Financial Decision Making Report: BM414, Module Assignment

This report provides a comprehensive analysis of financial decision-making, focusing on the application of management accounting techniques within SKANSKA PLC. It begins with an introduction to financial accounting and its role in preparing financial statements and making informed business...Read More

Financial Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK -1...........................................................................................................................................3
Role of management accounting techniques...............................................................................3
Management accounting techniques............................................................................................3
Critical analysis...........................................................................................................................4
CONCLUSION................................................................................................................................5
TASK-2 RATIO ANALYSIS..........................................................................................................7
A) Calculation of ratios...............................................................................................................7
B) Performance of SKANSKA PLC...........................................................................................8
REFERENCES..............................................................................................................................13

INTRODUCTION
For every business it is necessary to maintain record of their transaction so that on basis of it
financial statements are prepared. With help of statements financial performance is measured.
Also, effective and relevant decisions are taken by managers to improve financial performance.
Besides, it gives insight about profit and loss of overall organisation. Functions of accounting
include storing and analyzing financial information and make sure that all the monetary
transactions are done appropriately (Madhoun, 2020). Accounting helps in preparing the
financial statements is very important for knowing the company’s financial status. Finance
functions include financial planning, allocating funds, forecasting the cash outflows and inflows.
Finance function is important for the company to make sure that all the profits and losses are
being measured and the company is keeping account for all the transactions being done.
The present report will lay emphasis on importance of accounting function, duties, roles, etc.
within SKANSKA PLC. Also, ratios of two years will be calculated to analyse company
financial performance.
TASK -1
Role of management accounting techniques
Management accounting techniques play a crucial role in making plans for future and it
also helps managers in taking decision regarding financial position of company. There are many
techniques that can be used by SKANSKA PLC to identify all details related to financial
situation of company and it helps managers in identifying, analysing, interpreting and
communicating all information so that necessary decisions can be taken. These management
techniques help in make plans, controlling all activities and taking decisions which are beneficial
for company (Ameen and et.al., 2018).
Management accounting techniques
Financial planning – It is the technique which is used by companies to make plans which will
help in taking decision. It is a process use for estimating capital requirement in an organisation
and also helps in determining competition. It helps managers in identifying current position of
company and it will help them in making financial policies related to investment and
arrangement of funds when required.
Analysis of financial statements – It is management technique which is applied by companies
to analyse financial statements. This will help managers in identifying financial position of

SKANSKA PLC and evaluation of financial performance. If company requires fund then they
can make plans after analysing financial statements. It helps in taking decisions and controlling
all activities.
Historical cost accounting – This management technique will help managers in calculating
value which is used in accounting process. In historical cost accounting asset value is recorded at
its original cost in balance sheet (Madhoun, 2020). The price of asset is recorded at cost
purchased by company. Benefit of this technique is that it helps in knowing original value of
assets and liabilities in financial statement.
Budgetary control – It refers to making budgets after analysing previous year data because it
helps in making decisions which is beneficial for managers in taking decision. It helps in
managing income and expenditure. Budgets are made to make an estimate that how much
income will be generated in future and how much expenses a company has to bear.
Decision making – It is the process of identifying a decision, relevant information is collected
and alternative solutions are being find out so that it can be applied by company for future
growth. This helps managers in planning and controlling day to day activities so that
organisation can run smoothly.
Cash flow statement – Cash flow statement is a statement in which information of cash inflow
and outflow is being summarised. It helps managers in taking financial decisions and plans can
be made for future growth. It measures how well an organisation is managing it cash position,
generating revenue to pay its liabilities and expenses that are incurred (Pasch, 2019).
Marginal costing – This management accounting techniques helps in measuring variable cost
and fixed cost. Variable cost refers to cost which changes according to change in output and
fixed cost remains same, it does not change. This technique helps managers in planning,
controlling and correct decisions are taken.
Critical analysis
Management accounting techniques play an important role in taking financial decision
because it helps managers in identifying current position of an organisation and how much
revenue is being generated. It also measures overall performance by calculating expenses which
is incurred and mangers try to reduce expenses and make plans so that more revenue can be
generated. It is important for every company to apply management accounting techniques to
determine financial position of company and necessary steps can be taken to improve

