Financial Decision Making Report: Skanska plc's Performance Analysis

This report provides an executive summary of financial decision-making processes, focusing on the interplay between finance and accounting departments within various business entities, emphasizing their critical roles in resource allocation and organizational survival. The report then analyzes the financial health of Skanska plc, revealing a decline in 2019 compared to 2018, attributed to ineffective financial resource management. The introduction defines financial decision-making and its importance, particularly for companies like Skanska plc, a UK-based construction company. The main body delves into the roles of accounting and finance departments within Skanska plc, including financial accounting, management accounting, tax and auditing functions, and investment, financing, dividend, and working capital functions. Finally, the report calculates and comments on key financial ratios, including return on capital employed, net profit margin, current ratio, debtors collection period, and creditors payment period, highlighting performance changes between 2018 and 2019. The analysis provides insights into Skanska's financial challenges and suggests potential strategies for improvement, like focusing on generating higher operating profit and managing current liabilities effectively.

FINANCIAL
DECISION MAKING

EXECUTIVE SUMMARY
The project report summarize combined functions of finance and accounting department for
different kinds of business entities. Each department is crucial in order to make optimum
utilization of available financial resources. In the absence of both functions a company cannot
imagine to survive for longer period. While second part of report abstracts that financial health of
Skanska plc has been dropped in year 2019 as compared to year 2018. This is so because of
ineffective management of available financial resources and activities.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................5
MAIN BODY...................................................................................................................................5
Task 1..........................................................................................................................................5
Task 2..........................................................................................................................................9
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial decision making can be defined as a form of method or technique under which decision
about financial aspect of a company being taken regards to allocation of funds, liabilities, stock
and many more (Greenberg and Hershfield, 2019). This is essential for companies to take
accurate decisions in the context of finance so that they can they can sustain in competitive
environment. The report is based on a company that is Skanska plc. This company is located in
United Kingdom and operates is business in the context of construction projects. This company
was founded in year 1984 and planning to enhance their operations in other European nations in
upcoming ten years.
MAIN BODY
Task 1
Accounting and Finance Department: In each type of business, both accounting and
finance department are interrelated to each others. This is so because accounting
department is related to collecting, analysing and recording financial data in the books of
company (Hirshleifer, Jian and Zhang, 2018). It is one of the crucial process which need to
be followed by each business entity. Any form of error may lead to range of issues and
uncertainties in financial operations. Another key aspect of accounting department is to
identify which types of business transactions are need to be recorded and which ones are
not.
Finance department can be understood as a form of department which is related with
preparation of various kinds of financial statements at the end of financial years. This
department is responsible to know about financial health of company during a particular
accounting period. This department gathers different kinds of key financial information
by help of above mentioned accounting department because such department records
information in a systematic manner which can be used for preparation of financial
statements.

Role of accounting and finance department for Skanska plc: The above mentioned both
departments play a key role in the aspect of above mentioned business. The accounting
department is useful in order to record all activities related to monetary such as purchase
of land, construction cost and many more (Nigam, Srivastava and Banwet, 2018). Their
accountant prepare journal entries and ledgers which are used in order to assess
information about any specific financial transaction during a year.
Similarly, finance department also plays a key role in the aspect of above company. This
is so because this department analyse and prepare financial statements at the end of year.
These prepared financial statements are useful in order to assess financial health of
Skanska plc. Apart from this, their stakeholders also become able to assess whether they
should make investment or not. They do so in accordance of prepared financial
statements. Apart from this, another role of such department is that company's managers
and board of directors take crucial decision about investment in any long project which is
highly costly and risky.
Role of Accounts Department: Apart from the above done discussion, there are some key role
and importance of accounts department which are explained below in such manner:
 Financial accounting- This type of accounting can be defined as a form of accounting that
is associated with process of summarizing, analysing and recording monetary
transactions of a business during a particular time frame (Cook and Sadeghein, 2018).
This function is being performed by help of accounting department of a company. This is
so because without support of such department it is difficult to complete above activities
due to lack of information. In the context of above Skanska plc, their accounting
department plays a key role in relation to perform all elements of financial accounting. It
becomes possible because such department offers a range of financial information like
purchasing of any land, building as well revenues from effective activities of
construction.
 Management accounting- It can be understood as a form of accounting under which
internal reports are produced by help of both financial and non financial information.
These internal reports are used by management of a company in order to take crucial

