Financial decision making

Executive Summary

The report has been prepared showing the financial analysis of Skanska Plc. The report has been
covered with five ratios, role of accounting and finance for Skanska Plc. The impact of financial
ratios has been shown graphically and critically in this report.
Table of Contents
Executive Summary.........................................................................................................................2

Introduction......................................................................................................................................4

Task 1...............................................................................................................................................5

Task 2...............................................................................................................................................9

Conclusion.....................................................................................................................................12
Introduction
A manager of an organisation has to undertake several decisions for the firm and such decisions
have been made by analysing current condition of the business. A financial manager undertakes
financial decisions by evaluating financial elements of the firm (V.K, 2014). Financial decisions
are very significant as success of the business depends greatly on such decisions. Financial
decisions are made by evaluating several ratios, financial terms and so on. The report will cover
the analysis of financial statements of Skanska Plc along with the significance of accounting and
finance for undertaking effective decisions.
 Task 1
Several financial organisations are incurred in a firm and it is necessary to record those financial
transactions properly. Proper records of transactions are significant to analyse the financial
performance of a firm like Skanska Plc. Skanska Plc is a construction company that records all
sorts of financial transactions properly (V.K, 2014).

Definition of accounting

Accounting is the significant process identifying, analysing, recording, classifying and

evaluating the financial transactions so that expected outcomes can be measured and proper
decisions can be made. Modern day’s business cannot be thought without following the general
rules of accounting (Chu et al., 2017).

Importance of accounting within Skanska Plc

Keeping organised: Accounting helps to record all sorts or financial transactions in an

organised manner. As a result, Skanska Plc can obtain required information regarding any
financial factors easily. Information is kept permanently in the books of accounting. As a result,
the company and acquire any information whenever it is needed (V.K, 2014).

Helping to make decisions: Financial transactions are recorded in several books by maintaining
the principles of accounting. Cost related data are recorded specifically for which Skanska Plc
can make related decisions to reduce the costs of the organisation. Moreover, there are other
factors also that are related for taking important decisions. And accounting here plays prominent
role to improve the flow of decision (AICPA, 2018).

Ensuring statutory compliance: Statutory compliance must be maintained to operate the

business financially well. It is related to taxation policy which is very crucial to maintain growth
of revenue. Skanska Plc gets impacted from recording financial information properly in terms of
measuring tax and so on (Scott, 2018).

Evaluating performance: There are several stakeholders of Skanska Plc and those stakeholders
want to understand the financial performance and financial position of the firm. In this context,
accounting serves a great role. Income statement, cash flow statement and balance sheet are the
statements that are prepared under accounting (Chu et al., 2017). Those statements procure
desired financial output of the firm. Thus accounting evaluated financial performance and
provides output to the related stakeholders (V.K, 2014).

Duties and role of accounting within Skanska Plc

Accounting serves lot of audited to any type of organisation including Skanska Plc. Accounting
plays a great role to record and evaluate financial transactions of Skanska Plc. The duties and
roles of accounting within Skanska Plc are here:

Preparing financial statement: Financial statement is prepared in order to provide required

information to the stakeholders of Skanska Plc. And accounting serves the basis for preparing
financial statement by providing rules and regulations. Methodology of preparing financial
statements is also procured by accounting (Corbel et al., 2018). As a result, a firm like Skanska
Plc can easily prepare financial statements and evaluate financial performance.

Preparing budget: Skanska Plc needs to prepare several budgets as a matter of planning
activities. And for preparing budget, Skanska Plc has to depend on accounting information. The
manager of Skanska Plc analyses the accounting information and prepares budget (Chu et al.,
2017).

Controlling performance: Accounting plays a great role to control performance by measuring

the financial output. Skanska Plc can compare the financial performance of several years and
make significant decisions also (V.K, 2014).

Assisting other departments: Accounting helps other departments by evaluating the output and
providing the basis for undertaking decisions. Every department is interrelated and accounting
acts as a basis for all departments. Accounting helps financial manager by delivering required
output. Management department is helped by accounting to make budgets as planning process.
Thus accounting helps other departments for performing necessary actions and achieving overall
organisational goal (Tracy, 2012).

Assessing tax: Tax is calculated on the net income obtained by Skanska Plc. And net income can
be measured by the income statement of accounting. Thus accounting plays a great role for
assessing tax of the organisation (Tracy, 2012).
Controlling expenses: It is the duty of accounting to help the organisation to control the
organisational expenses. Information provided by accounting can be analysed to understand
which areas has to be focused to reduce cost (Corbel et al., 2018). Thus, costs can be reduced and
controlled by accounting.

