Financial Decision Making Report: Skansa Plc Ratio Analysis, 2018-2019

This report presents a comprehensive analysis of financial decision-making within Skansa Plc, a construction company exploring European expansion. It begins with an introduction to financial decision-making and its importance in achieving business goals. The report is structured into two main tasks. Task 1 critically evaluates the significance of accounting and finance functions, roles, and duties within Skansa Plc, encompassing financial accounting, management accounting, tax, auditing, investment, financing, dividend, and working capital functions. Each function is explained in detail, providing relevant examples within the context of Skansa Plc. Task 2 involves a detailed ratio analysis of Skansa Plc's financial performance, including the calculation of Return on Capital Employed (ROCE), net profit margin, current ratio, average receivable period, and average payable period. The report provides calculations for 2018 and 2019, followed by an analysis of the results, comparing the figures and explaining the implications of changes in each ratio. The report concludes with a synthesis of the findings, highlighting the key aspects of Skansa Plc's financial decision-making processes and financial position.

FINANCIAL DECISION
MAKING REPORT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Critically evaluating the importance of accounting and finance functions, roles & duties within
Skansa Plc....................................................................................................................................1
TASK 2............................................................................................................................................5
(a) Calculating ratios of SKANSA Plc........................................................................................5
b. Commenting on the financial position and performance of SKANSA PLC...........................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Financial decision making may be defined as a process that undertaken by manager of
taking profitable decisions about business aspects. In the context of business unit, it is an
accountability of manager of take effectual decisions which contributes in the attainment of
goals. The present report is based on the case scenario of Skansa Plc, a construction company,
which planning to explore operations in other countries of Europe. This report will provide
deeper insight about functions, duties and roles of accounting with regards to Skansa Plc.
Further, it will shed light on how ratio analysis exhibits financial position of the concerned firm.
TASK 1
Critically evaluating the importance of accounting and finance functions, roles & duties within
Skansa Plc.
Financial Accounting: -
Financial accounting refers to the process of recording, summarizing and analysis of the
financial transactions that are undertaken by Skansa Plc during the financial year. It involves
representing the financial performance through the preparation of the various statements of
accounts like the income statement, balance sheet, cash flow statement and the equity statement.
Financial accounting is conducted by the accounts department of the Skansa Plc which plays key
functions, roles and responsibilities in the organizations and ensures its smooth and efficient
operations (Mosteanu and et.al., 2019).
The internal and external users of the Skansa uses these financial statements of the
company depicting its performance, in order to make decisions related to the future course of
action, investment or loyalty. The various reports are prepared using the accounting policies and
procedures which assist the management in the budgeting and setting the standards.
The major functions of Skansa Plc are to support the decision-making process, helps in the
monitoring and control function of the management, depicts the financial position of the
company, guides the path for the future activities and facilitates comparison with competitors in
the industry and driving competitive edge. So it can be ascertained that a financial accountant
plays crucial roles and duties in the company.
Management Accounting: -
Management accounting involves the decision-making process that is undertaken by the
managers of Skansa Plc on the basis of the financial reports that are communicated to them
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(Campbell, 2017). They further analyse the financial statements of the company in order to make
decisions related to the future level of operations, the budget of the various operational activities,
cost management, deviations that have occurred and their respective corrective actions that can
be undertaken. They also decide upon the units of business that needs to be expanded and the
ones that are sick needs to be shut down by the company.
The major function and role of this accounting is to optimize the operations of the business
through optimal allocation of the resources, clearly defining the roles and responsibilities and
maximizing the profitability of the activities. The most prominent functions that are played by
the management accountant of Skansa Plc are forecasting the future business requirements,
maintaining the cash flows to manage the liquidity position of the company, assists in the long
term decision-making related to make or buy and monitoring the operations such that the
variances of the business can be rectified.
Tax function: -
The tax function that is played by the accounting department has a major function to be
played in the organization like ascertaining the liability of tax to be paid, the advance tax paid,
refund applicable etc. Its major duty is to assess the impact of levied taxes on the profitability of
Skansa Plc and how the tax could be limited in order to boost the profitability of the construction
business (Trinh and Thao, 2017). If the company includes major debt funds in the capital
structure of the company, so the interest shall be the tax-deductible expense and so the lowering
of the tax can improve the revenue generation.
The tax implications are also used in governing the future course of action as the main aim of
the business shall be to improve the profitability of the company. The role of the tax function in
the organization is compliance based where it is to be identified that the liabilities of the
company are timely and efficiently met by the officials of the company. This shall further
improve the credibility and reputation of the company.