decision during a time period. Under this accounting, accounts department plays a key
role in order to offer both kinds of information like financial and non financial aspects
which is used to produce internal reports. Such as in the context of above Skanska plc,
their accounting department contributes in huge by helping management accountants to
prepare internal reports.
 Tax function- Each type of business need to pay tax to the government on the behalf of
nature of business, generated income and expenses etc. This is essential for companies to
provide accurate information to government or tax authority so that they can measure
actual amount of tax (Chen, 2018). In this situation, accounting department plays a key
role to measure how total tax payable amount. This is so because by help of accounting
department tax authority becomes able to check various documents like invoices, sales
budget, expense sheet and many more. Like in the aspect of above company, their
accounting function is useful in order to offer information to company as well as to tax
authorities about their tax payable income.
 Auditing function- The term auditing can be defined as a form of process under which
company's financial statements are inspected and reviewed by independent auditor. These
documents need to be checked by auditors so that efficiency and effectiveness of
financial statements can be measured. In order to do auditing of financial statements of a
company auditors need a range of document which can be used as an evidence for each
recorded items. Like if company shows purchasing of 50000 pounds in a year than
auditor will need purchase sleep or document and this is provided by accountant or
accounting department of a company. As in the aspect of above Skanska plc, their
accounting department offers all necessary documents which are needed by auditors to
check accuracy of each recorded item in financial statements of business.
Role of finance department- In addition to this, finance department of companies' also play a key
role so that all operations can be conducted and operated in a smooth way. Below some role of
finance department are mentioned that are as follows:
 Investment function- The term investment can be defined as a form of activity that is
related to investing money in a particular project with an expectation of higher return in
future. Each investment decision needs to be taken in an effective manner because any

error may lead to different kinds of issues for company (Rai and Lin, 2019). In order to
take right investment decision, there are a range of techniques and each technique is
based on finance department. It is so because finance department produce financial
statements like profit and loss account, balance sheet and many more. The investors of
above Skanska plc takes crucial decisions for right investment by checking information
about their net profit, volume of expenses and many more. Thus, finance department is
useful for performing investment function in an accurate manner.
 Financing function- The financing function is considered as one of the main function for
financial management of a business. Basically, this is related to process of acquiring the
funds from different kinds of sources. It is essential for companies to keep their financial
statements up to date and to show actual results so that lenders can check financial health
and can take decision for lending money. In the context of above Skanska plc, their
financial managers take financial assistance from different kinds of sources by showing
actual results of financial statements. Hence, this role of finance department is too crucial
for growth and success of any types of business.
 Dividend function- The term dividend can be defined as a process of allocating or
distributing profits of a company into different kinds of stakeholders. In order to do so, it
is important for company managers to know about actual amount of net margin and
returns. For this aspect, managers rely on finance department as such department offers
information about actual amount of net profit, assets and many more. Such as in the
context of above Skanska plc, their finance department plays a key role in order to offer
effective information related to amount generated of net profit and on the behalf of such
information managers take effective decisions to pay dividend to all types of stakeholders
of company.
 Working capital function- The working capital can be known as a difference between
current assets and liabilities during a time period (Al Balushi, Locke and Boulanouar,
2018). The working capital is used in order to manage day to day expenses by help of
current assets. In the absence of proper working capital, this may become difficult for
companies to operate on daily basis for a long time period. It is crucial for companies to
make proper assessment of needed working capital for day to day activities. As in the
aspect of Skanska plc, their managers determine need of further working capital and it is

being done by help of assessing information of balance sheet. Under balance sheet,
information about current assets and current liabilities is included and it is prepared by
finance department.
Task 2
Calculation of ratios:
Ratio Formula 2018 2019
Return on capital
employed
Operating profit/Total
assets-current*100
liabilities
750/3825*100=
19.60%
975/5850*100=
16.67%
Net profit margin Net profit/sales*100 600/4800*100= 12.5% 675/6000*100=
11.25%
Current ratio Current assets/current
liabilities
1515/645= 2.35 times 2070/2220= 0.93 times
Debtors collection
period
Receivables/sales*365 900/4800*365= 68
days
1200/6000*365= 73
days
Creditors payment
period
Payables/
purchase*365
570/2700*365= 77.05
times
2100/4800*365= 159
days
Comment on performance:
Return on capital employed:- This can be understood as a form of ratio which is used in
companies in order to assess efficiency of a company in order to generate return from
their capital. Such ratio is applied by different kinds of business entities as per their need
(Zolfani, Yazdani and Zavadskas, 2018).
This ratio indicates about the way in which company's capital is managed and amount
which is generated at the end of year. If a company produce higher return than it indicates
that they are able to manage their capital in an efficient manner.