Finance department also plays a feat role for achieving success of the business. Finance
department deals with fund management which is the lifeline of a business.

Definition of finance

Finance is the overall process of managing funds of the business by identifying the right sources
of money and investing the gathered money into profitable sources. Such activities are performed
by finance department of the related organisation (Tracy, 2012).

Importance of finance within Skanska Plc

Finance plays a significant role for accessing and managing funds of the business. The firm will
fail to incorporate prior activities if finance department does not determine its activity properly.
Finance is very significant for Skanska Plc by several ways. Those are:

Liquidity decision: Skanska Plc must maintain proper liquidity to operate business profitably.
And finance helps Skanska Plc in this case a lot. Skanska Plc can understand the effective source
of investing from where invested money can be gathered immediately (Corbel et al., 2018).

Investment decision: Gathered money of Skanska Plc has to be inversed into right sources so
that the firm can gain expected profits. And finance helps Skanska Plc by providing required
financial outputs to the firm (Scott, 2018).

Financing decision: Finance is very helpful to undertake financing decision. Skanska Plc can
gather money from several sources. Finance analyses which sources will determine more
benefits to the firm. Thai finance is very effective to make financing deals.

Dividend decision: Dividend is paid to the shareholders as the reward for investing money to the
organisation. Finance determines how much income has to be kept retained apart from dividend
to maintain financial efficiency (Tracy, 2012).

Duties and the roles of Finance on Skanska Plc

It can be easily acknowledgeable that finance is very significant for a firm like Skanska Plc.
Skanska Plc has to make several financial decisions and in this context, finance has to perform
advanced duties and roles. Those duties and roles are here:

Financial planning: The finance department of Skanska Plc is very advanced as the financial
manger performs better facilities. In this case, the financial manager depends on the finance
department of Skanska Plc a lot. Financial planning is made by the finance department by
identifying the right sources of collecting fund, allocating fund in different sectors, making
investment decisions and so on (AICPA, 2018).

Creating budget: The manager of Skanska Plc has to make different budgets in order to identify
the financial efficiency of the plan. In this case, finance includes several measures such as
average rate of return, payback period, net present value, internal rate of return and so on (Scott,
2018).

Forecasting: It is necessary for Skanska Plc to understand how much capital is required for
conducting the business properly. In this case, finance plays a prominent role (Scott, 2018). By
implementing time value of money, finance forecasts how much money the organisation has to
obtain (Scott, 2018).

Establishing proper financial control: The financial manager of Skanska Plc has to be ensured
that the invested money has been operated properly. In this context, finance serves the purpose
properly. Finance measures the efficiency of the invested money by measuring the output. Then,
the manager can establish proper financial control over the business (AICPA, 2018).

Managing funds: Finance deals with fund management of the business so that it goes without
having any doubt that managing funds is a prior duty of finance.

Identifying the best project: There are several projects into which Skanska Plc can invest
money. By evaluating the financial measures, Skanska Plc can certainly identify the best project.

Accounting and finance work hand in hand for formulating basis and measuring engaged
elements into the organisation. Skanska Plc has to understand the roles of accounting and finance
properly so that organisational efficiency can be obtained (V.K, 2014).
 Task 2

Calculating ratios of SKANSA PLC

(1) Return on capital employed

Formula 2018 (£000) 2019(£000)

Net operating profit/Total Assets- 750.00/4470.00-645.00= 975.00/8070.00-2220.00
Current Liabilities
Result= 16.78% 12.08%

(2) Net profit margin

Formula 2018 (£000) 2019(£000)

Net Income/ Total sales 600.00/4800.00 675.00/6000.00
Result= 12.5000% 11.2500%

(3) Current Ratio

Formula 2018 (£000) 2019(£000)

Current Assets/ Current 1515.00/645.00 2070.00/2220.00
Liabilities
Result= 2.3400:1 0.9300:1

(4) Average Receivable days’/ Debtors collection period

Formula 2018 (£000) 2019(£000)

(Average accounts receivable/ (450/4800)*365 (600/6000)*365
Total credit sales)*365
Result= 34.21 days 36.5 days

Average Accounts Receivable = 900/2 = 450 (2018)

 = (450.00+750.00)/2= 600.00 (2019)

(5) Average Payable days’/ Creditors collection period

Formula 2018 (£000) 2019 (£000)

(Average accounts (285/3450)*365 (1335/4350)*365
payable/COGS)*365
Result= 30 days 112 days

Average Accounts payable = 570/2=285 (2018)

= (570.00+2100.00)/2= 1335.00 (2019)

Analysis of ratio calculation

Return to employed capital

From the calculation of return on capital employed, the efficiency of employed capital can be
measured. Stakeholders mainly investors and creditors have to analyse the output of return on
capital 3 so that further decisions can be made. However, other stakeholders have to understand
such ratio as well. In terms of Skanska Plc, the calculation of return on capital employed has
been done for 2018 and 2019.