performance of company. There are management techniques that can be applied by managers of
SKANSKA PLC to identify financial position and make plans for future growth of company.
These techniques such as, financial planning, analysis of financial statements, decision making,
cash flow statement, marginal costing and many other (Bangma and et.al., 2017). All these
management techniques helps managers in determining position of company and they can
identify that whether organisation should make changes or not. It also helps in determining that
how much revenue is being generated and expenses that are incurred.
It is essential to determine revenue generated because it will help managers in distributing
profit and salary. These techniques help managers to make future plans so that they can earn
more revenue and they try to reduce cost of production so that good quality products can be
made and customers will get products at low cost. Management techniques help in determining
current position of company and it also help in identifying financial position of competitors. All
the techniques are different and they have benefits, so managers can apply any technique
according to their business and they can get details which will help them in making plans. It also
helps in controlling day to day activities because when managers will know that what are the
areas in which improvement or changes is required they will make plans according to that
(Eberhardt and et.al., 2019). This will help in building good image in market and profit can also
be increased. Management techniques includes cash flow statement in which all income and
expenses are mentioned. It helps in determining that from where cash is received and what are
the expenses.
Management techniques has some negative impact as sometimes wrong decisions can be
taken by managers due to calculation mistake. Cash flow statement is being prepared by
employees so may be there is some error or they have not taken some items. So, this will affect
decisions taken by managers. Before making any plan managers should verify it properly and
check all the details so that there will be no problem in future. It is important for managers to
take correct decisions because if they will take wrong decisions then it can affect overall
performance of company and organisation has to suffer loss (Kim and et.al., 2017). So,
management accounting techniques has positive as well as negative impact. It helps company in
increasing profit and overall financial performance of company can be improved by taking
necessary steps.

CONCLUSION
Thus, it is concluded from the above report that the role of management accounting
techniques and its critical analysis helped in assessing the functions which were of key
importance and through these accounting techniques, it was analysed that how SKANSKA PLC
is functioning by managing its internal and external financial affairs. As the market the company
captured is on international basis, the company is following all the finance rules and regulations
which are being processed through the business. There were various accounting techniques
which were being followed by the company such as financial planning, historical cost
accounting, cash flow statement, marginal costing, decision making, budgetary control and
analysis of financial statements was being described which provided details as to how the
company operates through these systems. Along with this, the background of the company was
elaborated as how the company started its business. Key accounting and finance functions of on
general were discussed. The key practices regarding the management accounting techniques
were described. This overall analysis helped in introducing the company as to what the key sole
purpose and the operations of the company are. Therefore, the overall analysis helped in
knowing the expansion of the company on international grounds.

TASK-2 RATIO ANALYSIS
A) Calculation of ratios
Ratios Formula 31-Dec-2018 31-Dec-2019
Return On Capital
Employed (ROCE)
Operating
profit/Capital
employed*100
=750/3825*100
=19.61%
=975/5850*100
=16.67%
Net profit margin Net profit/Sales
revenue *100
=600/4800*100
=12.5%
=675/6000*100
=11.25%
Current ratio Current assets/Current
liabilities
=1515/645
=2.35
=2070/2220
=0.93
Debtor collection
period
Trade
receivable/Credit
Sales*365
=900/4800*365
=68.44 days
=1200/6000*365
=73 days
Creditor collection
period
Trade payable/Credit
purchase*365
=570/2700*365
=77 days
=2100/4800*365
=160 days
Operating profit:
=Gross profit-operating expenses
For 2018:
=1350-600
=£750
For 2019:
=1650-675

