BM414 Financial Decision-Making Report: Skanska PLC Expansion Analysis

This report provides a comprehensive analysis of financial decision-making processes, focusing on the case of Skanska PLC, a British construction engineering company planning to expand into European countries. The report begins with an introduction to financial decision-making and its importance in evaluating financial data for short, medium, and long-term decisions. It then delves into Task 1, evaluating the accounting and finance functions within Skanska PLC. The accounting department is examined, including financial accounting (financial reporting, accounting principles), management accounting, tax function, and auditing function. The finance department is also assessed, with a focus on investment, financing, dividend, and working capital functions. The report outlines specific duties and roles within Skanska PLC, such as assessing investment options and decision-making. Task 2 involves a detailed interpretation of financial ratios, including Return on Capital Employed, Net Profit Margin, Current Ratio, Debtors Collection Period, and Creditors Collection Period, and their implications for the company's financial performance. The analysis reveals decreasing trends in ROCE, Net Profit Margin, and Current Ratio, while Debtors Collection Period increased. The report concludes by summarizing the key findings and recommendations for Skanska PLC's financial strategies during its European expansion.

Financial Decision-
Making

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
TASK 2............................................................................................................................................4
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial Decision-making is a process through which the management of an
organization is able to take different types of decisions effectively and efficiently (Adhikari and
et.al., 2017). This helps them in ensuring that the firms are able to identify the way they can
analyse and interpret the given financial data, facts and information so that the different types of
short-term, medium-term and long-term decisions can be taken. Therefore In this way the
various companies can manage their funds in the right manner by making the use of financial
skills of their managers. It can be helpful for them to be able to identify and solve their financial
problems. This report is based on Skanska PLC which is a British Construction Engineering
Company which has headquarters in Hertfordshire, United Kingdom. The company is planning
to expand to European Countries in the next 10 years. Also this can help in raising the level of
profits. In this report, detailed focus will be made on evaluation of importance of Accounting and
Finance functions. Additionally, specific analysis on analysis of different ratios will be done as a
part of this project.
TASK 1
Accounting and Finance is an important department within the organizations. Thus the
requirement from the organizations is that they make its use effectively and efficiently to
evaluate their financial situation in the right manner (Agnello, Laney and Lucey, 2019) (Aren
and Zengin, 2016). As Skanska Plc. Is planning to expand to European Countries in the next 10
years therefore the requirement from its managers is that they must evaluate the different
functions in both Accounting Department and Finance Department so that effective decisions can
be taken by them. Thus the evaluation of both of the departments and the elements under them is
as follows-
Accounting Department-
 Financial accounting- The role of financial accounting is important for a company
because it is used specifically to record and manage the different transactions (Bellofatto,
D’Hondt and De Winne, 2018). Thus by making its use decisions can be taken by the
management. It includes Double Entry and the Accrual Basis of Accounting, Accounting
Principles, Financial Statements and Financial Reporting. For example- In Skanska Plc.
The management has to make sure that they use Financial Reporting to prepare a report
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of the overall financial situation in a highly effective manner. This will help them in
assessing their financial situation to take a suitable decision regarding expansion in
European Countries. This is so because in Financial Accounting a detailed summary of
the financial statements can be created which helps the management in deriving the
conclusions and recommendations which can be quite useful for them. Thus in this way
these conclusions and recommendations will be helpful for Skanska Plc.'s managers so
that they are able to take a decision regarding expansion in European Countries.
 Management accounting- Management accounting is a process through which different
types of reports regarding financial data, facts and information are prepared after
carefully analysing and interpreting the given financial data, facts and information
(Calabretta, Gemser and Wijnberg, 2017). It is very useful for them so that relevant
decisions can be taken by them in the future. This can help them a lot in achieving their
goals and objectives in the future. It includes the use of different types of systems, using
various types of reports, using techniques to ascertain profit, using budgets for planning
for the future and using systems to solve the financial problems effectively and
efficiently. Thus as Skanska Plc plans to expand to European Countries in the next 10
years it will be required to make the use of provisions of Management accounting to
analyse and interpret whether it will be able to earn the right amount of profits in these
countries. Thus the use of Management Accounting will be helpful in assessing that.
 Tax function- Tax function is crucial in the organizations because through it they are
able to assess their tax liability. Direct Tax, Indirect Tax, Assessment of Tax Liability all
form a part of this function (Christensen, Nikolaev and Wittenberg‐Moerman, 2016). By
making its use the management of Skanska Plc. Are able to ensure that they assess the
liabilities related with their tax highly effectively and efficiently. As the decision of the
company to expand to European Countries in the next 10 years involves assessing the tax
liability which it will incur in these countries therefore this function will be highly useful
for it. It has to ensure that it identifies the tax liability which it has to pay in these
countries. Thus in this way it is quite useful for the financial managers to evaluate the tax
they need to pay.
