Skanska plc Financial Decision Making: An Analysis of Performance

This report provides a detailed analysis of Skanska plc's financial decision-making processes and performance. It evaluates the importance of accounting and finance functions within the company, including financial accounting, management accounting, tax functions, auditing, investment, financing, and dividend functions. The report includes a calculation of key financial ratios such as Return on Capital Employed (ROCE), Net Profit Margin, Current Ratio, Debtor Collection Period, and Creditor Collection Period for the years 2018 and 2019. Based on these calculations, the report evaluates Skanska plc's business performance, noting changes in efficiency and profitability. The analysis aims to provide insights for making informed decisions regarding the company's growth and financial strategies.

Financial Decision Making

TABLE OF CONTENT
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
TASK 1............................................................................................................................................1
Evaluation of the importance of accounting and finance functions, duties and roles in Skanska
plc................................................................................................................................................1
TASK 2............................................................................................................................................5
a) Calculation of ratios.................................................................................................................5
b) Evaluation of the business performance..................................................................................6
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial decision making is the process through which the business is able to make sure
that it is optimizing its capital structure for the utilization of the debt and equity. It helps the
business in creation of the link between the risk and return of the shareholders. In this project the
chosen organization is Skanska plc is a construction company based in UK which was founded
in 1984. This organization is planning on investing the its finances for expansion in other
countries. In this project the importance of accounting and duties and roles of finance and
accounting has been analysed. This project will help provide the calculations on the ratios and
required performance of the organization. This project will also comment on the performance of
this organization with comparison to the two given years for the analysation of the business. The
main aim of the project will be to help this organization in making strong decisions regarding its
growth.
MAIN BODY
TASK 1
Evaluation of the importance of accounting and finance functions, duties and roles in Skanska
plc
The importance of the function, duties and roles of the different accounting in Skanska plc
are as follows,
Financial accounting:
It is a type of accounting which is very important for the company as it includes the
method of documenting summarising and reporting the transactions which arises in the business
operations for a given period of time. The reflection of this accounting process is in the accrual
basis and also on cash basis. It is very important for the business because it helps the
organization to keep tract of their financial transactions. This helps the businesses in making
decision which are beneficial for them in the future (Faccia, Al Naqbi and Lootah, 2019). It helps
them in making sound decisions which allows the business in allocating the resources which
helps them in communication of the business finance with other parties such as the creditors and
investors. Major role of financial accounting is to provide the management with financial
information which represents the business budgets, business plans and financial statements. It is
very important for the audit of the financial information of the organization. It is considered very
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essential for the preparation of accounts and tax returns helping the business to maintain
regulatory framework in its operations.
Management accounting:
Management accounting is the provision to the financial data which is helpful for
advising the organization for the use of finance in its development. It is considered as the process
of identification, measurement and analysation of the interpretation of the accounting
information which helps the business leaders for making sound financial decisions which in
general said to be very efficient for the management of the daily operations (Ishak and et.al.,
2019). Certain importance of management accounting for this organization are,
 It allows the business in the measurement of its performance which is very helpful for the
business in its success as it is used for planning.
 Management accounting help the management to take better financial decision which
ultimately results in better efficiency of the business.
 Management accounting focuses on providing the customers with quality goods which
are at fair prices and can be controlled by the company for employing cost control
devices.
 Management accounting is considered to be one of the best methods for the business in
enhancing the companies cost consciousness and assisting towards the extra expenditure.
 It is very helpful for the company as the management can rely on it for proving genuine
performance.
Tax functions:
The tax functions are very essential for an organization as they play a very important role
which is to purely compile the requirements for meeting the boxes for ticking the strategic
partner of the business which helps it in making decisions which helps it to drive the productivity
(Kokina and Blanchette, 2019). The main function of taxation is considered to be the fiscal one
which allows the business to pay taxes for the formation of the state budget necessary for the
realization of the national and holistic state programmes. It is considered to be the essence as the
special concern towards the centralized instruments of the allocation of relations which consists
of the social income distribution. The tax functions of the business are very essential factor for
the business in the analysation of the regulatory function of the taxation which is considered to
be helpful for the business of the organization. It is a function of the accounting which is
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important as it fulfils the duty of the organization for paying the government funds which can be
used for the social welfare of the society. It is helpful for the business in the development of the
standard of living as CSR.
Auditing function:
The auditing functions of the accounting department of Skanska plc is a very responsible
operational procedure, which is very helpful for the business in the risk management, controlling
functions and also the governance process (Jackson, 2020). The functions of auditing is
considered as the departmental compliance related to the policies and procedures which help the
business in the assessment of the quality. It is considered to be the evaluation of the risk
management of the organization. This is very helpful as the it ensures compliance with
regulatory rules and agencies which are helpful for the accounting standards of the organization
which are to be issued by the accounting standards of he organization. It is considered to be
helpful for the business for reviewing information technology system which is considered to be
important for maintain the code of ethics (Melé, Rosanas and Fontrodona, 2017). The internal
audit practices provide the organization insights over the accounting practices before the external
auditor focuses on them.
