helped in analysing the performance of the company in two different years. This is how; the
importance of these ratios was highlighted with respect to the Skanska Company and its growth
of profitability.
11

REFERENCES
Books and Journals
Andrei, G., Gâlmeanu, R. and Radu, F., 2018. Managerial accounting-an essential component of
the information system. Valahian Journal of Economic Studies. 9(2). pp.109-114.
Appelbaum, D. and et.al., 2017. Impact of business analytics and enterprise systems on
managerial accounting. International Journal of Accounting Information Systems. 25.
pp.29-44.
Doktoralina, C. and Apollo, A., 2019. The contribution of strategic management accounting in
supply chain outcomes and logistic firm profitability. Uncertain Supply Chain
Management. 7(2). pp.145-156.
Honggowati, S. and et.al., 2017. Corporate governance and strategic management accounting
disclosure. Indonesian Journal of Sustainability Accounting and Management. 1(1).
pp.23-30.
Meriç, E., Kamışlı, M. and Temizel, F., 2017. Interactions among Stock Price and Financial
Ratios: The Case of Turkish Banking Sector. Applied Economics and Finance. 4(6).
pp.107-115.
Myllynpää, O. and Hanosh, J., 2018. Collaboration between companies in sharing economy and
Skanska.
Myšková, R. and Hájek, P., 2017. Comprehensive assessment of firm financial performance
using financial ratios and linguistic analysis of annual reports. Journal of International
Studies, volume 10, issue: 4.
Nitzl, C. and Chin, W.W., 2017. The case of partial least squares (PLS) path modeling in
managerial accounting research. Journal of Management Control. 28(2). pp.137-156.
Sohrabi, M., 2017. The Relationship between Non-Financial Innovative Management
Accounting Tools and Risk and Return of Iranian Stock Market Listed
Companies. Dutch Journal of Finance and Management. 1(2). p.40.
Vítková, E., Chovancová, J. and Veselý, D., 2017. Value Driver and Its Impact on Operational
Profit in Construction Company. Procedia computer science. 121. pp.364-369.
Zorn, A. and et.al., 2018. Financial ratios as indicators of economic sustainability: A quantitative
analysis for swiss dairy farms. Sustainability. 10(8). p.2942.
Online
12

Accounting and Finance, 2021. [ONLINE]. Available through :<
https://www.freshbooks.com/hub/accounting/why-is-accounting-and-finance-
important>
Skanska is building for a better society, 2021. [ONLINE]. Available through :<
https://www.skanska.co.uk/>
Skanska, 2021. [ONLINE]. Available through :< https://group.skanska.com/ >
13