 Auditing function- Auditing function is useful in the firms because it helps in checking
the authenticity of the financial transactions (Ho and et.al., 2016). By making its use the
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errors and frauds in the financial statements can be easily identified. Therefore rectifying
measures can be taken so that they are removed to ensure smooth functioning effectively
and efficiently. As Skanska Plc is a company which plans to expand to European
Countries in the future it can audit its financial statements to assess whether its financial
position is good enough for planning an expansion to foreign countries.
Finance department-
 Investment function- It is an important function in the Finance department because by
making its use the financial managers are able to determine the decisions which they can
take in the future (Kastner, 2018). The function has a role of evaluating the financial
position of the organization and the investment options which are available for it and the
best decision which can be taken by it accordingly. Therefore as Skanska Plc plans to
expand to European Countries it has to evaluate the investment options which are
available before it effectively and efficiently. Thus in this way a proper evaluation of the
options for investment can be done and the right decision can be taken.
 Financing function- It is a crucial function in the Finance department because by
making its use the financial managers are able to ensure that they can identify the way the
project can be financed (Krause, Noth and Tonzer, 2016). Thus in this this function is
important for the managers because by making its use the decisions can be taken highly
effectively. In the context of Skanska Plc it is very important that for expanding in the
European Countries it evaluates the overall situations effectively and efficiently. The
main role which has to be played by this function is to identify the sources of funds and
the way a right source can be used. It has to identify the way the financing of its project
can be done and the various types of options which are available for it. Thus by
evaluating the options the best decision can be taken regarding the investment to be made
in a particular project. Thus the management of the company is required to identify the
way it can fund the projects in the right manner.
 Dividend function- It is a function which can be used by the organizations and under it
the reward, cash and other benefits can be provided to them (Murendo and Mutsonziwa,
2017). Thus, In the context of Skanska Plc it is crucial that for expanding in the European
Countries it evaluates the option of investment which is available for it and the Dividend
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which it will be required to pay when it chooses a particular option. In this way it will be
able to satisfy the stakeholders in the right manner.
 Working capital function- It is a function which evaluates the working capital of an
organization (Paley, Tully and Sharma, 2019). It identifies the money which is required
for the purpose of fulfilment of short-term expenses. Thus the financial managers in
Skanska Plc. Are required to make the use of this function so that they are able to identify
the working capital which will be required for the expansion in European Countries in the
next 10 years. This will be quite helpful for the achievement of relevant goals and
objectives of the organization.
Duties and roles within Skanska Plc-
 To assess the investment options- The management is Skanska Plc is required to assess
the different investment options which are available before it so that it is able to take an
appropriate decision in the future. In this way it will be able to make sure that a thorough
assessment of the investment options for shifting to European Countries in the future
must be made so that a decision of investing can be made.
 Decision-making- When the management of Skanska Plc has analysed all the relevant
financial data, facts and information then it is required to make sure that it is able to take
decisions which can benefit it in the future. The managers of the company are required to
make sure that they fulfil their duty and role by taking a decision regarding shifting to
European Countries in the next 10 years after they have assessed the benefits which can
be created if it shifts there and the way it can create a benefit for the organization. Thus
taking decision is an important duty and role of the management which has to be used
here in this situation.
TASK 2
The following ratios have been calculated-
Return on Capital Employed- It is ratio which can be calculated by dividing the EBIT
with the Capital Employed (RĂDUȚU, 2016). The use of this ratio can be very useful for
Skanska Plc so that it is able to identify the return which it will receive on the capital which has
been invested by it. Thus if the return is on the higher side then it will make sure that the
company is earning suitable profits in the future.
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Net Profit Margin- It is the ratio which can be calculated when the Net Sales are divided
by the revenue. The use of this ratio can be made by the management of Skanska Plc so that it
can ensure that it can ascertain the way its net profit have increased.
Current Ratio- It is the ratio which is ascertained by dividing Current Assets with
Current Liabilities. For the managers of Skanska Plc it is highly useful so that the company is
able to make sure that it maintains a right balance between Current Assets and Current
Liabilities.
Debtors Collection Period- It is the ratio which can be derived by dividing the Number
of days in a year with the Debtors Collection Period. Thus in this way the management of
Skanska Plc can make sure that it is able to identify the number of days it will take to collect the
payment from the debtors.
Creditors Collection Period- It is the ratio which can be derived by dividing the
Number of days in a year with the Creditors Collection Period. In this way the managers of
Skanska Plc will be able to ascertain the number of days it will take to pay the payment due to
the creditors.
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Interpretation of the ratios-
 Return on Capital Employed- The ROCE has decreased from 34.96 % to 18.67 %. This
means that the return which the company has been earning has decreased which has
thereby impacted it a lot.
 Net Profit Margin- The Net Profit Margin has decreased from 12.5 % to 11.25 %.
Therefore in this manner the company's profits have reduced thereby impacting its level
of financial performance during the year.
 Current Ratio- The Current Ratio has also reduced from 2.35 to 0.93. Thus in this
manner the company's assets have witnessed a change. This has happened because the
assets of the company have changed which has led towards this change.