The importance of the function, duties and roles of the finance department in Skanska plc
are as follows,
Investment function:
Investment for an organization like Skanska plc is the making addition to the stock of
goods which are in existence where as on the other hands the factories plants, equipment and
inventories of finished goods and semi-finished goods are considered to be the input of the
production of the goods which are needed to be produced by the organization. It is one of the
most important finance functions which helps the business in intelligently allocating the capital
to the long-term assets. With the help of methods of capital budgeting the business is able to
analyse the maximum yield of the long-term assets of the company. It is considered as the
allocation of the long-term investment decision for making profit in the company. It is also very
important for the organization in the comparison of the cut off rate against the new investment
for prevailing investment (Kyriakopoulos, Ntanos and Asonitou, 2020). It is also very important
for the decisions towards the utilization of the use of the assets which are therefore becoming
less profitable and productive. It is considered to be very important and effective towards the
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performance of the organization. The opportunity cost is saved by the business by using this
function effectively.
Financing functions:
The financing function for this organization is responsible for the allocation of the
resources which help them business in the creation of economic forecasting, reviewing
opportunities towards equity and debt financing of the business. It is considered to be very
essential for the business operations. This function has role of helping the business to provide
effectiveness in the financial decision making. The organization is successful in doing so by the
development of budget which is very important and effective for planning the business
operations. Budget is considered to be the key to all the decision-making process which is
involved in the organization. It helps the business in the analysation of different strategies which
are very effective and influential for the organization and its management. Financing function is
very essential for the business for the allocation of the funds which it requires from its investors
or through loans (Trifu, 2020). It is also essential for management of the payments and
receivables of the organization which helps the business in the management of the organizational
policies and procedures through a regulatory framework.
Dividend function:
Dividend is the rewards or cash which the company gives to its shareholders which can
be issued by the organization for different forms of cash which are considered as payments
stocks and other forms business (Kantsedal, 2019). It is also very effective for the company to
provide the investors with dividend which is decided by the board of directors of the company.
The company is not obliged for the payments of the dividend it is generally the part of the profit
which the company shares with the shareholder. Dividends are very important considerations
while investing in the market share as they provide reliable source of return. The payment of the
dividend is much more depended on the capital growth of the given organization. Sometime
payment of dividend also shows that the business is developing investors provide uncertainty
about the company’s financial wellbeing. It helps the business in the creation of investment and
demanding high stock returns from the business of the organization. For Skanska plc it dividend
function of finance is helping for proving the payment to their shareholders.
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TASK 2
a) Calculation of ratios
Return on Capital Employed :
ROCE 2018 2019
EBIT 750 975
Capital employed 3825 5850
Formula
EBIT/Capital
Employed
EBIT/Capital
Employed
Ratio 19.60784314 16.66666667
Net Profit margin :
Net profit margin 2018 2019
Net profit 600 675
Total Revenue 4800 6000
Formula NP/Revenue NP/Revenue
Ratio 0.125 0.1125
Current Ratio:
Current Ratio 2018 2019
Current assets 1515 2070
Current liabilities 645 2220
Formula CA/CL CA/CL
Ratio 2.348837209 0.932432432
Debtor collection Period:
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Debtors collection Period 2018 2019
Receivables 900 1200
Sales 4800 6000
Formula Receivables/Sales*365 Receivables/Sales*365
Days 68.4375 73
Creditors Collection Period:
Creditors collection
Period 2018 2019
Payables 570 2100
Cost of Sales 3450 4350
Formula Payables/COGS*365 Payables/COGS*365
Days 60.30434783 176.2068966
b) Evaluation of the business performance
Return of capital employed:
ROCE is a profitability ratio which is the measurement of the efficiency of the company
which helps the organization in the generation of the profit. It is considered to be very important
profitability ratio which ratio which is commonly used by the investors of the company for the
determination of whether a company is suitable for the investment of the business or not. It is
also said to be very beneficial for understanding efficiency of the company (Bowles, Ghosh and
Thomas, 2020). The calculation of the Return on capital employed of the organization is done
by dividing the EBIT with the capital employed of the organization. The EBIT is the earnings
before interest and tax which is inclusive of the company profit and also includes all the
expenses except the interest and tax expenses. Capital employed is considered as the total
amount equity invested in a business. Capital employed is also calculated with the total assts les
the current liabilities and also fixed assets addition the working capital. For this organization the
ROCE for the year 2018 was 19.6 which shows how much return the company is making from
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the total investment of the organization. However, in 2019 the ROCE ratio decreased to 16.66
which shows the fall of the efficiency of the business in the utilization of its assets. For
improving this the organization can utilize different methods which will help the business to
improve such as increasing the monitoring of the assets and resources which will help the
organization to gain sustainability in their performance.