=£975
Capital employed:
=Total assets- current liabilities
For 2018:
=4470-645
=3825
For 2019:
=8070-2220
= 5850
B) Performance of SKANSKA PLC
Accounting ratio and their importance:
Accounting ratio:
It refers to the ratio that are concerned with accounting and calculated on the basis of
accounting information. These ratios are concerned and assist the company to measure the
financial performance of the business. Under the accounting ratio analysis the comparison of the
financial data of the company is being performed through which the growth and success is being
measured.
Importance:
Accounting ratios are important both for the company and its stakeholders. This is
because through the calculation of these ratios the company can determine their own financial
performance. Likewise, the investors can also take investment decision regarding the company
(Andjelic and Vesic, 2017). These are also important to be calculated by the business including
the SKANSKA PLC because through these they can measure the profitability as well as
efficiency of their business operations.
Return on capital employed:
It refers to a ratio that is concerned with the calculation of return on the basis of capital
employed. This means that through this ratio it is being calculated that what is the amount of
return that the company has earned from the capital it employed.
Importance:

This is important ratio because through this the company can determine its efficiency in
terms of its business operation along with using of the capital. Through this ratio the company
can also analyse that whether they are running their business on correct direction or not or
whether the business is generating adequate return or not (Das and Swain, 2018).
Comparison:
While having a comparison of the ROCE of the SKANSKA PLC it is analysed that the
ratio is being declining from 19.61 to 16.67% from 2018 to 2019. This clearly shows that the
performance or the return generation capacity of the company is being declining from the last
year.
Cause:
There could be many causes for this declining ratio including declining the percentage of
sales or the low efficiency of the company with regard to the generation of return. Low
performance of business operation or the employing the capital is also counted as its reason.
Improvement:
This can be improved with the raising or focussing over the percentage of sales. This
means that if the sales will raise then the percentage of the profit will automatically raise.
Likewise, timely disposal of the non-useful assets of the company may also work in the direction
of raising the ROCE percentage.
Net profit margin
This ratio calculate that how much net income or profit is generated as percentage of
revenue. The ratio calculates net profit to revenue of organisation. Here, a good net profit ratio
that is considered is 20% and 10% is considered as average and 5% as low.
Importance
It is important ratio as it shows how much profit or revenue is generated by company.
This means that how much is net income from profit. By that it becomes easy to find out whether
company is profitable in long term growth or not.
Comparison
By comparing the ratio of two years that is 2018 and 2019 it can be analysed that in 2018
the ratio of SKANSKA PLC was 12.5% and in 2019 it was 11.25%. thus, it clearly shows that
net profit ratio is declining. It simple means that company performance is decreasing along with
decline in revenue and profit.

Cause
There can be several causes or reason for decline in net profit ration. It might be due to
decrease in sales, increase in expenses, etc. besides that, there can be another reason of decrease
in gross profit or revenue of SKANSKA PLC.
Improvement
The ratio can be improved by making some improvement in sales. In this sales
percentage can be increased so that net and gross profit margin or revenue increases. This will
help in rise in net profit ratio. In addition to that, expenses can be decreased as well so that net
profit margin ratio increases.
Current ratio
It is a liquidity ratio which helps in measuring company ability to pay short term debts
within one year. Also, it helps in finding out how business can maximise their current asset on
balance sheet to satisfy creditors.
Importance
This ratio is important because it helps to understand that how rich company is. It enables
in examining short term financial strength of firm. With that it can be evaluated how quickly is
business able to convert inventory into cash.
Comparison
By comparing the ratio of two years that is 2018 and 2019 it can be analysed that in 2018
the ratio of SKANSKA PLC was 2.35% and in 2019 it was 0.93%. thus, it clearly shows that
current ratio is declining. Thus, in 2018 SKANSKA PLC was having 2 times asset than liability
but in 2019 they are having only 1 time asset than liability.
Cause
It can be stated that there are certain reasons for this. it can be due to increase in liability
and decrease in asset. Moreover, it may be due to that SKANSKA PLC has sold some asset and
took more debt in 2019 as compared to 2018. Due to this current ratio has decreased.
Improvement
The ratio can be improved by focusing on asset. Here, SKANSKA PLC can buy more
asset in order to pay debt within one year. Besides that, they can keep more cash in bank and in
land, building, current asset, etc. so that current ratio is improved.
Average receivable days