The scenario shows that Skanska Plc has got less efficiency in 2029 in terms of capital employed
than 2018. In 2019, the rate was decreased as it shows 12.08% compared to 16.78% in 2018. It
indicates that Skanska Plc will lose financial efficiency as the output of capital was not up to the
mark. It has been found that the accounts payable was higher in 2019 than 2018. As a result, the
firm lost its liquidity. Operating resources has been lost also. This will result in dissatisfaction of
the stakeholders.
Net profit margin

Net profit margin is measured in order to understand the profitability of the firm. Whether
company is in better position or not, be understood through evaluating the output of net profit
margin. Investors will be satisfied if the net profit margin is higher and dissatisfied for the
alternative result (AICPA, 2018).

From the scenario, it has been obtained that Skanska Plc did not make satisfactory result both
2018 and 2019. In 2018, net profit margin for Skanska Plc was 12.5% and 2019 was 11.25%. So,
it can be stated that net profit margin was not up to the mark for Skanska Plc. In 2019, the
company faced less revenue than 2019. It was happened due to excessive operating cost. It can
be stated that the firm did not undertake effective decisions to acquire the affected organisation.
The firm experienced high manufacturing cost which was also a relatable matter for increasing
cost. It has been obtained that the financial manager of Skanska Plc could not forecast the
profitability properly for which the deficiency has been obtained. It has also been experienced
from the prediction that the firm may face more loss in future. As a result, the owner will not
invest more money to the business. The investors will not be motivated enough to make further
investment to Skanska Plc also.

Current ratio: Current ratio is prepared in order to understand the liquidity of the firm. Whether
the firm is capable enough to pay the obligations to the third party is not can be under through it.
It is acknowledged to be good ratio if the position of current assets is higher than current
liabilities (Scott, 2018).

From the scenario, it has been obtained that Skanska Plc did not maintain effective output in
2019 as the result was below the mark. The company had more current liabilities than current
assets which indicate that the firm lost its liquidity. Liabilities were more in 2019 than in 2018.
Accounts payable was higher in 2019 compared to 2018. Though the firm has expanded its
current assets; due to current liabilities, the ratio for decreased.

Debtor’s collection days: Debtor’s collection days is an effective measure through which the
users of accounting can understand the recovery days required to get back the money. Both
investors and creditors analyse the output given by this measure. If the number of days is lower,
investors will be satisfied. Alternatively, higher days will dissatisfy the investors.
From the scenario of Skanska Plc in terms of debtor’s collection days, it has been found that the
firm was not in good position in 2019. Because of it took more days to turn accounts receivables
into cash in 2019 than 2018. As the company turned cash from related accounts receivables in
less days in 2018, the company could not satisfy the investors at all.

Average payable in days: The ratio indicates how much days the firm need to pay its creditors
due to credit purchases. From the scenario, it has been found that Skanska Plc took more days in
2019 to pay to the creditors. It took 112 days in 2019 whereas in 2018 the company took only 30
days to make the payment. It means that the company went for more credit purchases in 2019
and paid less to the creditors.

Several ratios have been evaluated by the author to understand the financial condition of Skanska
Plc. The company is in moderate position but there are some recommendations that the company
should grant.

Recommendation: The company should go for cash purchases in order to lessen the current
liabilities. Operating cost should be reduced in order to enhance the profitability of the firm.

Conclusion
It is very significant to be acknowledged that accountjnb6 and finance both are very helpful to
pertain the organisational goal effectively. The roles of accounting and finance are very
significant in order to understand the financial variables as well as make financial plans for the
company. Both accounting and finance maintain specific course or actions for which a firm can
be benefitted effectively (AICPA, 2018). Skanska Plc is a construction company in UK. The
roles of accounting and finance have been described in this report on Skanska Plc has. Ratio
analysis of Skanska Plc has also been performed in later section in order to evaluate the financial
output of the company.
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