Auditing function: -
The auditing function is one of the key areas of accounts that ensures that the financial
statements that are prepared are showing the true and fair view regarding the financial position of
Skansa Plc and are independently constituted. The major role is to identify the financial reports
of the company are depicting accuracy of transactions, avoiding any sort of material
misstatements, governing the internal controls, reducing the risk of frauds and finally provide the
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various recommendations that need to be undertaken in the future (Cheng, Ge and Wang, 2017).
The duties are to ascertain that the financial report generation is undertaken with due diligence
such that the users can make efficient decisions, the operational efficiency of Skansa can be
maximized by fulfilling the aims and objectives of the business.
Also, a prominent function is to keep the track regarding the maintenance of the formulated
policy and procedures. Through this the functional inefficiency of the company can be avoided
and ensure the operational efficiency. The variances that are arising should be removed through
the corrective action in the business. With the auditing of the financial statements the data of the
company shall be considered safe and secure by the investors.
Investment function: -
The investment function as carried out by the finance department constitutes important
activities that ascertains the long term growth of the company. The investment shall be made by
the finance department with due diligence and care ensuring that maximum returns could be
derived by Skansa. The investment function performs the major role related to the choice of
investment, rate of return analysis, make or buy decisions, maintaining the liquidity position etc.
are some decisions that are taken by the company.
It's the duty and responsibility of the finance manager to take efficient and effective
investment decisions if they are taken for the long term as it shall involve huge sum of money,
they are irreversible and determine the long term profitability of the company. The investment
decision is very risky in nature and needs to be evaluated prior hand for which the specialized
knowledge and expertise is required.
Also, the right investment made in the capital equipment’s shall boost the operational efficiency
of the business of Skansa. It shall help in achieving the economies of scale such that cost per unit
of the products of Skansa are reduced.
Financing function: -
The finance function in an organization is concerned with managing the finances of the
company in a manner that the profitability and growth prospects of the business could be
maximized (Finance Functions, 2021). Its major function is to manage the control the financial
resources of the company which is the life blood of the business. They are to ensure that the
finances of Skansa must neither be idle nor be lacking in the company. Since if the finances are
idle they shall be imposing cost and generating no returns for the company. It shall also be
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identifying that if there are lack of sufficient finances in the company then it shall affect the
smoothness of the operations.
The major role is to decide upon acquiring the finance as to which source is to be used
debt or equity. The balance needs to be maintained in such a manner that the cost of finance is
also optimized and the control is not diluted. The duties related to the efficient acquisition and
further utilise it so that it can be effectively managed are the major aspects of the financial
management.
Dividend function: -
The dividend function is the crucial role that is played by the finance manager of the
company in which it has to decide regarding the amount of profitability that is to be distributed
in the form of dividend to the shareholders. The proportion of the overall earnings that are
generated that is to be extended to the shareholders of the company and the remaining that is to
be maintained in the form of retained earnings is a a decision that is to be wisely taken by the
company (Osipova and et.al., 2019).
The decision and function is related to the dividend payout ratio as what percent of the total
earnings available to the shareholder is to be paid to them and remaining is to be invested in the
business to carry out operations in the future. It should be undertaken in a manner that the
shareholders are also satisfied and liquidity is retained in the business.
Working capital function: -
The working capital function of the finance department shall be used by the company to
manage the working capital requirements in a manner that all the short term liabilities and
obligations of the company are timely and efficiently met (Shortell, Rundall and Blodgett, 2021).
The working capital is the difference between the current assets and the current liabilities of the
company which shows the availability of the current asset for meeting the current liabilities that
are to be arising within a span of one year.
The major role and duty can be defined in the form of managing the cash, inventory,
accounts receivable and payable upon which the operating cycle of the business depends. If the
working capital management of the company is ensured in that case the operational efficiency
shall be maximized by the smooth operations of the business. If the short term obligations are
met then it will increase the loyalty and credibility of Skansa thereby maximizing its
performance.
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TASK 2
(a) Calculating ratios of SKANSA Plc
Ratio analysis is a tool of management accounting in that financial data for further
evaluated for decision-making process (Tulli, and et.al., 2020). It also allows firm to make
analysis past performance also there are some benefits that attract companies to make extra effort
calculation of ratios-
Planning and Forecasting- Ratio analysis make working easy for top management to set
future goals and objectives, this also allows them to make forecasting for objective that are
determined. Sometime in also helps in reality check for company because it presents data and
future forecast data can be compared.