Net Profit Margin:
Net profit margin is also known as the income of the organization which the company
makes as the total indication towards the sales which has helped the business achieve higher net
profit than the company which is considered by the company very efficient for the management
of the actual profit of the organization. It is also known as the net profit margin which is the ratio
of the cost which is included in the final benefit of the organization in relation of its income. The
net profit margin includes the net profit and all the expenses. This ratio is used by many business
organization owners as the measure to access the financial position of the company. The
organizations net profit margin was 0.125 in 2018 and 0.1125 in 2019. It can be observed that
there is a decline in the Net profit margin in the organization in 2019 as compared to 2018. This
fall in net profit margin is due to the increase in expenditure, inefficient cost management and
majorly due to the lack in ability to observe and behave according to the changes in the market.
However, there are several ways to stabilize and increase the net profit margin. Firstly, it is very
important to identify what was the cause in the decline of the net profit margin and build an
effective team to evaluate and stop the excessive flow of cost and utilize it in organizations
benefit.
Current Ratio:
Current Ratio is a measure to analyse the organizations ability to pay short-term due within a
year Also known as liquidity ratio, it reflects how effective an organization is in generating cash
to pay off all its debts at the due date. It is calculated by dividing current assets by current
liabilities (Gulin, Hladika and Valenta, 2019). In 2018, the current ratio was recorded at 2.348
while in 2019 it was 0.932. The organization had the current ratio of 2.348 which is considered
as an ideal ratio but the fall in this ratio in 2019 as compared to 2018 reflects the inability of the
organization to meet its short-term goals. It can be clearly observed that there is an immense rise
in current liabilities in the organization but the net revenue generated is not increased as much as
it was expected to be. This reflects poor resource management and inability of the organization
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in effective fund control. This ratio indicates the company’s inability for dealing with the short-
term obligations as the liquidity of its assets have decreased. In 2018 the current ratio was 2.348
which was even higher than the ideal current ratio for an organization but the fall which Skanska
plc suffered in 2019 at 0.932. This shows that the liabilities for the company has increased a lot
in that year due to which its current ratio has fallen. In order to improve its current ratio, the
organization needs to improve its efficiency and negotiate with the creditors for the payment of
their bills.
Debtors Collection Period:
Debtors collection period is the average number of days which an organization take for
the collection of its debtors. The calculation of this ratio is done by the dividing the receivables
with the total sales of that given period and by multiplying with 365 days the average collection
period is calculated (Unda and et.al., 2020). It explains the how long does it take for the
organization in average to collect its debts from its debtors. Thus, it can be said that quicker the
company is able to collect its debts its more profitable for the organization. This happens due to
the fact that the organization gets the potential of utilizing that money for productive process in
the organization. It helps the business in the increasing its efficiency in a way of maximum
utilization of its resources. For this organization in 2019 the debtor’s collection period is 68.4
which shows that in average the organization takes. This period of the organization in the year of
2019 increased to 73 which suggests that the organization is unable to recover its debts from the
customers and as a result is struggling to recover the revenue that is due. The company should
negotiate with the debtors for recovering it amount. It should also provide discounts over early
payments of the debts so that the amount can be used by the organization even more. It can be
said as a very effective strategy which will improve the chance for recovering the debts for this
organization. Another reason for the increase of the debts can be due to the increase in the total
debts of the company which is good for the business of the organization.
Creditors collection period:
Creditor collection period is the average number of days which the organization takes in
paying of the creditors of the company (CHEN Tien Yiu, 2017). The calculation of this average
number of days is done by dividing the total payables of the company with the cost incurred for
selling the products and services and multiplying it with 365 this will allow the business in the
calculation of the creditors collection period which is considered to be very effective and
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important for the business to pay of the credit of the organization. For this organization the
calculated the credit collection period in 60. However, in the following year of 2019 the credit
collection period of the company increased to 176 days. This shows tremendous improvement in
the payment period as the company now gets to keep the money with itself for almost thrice the
number of days it previously did. This can be the sign of the lack of liquidity of the company
which was noticeable from the current ratio. It is important for this company to now ensure that
is increasing its liquidity so that the creditors can be paid.
CONCLUSION
With the help of this project it can be concluded that finance and accounting is very
important for the business of Skanska plc and will help it to expand its business in the
international market. In this project the different importance, duties and roles of accounting in
the organization. This project also explained the importance of the duties, and role of financial
activities for Skanska plc. This project is very helpful in the calculation of the ratios and
financial days for the evaluation of the business with the help of information which were
provided. With the help of this project the interpretation to the different ratios and suggestion
towards how can their analysis be used for the company to improve their business is also
highlighted.
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Conference on Cloud and Big Data Computing (pp. 31-37).
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Accounting Profession. In Proceedings of the ENTRENOVA-ENTerprise REsearch
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