The days helps in finding out how long it takes for company to clear accounts receivable
during a year. This means in how much time payment will be received.
Importance
This is important because it is useful in finding out how quickly business receive their
short term payment within a year. By that it can be evaluated that how financially strong
business is in receiving cash.
Comparison
By comparing the ratio of two years that is 2018 and 2019 it can be analysed that in 2018
the ratio of SKANSKA PLC was 68.4 and in 2019 it was 73. thus, it clearly shows that average
receivable days has increased.
Cause
Here, the cause can be many. It may be due to that business may not be able to focus on
receiving cash from others. Besides, there might be delay in collecting of short term payment.
Improvement
This can be improved by focusing on collection of short term payment. The business can
collect all due payment quickly by taking regular follow up.
Average payable days
It measures the average number of days it takes for a company to pay its suppliers. By
that it shows how much time business make payment.
Importance
The ratio is important because it shows ability of business that how quickly they make
payment to suppliers. So, having less days means firm quickly make payment to supplier and
meet their financial obligation towards suppliers.
Comparison
By comparing the ratio of two years that is 2018 and 2019 it can be analysed that in 2018
the ratio of SKANSKA PLC was 77 and in 2019 it was 160. thus, it clearly shows that average
payable days has increased.
Cause
The cause for this can be that business might not be having enough cash to make payment
to suppliers. It also might be possible that due to low sales and revenue the profits are less due to

which payment is not made. Along with it, SKANSKA PLC might not have got cash from
debtors due to which they are not able to make payment.
Improvement
It can be improved by reducing the average payable ratio so that payment is made to
supplier. Moreover, they can use cash kept in bank to make payment.
CONCLUSION
Thus, it can be concluded by analysing the performance of SKANSKA PLC it can be said
that financial performance of company is low. They are having low net profit ratio. Also, the
average payable days are 160 so they take a long time to make payment to suppliers. Hence,
investor should not invest in SKANSKA PLC as their financial performance is not good for long
term. Besides that, investing in SKANSKA PLC will be risky as it may result in loss in future.
Even if there is increase in gross profit but the ratios of company are not good. This clearly
shows that financial performance of SKANSKA PLC is average.

REFERENCES
Books and journals
Andjelic, S. and Vesic, T., 2017. The importance of financial analysis for business decision
making. In Book of proceedings from Sixth International Scientific Conference
Employment, Education and Entrepreneurship (pp. 9-25).
Das, C.P. and Swain, R.K., 2018. INFLUENCE OF CAPITAL STRUCTURE ON FINANCIAL
PERFORMANCE. Parikalpana: KIIT Journal of Management. 14(1).
Ameen, A. M., and et.al., 2018. The Impact of Management Accounting and How It Can Be
Implemented into the Organizational Culture. Dutch Journal of Finance and
Management. 2(1). p.02.
Bangma, D. F., and et.al., 2017. The effects of normal aging on multiple aspects of financial
decision-making. PloS one. 12(8). p.e0182620.
Eberhardt, W., and et.al., 2019. Age differences in financial decision making: The benefits of
more experience and less negative emotions. Journal of behavioral decision
making. 32(1). pp.79-93.
Kim, J., and et.al., 2017. Review of family financial decision making: Suggestions for future
research and implications for financial education. Journal of Financial Counseling and
Planning. 28(2). pp.253-267.
Madhoun, K. A., 2020. Effects of Modern Strategic Management Accounting Techniques on
Performance of Commercial Banks in Palestine: An Empirical Study. Journal of
Economics, Finance and Accounting Studies. 2(1). pp.35-48.
Pasch, T., 2019. Strategy and innovation: the mediating role of management accountants and
management accounting systems’ use. Journal of Management Control. 30(2). pp.213-
246.