Control on cost and performance- It makes comparison between past and present data
that will use for future goal, all part of liquidity, working cycle, collection, and payment period is
decided in advance, so they have targeted to achieve and path to follow.
Long term liquidity position- All the long term positions of company is decided from its
short term efficiency, means if current ratio of company is better than it will benefit in long term
(Karmańska and Wiśniewska, 2020). We can understand this with an example if a firm has better
liquidity than they are not in need to increase debt part.
Calculation of Ratio for SKAANSA PLC FOR 31 Dec 2018 and 2019
1. Return on capital employed (ROCE)
Particulars Formula 2018 2019
EBIT Earning before tax and interest 600 675
Capital employed Total assets- current liabilities 3825 675
ROCE (Earnings before interest and
tax)/capital employed
15.69% 11.54%
2. Net profit margin
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Particulars Formula 2018 2019
Net profit/EBIT 600 675
Total sales 4800 6000
Net profit Margin Net profit /total sales * 100 12.5% 11.3%
3. Current ratio
Particulars Formula 2018 2019
Current assets 1515 2070
Current liabilities 645 2220
Current Ratio CA / CL 2.35 0.93
4 Average Receivable period
Particulars Formula 2018 2019
Total receivable 900 1200
Sales 4800 6000
Average receivable
period
(total
receivable/sales)*365
68 days 73 days
5. Average Payable period.
Particulars Formula 2018 2019
Total Payable 570 2100
Purchase 2700 5250
Average Payable period (total payable /purchase)*365 77 days 146 days
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b. Commenting on the financial position and performance of SKANSA PLC
There are two-year data is provided of SKANSA PLC in which company has change its
financial position that are following-
Sales- Company's sales are increased by only 25% and cost of goods sold is increased by
34 % in means company sales is not growing with exception (Liang and Hong, 2019). And
inventory in store is increased 66.% so company need to focused on sales promotion and
advertising to reduce in hand inventory and make sales higher, these will make inflow of cash
and liquidity.
Payable and Receivable- SKANSA PLC company need to make adjustment for
collection period and payable period, moreover company's payable is become 3 times from last
year. That reflect inefficient management of receivable and liquidity because if receivable is
increased with only 40%.
Current Assets and Liabilities- There is also miss-match in short term assets and
liabilities due to this company is in position where they have more liabilities in respect to assets.
Company need to make balance to avoid impact on long term factor.
Retain Earnings- company may look for use of retain earning for reducing creditor’s
part to avoid increment in debt part of company it will allow them to less interest payment and
better utilization to retain earning. Company need not pay any interest and not liable to refund
this money to anyone they just have to pass a resolution for that in board meeting.
Recommendations on the basis of ratio analysis-
 ROCE is use to find out the relationship between profit and capital employed it defines
how much company has earned from investing capital and debt. This is important ratio
from company's prospective to find rate of return on their investment. For SKANSA PLC
this ratio is decreasing due to increment in debt part of company last year ratio is 15.69%
and this year it is 11.54% that need to be increased. For that company may use its retain
earning for payment of short term liabilities rather than going to increase loan.
 Through NP ratio company can find out level of net profit and difference form gross
profit (Liu, and et.al. 2020). In also show that are company is making most of its profit
from operating activities of investing activities for that different can be look between
GPR and NPR. SKANSA PLC net profit ratio is also decline by 1.3% this is due to less
sales and more inventory in closing stock. Company should focus on maximizing sales
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portion and use working capital management for effective utilization of resource.
 Current ratio shows the liquidity position of company in generally ration more than 1 is
good for company that means company's current liabilities can be paid with its current
assets (Tulli, and et.al. 2020). In this company current ratio is declined from 2.35 to 0.93
times so this is not good and an good indication for future and need increase it.
 For better cash and working cycle management company need to manage average
collection and payment period approx same this will make SKANSA PLC to manage its
liquidity position strong. Company's avg. Collection period is 73 days and payment
period is 146 days that is good for company.
CONCLUSION
It can be summarized from the above project that the key accounting and the financial
functions that are carried out in the business shall be positively impacting the operations of the
business. It shall help in the efficient decision-making by the management governing the
prosperity of the business. Apart from that ratios shall help the company know its liquidity and
financial position and facilitate comparison with the competitors.
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Tulli, F., and et.al., 2020. The Use of Stable Isotope Ratio Analysis to Trace European Sea Bass
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Online
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<https://www.managementstudyguide.com/finance-functions.htm>
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