In relation to above company, this can be assessed that return on capital employed ratio in
year 2018 was of 19.60% which dropped and became of 16.67% in year 2019. this
change in number shows that company failed to manage their capital in year 2019 that
resulted in lower volume of return. The reason due to which this ration dropped in year
2019 as compared to year 2018 is that because their current liabilities increased in a
significant manner in year 2019 as in year 2018, current liabilities were of 645 which
increased and became of 2220 for year 2019. As a result, value of capital employed
affected and company got lower return on capital employed.
In this scenario, this can be suggested to above company that they should focus on
generating higher operating profit so that excess volume of current liabilities can be
covered and they can generate higher value of return on capital employed.
Net profit margin- It can be defined as a form of ratio which is used to measure efficiency
of a company to generate net profit by subtracting all kinds of expenses. This ratio is
crucial for companies to measure because it reflects true position of a company as well as
dividend distribution decisions are also made according to this (Mostafa, Montemagno and
Qureshi, 2018). In the aspect of above Skanska plc, this can be assessed that their net
profit margin was of 12.5% in year 2018 that reduced and became of 11.25% for year
2019. This variation in figure shows that they failed to manage their overall expenses
during year 2019 which resulted in lower net profit margin.
The rationale behind such dropped performance in year 2019 is that company's net profit
increased by a lower rate as compared to expenses. Like company's cost of sales in year
2018 was of 3450 which increased and became of 4350 for year 2019. It shows that their
expenses increased by an effective pace while net profit increased by a slower pace.
In such case, this can be recommend to above company that they need to focus on the
ways through which their sales revenues can increase and expenses can be reduced.
Though, their net profit is increasing but it is not so effective as proportion to expenses
like cost of sales and operating expenses.

Current ratio: It can be defined as a type of ratio that shows relation between current
assets and current liabilities. This ratio shows liquidity position of a company during a
particular time period. The ideal form of this ratio is of 2:1 which means a company
should have 2 times of assets to pay 1 times of current liabilities. Basically, this ratio
indicates a company's liquidity position or analyse efficiency of a company in terms of
cash they have to pay various short term expenses (Kopanja, Tadić, Kralj and Žunić, 2018).
In comparative manner, this can be assessed from above table that company's current
ratio in year 2018 was of 2.35 times which dropped and became of 0.93 times. Here, we
can see that there is dramatically difference in financial performance of company in terms
of liquidity. This shows that company is not able to manage their expenses in an effective
way as well as their current assets too.
The rationale behind such poor performance is due to increased value of current liabilities
as compared to current assets. Though, company's current assets are also increased but
not in the way in which their current liabilities can be controlled.
In such situation, above company needs to focus on those activities which are leading to
increase in current liabilities. As well as they should eliminate those operations which are
performed on a credit basis because such credit functions lead to increased volume of
current liabilities.
Debtors collection period- This is known as a form of ratio which is used to assess a
company's efficiency to collect debt amount from debtors. If a company is able to recover
their debts in less time than it is too beneficial for them (Paudel, Nagana Gowda and
Raftery, 2019). The efficiency of such ratio depends on number of debtors and employees
efficiency to collect the debts.
In terms of Skanska plc, this can be assessed that their debtors collection period for year
2018 was of 68 days which increased and became of 73 days. Such figures show that
company's efficiency has been dropped for year 2019 to collect debt from debtors.

The rationale behind such performance is due to higher credit sales in year 2019 as
compared to year 2018. Apart from this, the another reason can be debt collectors
efficiency to collect debt amount in specified amount of time.
In accordance of above scenario, this can be recommend to company that they should
focus on reducing credit sales because higher credit sales increase burden on them. Apart
from this company should offer credit sales only to those customers who are able to pay
in given time limit. Another key recommendation is that company should only give credit
sales facility to old customers who are effective in paying debt on time.
Creditors payment period- This can be defined as a type of ratio which is used to define a
company's efficiency to pay their debt on time (Komar, Panella, Golnar and Hamer, 2018). If
a company is taking too much time in terms of repaying their debt than this may make
negative impact on their goodwill and suppliers might stop credit transaction with them.
In the context of above Skanska plc, this can be assessed that in year 2018, they paid their
debts in 77 days while in year 2019, they too time of 159 days. It shows that company
failed to make payment of their creditors on time and this may affect their goodwill in the
market. The rationale behind such poor performance is only because of higher volume of
credit purchase in year 2019 as compared to year 2018. They made credit purchasing of
2700 pounds in year 2018 while in year they did of 4800 pounds. So this is the main
cause which resulted in poor performance to make payment of debts on time.
On the basis of above done analysis, this can be recommended to company that they
should focus on dealing in cash instead of credit. It is so because higher volume of credit
transaction leads to burden on financial health of company.
CONCLUSION
On the basis of above project report this can be concluded that each business entity needs
to assess importance of both accounting and finance department. It is so because both
departments are the base of company's success and each of them contribute in an
effective way to manage available financial resources. Apart from this, from the second

part of project report this can be articulated that Skanska plc's financial performance is
poor in year 2019 as compared to year 2018. This is so because each measured ratio
showing that company's performance is dropping in a significant margin in year 2019.
Hence, Skaska plc should wait for right time to take decision of expending business in
European nations because their performance is not so good for expansion.

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