Financial Decision Making

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Executive summary
Financial decision making is an integral part of an organisation. A manager plays a crucial
role in taking suitable business decisions. It is essential to get a proper business decision for
achieving business objectives within the desired time. Skanska Plc is a construction based
company in the UK. This business aims to expand the business in Europe. This report will
analyse accounting, finance and that importance with some potential roles on behalf of
Skanska Plc.

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 Contents
Executive summary.........................................................................................................................2

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

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

Definition of Accounting.................................................................................................................5

Significance of accounting for Skanska Plc....................................................................................5

Duties and Roles of Accounting for Skanska Plc............................................................................6

Definition of Finance.......................................................................................................................7

Significance of finance for Skanska Plc..........................................................................................7

Duties and Roles of Finance for Skanska Plc..................................................................................8

Task-2.........................................................................................................................................10

Calculating ratio analysis for Skanska Plc.....................................................................................10

Analysing the calculation of ratios for Skanska Plc......................................................................11

Recommendation...........................................................................................................................13

Conclusion.....................................................................................................................................14

References......................................................................................................................................15

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Introduction
Today is the age of the modern business arena. Without understanding the financial decision-
making process, no organisation can choose a proper business decision by adapting finance
and accounting (Allen, 2014). Therefore, finance and accounting both are significant for an
organisation. This report will showcase finance, accounting, the importance of finance and
accounting, roles of finance and accounting and ratio analysis calculation and analysis for
Skanska Plc. Understanding the overall demonstration will help Skanska Plc to get a proper
business expansion in Europe.

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 Task-1
Recording financial transaction is a common task for an organisation. Every business
organisation wants to analyse the transaction and keep the entry properly within the journal.
Business is all about finance and accounting. This task-1 is going to evaluate accounting,
finance, and the roles, importance of Skanska Plc.

Definition of Accounting
Accounting is the guide of an organisation. Accounting is a potential process of analysing,
recording, identifying, and so classification of business entries. Without measuring the
financial amount, an event cannot be an entry (Anthony and Pearlman, 2015). For example, X
buy a pen for £5. Here it is a financial transaction that is essential for every organisation, and
so Skanska Plc to keep the transaction on statements.

Significance of accounting for Skanska Plc

Helps to make decision

Another importance of accounting is making a proper business decision. Skanska Plc is

expanding its business in Europe. Using accounting may help Skanska Plc to get an
appropriate decision because accounting will show the path of operation and the profitable
way to expand the business easily, and choosing a decision will be effective.

Keep organised

Accounting is an organised process from the identification of data to closing entries, all steps
done systematically. