Financial Decision Making: Analysis of SKANSKA PLC Performance (BM414)

This report delves into the critical importance of accounting and finance within a business organization, emphasizing their functions, duties, and roles through the case of SKANSKA PLC. It underscores the significance of compliance, capital budgeting, and financial performance analysis. The report then provides a detailed financial analysis of SKANSKA PLC, focusing on ratio analysis, specifically Return on Capital Employed (ROCE), to assess the company's efficiency and performance over two years. The analysis includes calculations, interpretations of financial results, and discussions on factors influencing ROCE, offering insights for investors and management. The report highlights the relevance of financial strategies and the impact of market conditions on the company's financial outcomes, providing a comprehensive view of SKANSKA PLC's financial health.

Assignment

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Task 1...............................................................................................................................................3
Importance of accounting and finance functions, duties and role..........................................3
TASK 2............................................................................................................................................6
Financial analysis of performance and position of SKANSKA PLC ....................................6
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
In every organization the relevance of the accounting and the finance team is very
important. There are various function and roles which are being played by the management in
effectively managing the business operations. With the finance team all other functional units of
the organization is interrelated and interconnected. It is very important to understand the
relevance of it to the successful business organization. This report provides an insight about the
importance, roles and duties of the accounts and the finance team within a business organization
with the help of an example. It also covers the calculating and interpreting the financial results of
the ratio analysis of the SKANSKA PLC.
Task 1
Importance of accounting and finance functions, duties and role
The key of the successful business lies within the accounts and finance team of the
organization as it helps in understanding the financial numbers of the organization. This helps in
analysing the business activities which assist in taking better business decisions. Therefore, the
role and importance of the accounts and finance team is very crucial and some of them are stated
underneath.
Importance of accounting and finance functions
Ensuring compliance with the relevant laws and regulations: The business world is
changing continuously which makes it important for the company to be up to date with the
changing laws and regulations. There are situations which makes it important for the small
businesses who don't have the right lawyer or the attorney which will make sure that the
accounting department is keeping tab over all the relevant and crucial business laws (Piontkevich
and Shatkovskaya, 2020). For example, SKANSKA PLC has employed the right and
experienced team of professionals who are knowledgeable in regard to the accounting laws and
regulations and other laws as well. This has helped it in effectively handling and complying with
the all the required laws and regulations. This is another important function of the accounts and
the finance team which provides assistance and support in attaining the desired goals and
objectives.
Undertaking capital budgeting decisions: This is an important aspect and function of the
finance team in assisting the management in taking crucial business decisions on account of the
investment to be made. With the application of different capital budgeting techniques, the

finance and the accounting team of the business organization takes various types of business
decisions which will help in determining the long term growth of the company (Roy and Hota,
2016). Like in SKANSKA PLC, the finance and the account department works in effectively in
identifying the various factors that can have an influence over the investment decision-making
process. For instance, there are times when in the situation of mutually exclusive proposals, it
becomes important to exercise various techniques that will help in taking right decisions along
with determining the external factors having an influence over the decisions, Thus, it is
considered to very important function of accounts and finance team.
Analysing the financial performance of the company: For attaining success in an
effective manner requires the business owners or the relevant person to keep checking and
analysing the current performance level of the organization in comparison to its previous year
performance. By conducting such as analysis assist the businesses in determining and learnings
from their past mistakes which results into taking better and informed business decisions. In
respect to the planning for the future prospectives (Green, Greene and Orsini, 2018). For
example, the finance team of the SKANSKA PLC provides all the relevant information which
helps the management in determining the current financial performance and position of the
company. This requires the application of analytical skills for interpreting the data provided in
the rightful manner and not everyone can do it as it requires the knowledge about reading the
financial statements and the important financial terms. Thus, analysing the financial performance
and position of the organization is the major function of the accounts and the finance team.
Importance of accounting and finance duties
Managing the working capital of the company: The role of finance department is to
manage the working capital requirements of the business. Handling the working capital is an
important aspect that cannot be ignored by the management (Ooko, Githui and Omurwa, 2018).
For example, in the case of SKANSKA PLC with insufficiency of cash, it will create trouble for
the management in carrying out the business activities and for assessing this requires highly
qualified team. Thus, it is considered as an important duty of the accounts and the finance
department.
Developing business strategies: The good accounting and the financial knowledge skills
paves the way for the good strategy. As and when the budget is prepared and the data has been
analysed properly it becomes very easy for the management in formulating and determining the

strategy which will helps in achieving the desired business objectives and goals. It can be
understood with the help of an example, SKANSKA PLC after reviewing its financial records
makes the management more empowered in respect to taking the informed business decisions. In
various aspects ranging from staffing to the supply chain management. This factor makes the
role and duties of the accounts and finance team more crucial which cannot be ignored.
Implementing cost control: The main crux of the accounting and finance is to determine
the areas where most of the cost is being incurred so that timely actions can be taken for reducing
the impact of it. In SKANSKA PLC, the accounts and finance team is actively being involved in
the cost saving activities which is being done by looking at the various expenses which is being
incurred at the different level of business activities. Therefore, it becomes important for the
accounting department to get in touch with the other departments as well which will help in
determining any unnecessary cost and so that actions can be taken for reducing it. But for
exercising cost control it requires the professionals who are qualified enough to handle it and
implement it effectively which is a crucial duty to be exercised by the organization.
Importance of accounting and finance roles
Maintaining the financial record: Accounting team of an organization works on
effectively recording the financial activities of the organization. The accountant of the company
records the transactions in the respective books of accounts from where the business can track
the revenue and expenses of the company on a daily basis. For example, in case of SKANSKA
PLC, the company's accounts team works effectively in accurately recording all the financial
transactions on a timely basis (Bible, 2019). But for doing the same, it is essential to have
complete knowledge about the accounting otherwise, it will all go wrong resulting into
inaccurate preparation of the accounting information. This is first and foremost role of the
accounts and finance team based on which the financial reports can be prepared and the analysis
can be carried out.
Avoiding the legal problems: By maintaining and keeping up with the accurate financial
records supports the organization in following the essential business laws. Overlooking or
ignoring any of the major factor will have an implication over the tax management. Therefore, it
becomes important for the financial managers to understand about the what types of expenses
and income and expenses to be deducted and how much tax is required to be paid and when.
SKANSKA PLC, for instance, has an effective team of finance having all the relevant

knowledge and experience in the field (Suwannaset, 2019). But in contrast to it, poor financial
recording and less knowledgeable team will result into company being audited and might land it
in some legal trouble as well. Thus, it is an important function or role of the finance team in
respect to reducing the government intervention in the business processes and activities.
Creating budget: By effectively and appropriately recording the financial transactions
helps the organization in creating plans and the budget for the future in order to carry out the
business activities in an effective manner. This helps in keeping track of all the business
operations and activities. In case of SKANSKA PLC, the budget prepared by the finance team is
based on the information being provided by the accounts department (Nevries and Payne, 2017).
This budget provides the current view of the financial position of the company and also assist in
navigating the future growth and development of the business. Therefore, the role of finance
team in developing the budget will help in ensuring future growth and success and effectively
achieving the desired objectives. But for carrying out budgeting process requires highly qualified
and experienced team of professional for ensuring accuracy.
TASK 2
Financial analysis of performance and position of SKANSKA PLC
Financial analysis of SKANSKA PLC. The company is engaged in construction business.
Below reports are computed for analysing the performance of company over the two years from
the perspective of investors who is willing to invest 1 million in the company.
Ratio Analysis
Ratio analysis is a tool used in the financial management for analysing the performance
and position of the company. It is utmost important for the management and the investors to
assess the performance of the company for ensuring that the strategies laid by them are working
effectively and for investors that adequate returns will be provided over their investments or not.
Ratio analysis of SKANSKA Plc
i) Return on capital employed
Return on capital employed is a ratio used for assessing the efficiency of the management
in generating returns over the capital employed. It is also used for assessing the returns generated
by effectively managing the resources. Higher ROCE implies that the capital is being used

economically (Asuquo and Offiong, 2019). Company must have ROCE higher than cost of
capital for attracting new investors and for raising capital from market.
Particulars Formula 2018 2019 Change
Profitability
Ratios
Return on
capital
employed
Net operating
profit/Employed
Capital 15.69% 11.54% -26.44%
Employed
Capital
Total assets – Current
liabilities (4470-645) 3825 (8070-2220) 5850
Net operating
profit 600 675
Interpretation
It could be analysed from the above computation that the ROCE of SKANSKA plc is
11.54% in year 2019 which has showed negative movement of 26.44% towards down. Last year
company had ROCE of 15.69% which is high and adequate. From the results of last year, it
could be interpreted that the company was very effectively utilising the resources of company
leading to growth of the company and higher returns. When the resources of company are
utilised economically they bring higher cash flows to firm leading to higher net profits and
returns. In year 2019 ratio showed a decline and was reduced to 11.54%. It could be seen that the
resources of company are currently not utilised with higher effectiveness. The decline in the
returns is also seen as company has employed new capital of plant and machinery for growth and
expansion of business. However, the profits have not increased according to the capital
employed in company. This shows that the existing strategies of the company are not useful with
increased capital employed and resources at large (Kubánek, 2016). This has led to the decline of
company profits. On the other, if looking at the market conditions construction business has
showed slow down with the economy that has led significant impact over the real estate business

as compared with last year. This can also be the cause due to which company might have not
been able to achieve the target profits levels.
Company for improving the ROCE from current level is required to implement new
strategies replacing the existing ones that will help the company in growing its existing level of
profits and returns. It is essential for the company to use its resources economically both for
internal efficiency management and for attracting investors by showing that it is capable of using
the resources economically and provide better returns. Investors are influenced by the ability of
management in using the employed capital for generating higher revenues for the business so
that it could earn required level of profits.
ii) Net Profit Margin
Net profit margin refers to the metric used for assessing the profitability of entity or the
organisation. Investors are mainly interested in the profitability of the firm as they want to earn
adequate returns over their investments through profits in form of dividend or by wealth
maximisation. A company not having adequate profits will find it difficult to attract investors
and achieve the goals and objectives of the business (Al-Nimer and Alslihat, 2016). Every
business is started with the motive of earning profits and if adequate profits are not earned it
shows that the company is not running the business adequately or facing problems in meeting the
expenses.
Particulars Formula 2018 2019 Change
Net profit
margin
Net Profit
margin / Net
Sales 12.50% 11.25% -10.00%
Net Profit 600 675
Revenues 4800 6000
Interpretation
It could be evaluated from the above calculations that net profit margin of company is
11.25% where the profit margin was 12.50% last year in 2018. There has been significant decline
of 10% in the net profit margins of SKANSKA. It could be evaluated that business has not
performed as of last year. However, the turnover and net profits of company are increased from

last year which shows that company has increased the market share and has obtained access over
new customer base. The profits of company have not increased in the proportion of the increase
of turnover due to increase in cost of sales. The cost of sales was raised as company has acquired
new suppliers for meeting the raw material requirement that provided them with materials at high
cost. This led the cost of sales of company to raise high and decrease in profits was seen.
Decreased profit level have strong impact over the share prices and image of business. Main
motive of investments is to gain higher profits over the capital they have invested in the firm.
Company is required to contact new suppliers that are able to provide material at reasonable
costs by negotiations for bulk purchase in case of emergent needs. Company has achieved the
profitability higher from last year which will not be impact stock prices and the shareholder
return (Aulová, Pánková and Rumánková, 2019). It is essential for the management to employ
cost efficient strategies to generate adequate profits from the business and for further expansion
of the business. Decreased profit level will lead the investors to make a shift toward other well
performing companies. The returns of the company are yet higher than the other competitors in
the industry which is an advantage for the business.
iii) Current Ratio
It is a liquidity ratio used for measuring the liquidity of business. The ratio is highly used
by the investors for identifying the liquidity position of company. It is essential for the business
enterprise to have strong liquidity position so that it could be able to meet the cash flow
requirements of the business. Current ratio ensures that the company is able to meet the short
term obligations from the existing current assets.
Particulars Formula 2018 2019 Change
Current
assets 1515 2070
Current
liabilities 645 2220
Inventory 450 750
Quick
assets 1065 1320

Current
ratio
Current
assets /
current
liabilities 2.35 0.93 -60.30%
Quick ratio
Current
assets -
(stock +
prepaid
expenses) 1.65 0.59 -63.99%
Interpretation
Current ratio is used for analysing the liquidity position of SKANSKA plc which is 0.93
in current year. Last year current ratio of firm was highly strong at 2.35 representing that the
company was having enough current assets for meeting its obligations. In current year liquidity
position had declined by 60.30% which is significantly high where company is required to take
immediate measures for improving the position. Ratio of 0.93 shows that current assets are not
even equal to current liabilities which show inability of SKANSKA in meeting obligation over
short period. It could be analysed from the financial statements of the company that there are
high amount of trade payables which has increased the current liabilities as materials for meeting
the demand were purchased on credit from the suppliers (Monnet and Vari, 2019). It is required
to establish strategies for increasing the current assets and decreasing the liabilities by timely
payments to suppliers as it will increase the working capital requirements leading to further
increase in liabilities. It could also improve the liquidity by taking long term loans for meeting
the short term obligations. It is caused due to operating cash cycle dis balance and it may cause
the company to increase the loans and obligations which will decrease the profit levels.
iv) & v) Debtor collection period and Creditors collection period
Debtor collection period refers to the time taken by entity for collecting the dues from
debtors or customers while creditor collection period refers to time taken for making payments to
suppliers.

Particulars Formula 2018 2019 Change
Debtor 900 1200
Creditors ' 570 2100
Days 365 365
COS 3450 4350
Sales 4800 6000
Debtor
Collection
period
Debtor/
Sales*365 68.44 73.00 6.67%
Creditor
payment
period
Creditor /
Sales*365 43.34 127.75 194.74%
Interpretation
It could be analysed that debtor collection period has increased from last year to 73 days
which due to increased credit given to customers for raising the sales level. Collection period of
the company should be shorter.
On the other creditor collection period is raised from 44 days to 127 days due to
increased supplies and high amount of bills pending. It could be evaluated the cash flow cycle of
the company is not adequate. It will be required with high demand for cash funds for meeting the
operations of business (Omondi-Ochieng, 2018). Management of SKANSKA has to take steps
for improving operating cash cycle of the firm so that it could meet the working requirements
without raising funds from outside sources. Higher debtor collection period is seen with the
motive of increasing sales and customer base. Ineffective debtor & creditor collection period can
lead company to have increased need of raising funds from external sources for meeting the
funds requirements.
CONCLUSION
It can be summed up from the above that the roles and importance of the accounts and
finance differs from the organization to organization. Each of the point is very important for the
proper functioning of the business organization such as managing WC, investment decisions etc.

Along with that by conducting the ratio analysis helped in determining the financial position and
performance of the company. Based on the analysis, it can be said that the current positioning
and performance of the SKANSKA PLC is moderate and there are relevant actions and steps
which it requires to undertake for improving the performance level in order to remain
competitive. Therefore, understanding the essentials of the accounts and finance department or
team and carrying out the ratio analysis has supported in the effective management of the
business operations and formulating the business strategies.