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 Debtors Collection Period- The Debtors Collection Period has increased from 68 to 73
days. This means that the debtors are taking more time for paying their dues to the
company. This is therefore impacting the revenues of the company also as the company is
receiving its payment late.
 Creditors Collection Period- The Creditors Collection Period has increased from 77
days to 160 days. This means that more time is taken by the company to pay their dues to
the creditors. Thus in this way this is creating an impact on the liabilities of the company.
This shows that the company does not pay its creditors on time and thus this affects its
goodwill in the market.
Thus overall it can be said that the performance of the company has been quite
satisfactory. An increase in the Return on Capital Employed Ratio means that a higher return is
being earned on the capital which has been invested by the company thereby leading towards
positive signs. However due to a decrease in the Net Profit Margin it can be said that the
expenses of the company have increased which has reduced Net Profit thereby leading towards a
decrease in the Net Profit Margin. However due to a decrease in the Current Ratio it can be said
that Current Assets and Current Liabilities of the company have been impacted. The Debtors
Collection Period has increased which impacts the receiving of payment from the Debtors and
thus also impacts the revenue collection from them. The Creditors Collection Period has also
increased which is therefore leading towards a delay in the payment to the Creditors.
Therefore it can be said that the financial performance of the company though good
requires certain improvements to be made so that it can be enhanced. The following
improvements can be made-
 Reduction in expenses- The managers of the organizations are required to make sure
that the expenses are reduced (Smolka and et.al., 2018). In Skanska Plc reduction in the
level of expenses will be quite helpful in ensuring that the level of profits are effectively
enhanced.
 Enhancement of revenues- The managers of the firms are required to ensure that the
enhancement of revenues is done so that the performance can be increased (Thakur and
Kumar, 2018). In the context of Skanska Plc an increase in the level of revenues will
mean that the company is able to earn more profits.
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 Setting a period for collecting dues from debtors- In the organizations there is a
requirement that a definite period must be set so that the dues from the debtors can be
collected. Thus in the context of Skanska Plc it is important because this will help in
improving Average Collection Period of the organization.
 Setting a period for paying the due to creditors- In the firms the requirement is to
ensure that a definite period is set for making the payment to the creditors. In Skanska Plc
it is quite important that this period is set so that the creditors can be paid their dues on
time.
Thus it can be said that by following these measures an effective improvement in the overall
level of financial position can be made in the organizations. This will make sure that the
company is able to bring an improvement in the financial performance and thus the ratios can be
improved as an indicator of improved performance.
There are different reasons due to which ratios are changed. These reasons are explained
as follows-
 Change in assets- The ratios can due to change in assets. Thus if there is an increase or
decrease in the value of assets then this can lead towards an impact on the ratios. In
Skanska Plc this is the reason due to which the assets have witnessed a change.
 Change in liabilities- The ratios can also change due to a change in liabilities. Therefore
if there is an increase or decrease in the liabilities then this creates an impact on the
ratios. Therefore In the context of Skanska Plc this is the reason due to which the
liabilities can witness a change.
 Change in profits- If there is an increase or decrease in the level of profits which the
company is earning then this can create an impact on the ratios. Therefore for Skanska
Plc this is the reason due to which its profits have witnessed an impact.
 Change in sales- If there is an increase or decrease in the level of sales then this can
create an impact on the ratio calculation. Thus in the context of Skansksa Plc this can be
the reason due to which the revenues have been impacted.
Effect of change in ratios-
 Impact on financial situation- Due to a change in the ratios an overall impact can be
created on the financial situation of the organization. Thus as the various ratios of
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Skanska Plc have witnessed a change this has led towards an impact on the overall level
of performance of the organization.
 Financial performance- When the ratios change an impact is created on the financial
performance of the organization. In the context of Skanska Plc this can lead towards an
increase in the financial performance because if there is a positive change in the ratios
then the financial performance of the organization can witness a boost.
 Change in the level of expenses- Due to a change in ratios a change can be witnessed in
the overall level of expenses (Zavadskas and et.al., 2016). Therefore for Skanska Plc it
can be said that the level of expenses are required to be ascertained effectively and
efficiently.
 Change in profits- A positive change in the ratios can lead towards an impact on the
profits level. Therefore In the context of Skanska Plc it can be said that the ratios can
impact the profitability level.
CONCLUSION
From the above report, it can be concluded that financial decision-making is a skill
through which important financial decisions can be taken. The management of the firms have to
ensure that they make the use of their decision-making skills effectively and efficiently so that
appropriate decisions can be taken by them without problems and issues. Therefore in this way
they can ensure that the company makes good progress in the future. Under the Accounting and
Finance Department there is a presence of multiple functions which ensure that the decisions can
be taken after proper evaluation. Also the use of ratios can be made so that the financial
performance of an organization is effectively interpreted. Therefore in this way the right
measures can be taken so that the overall financial performance can be improved.
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REFERENCES
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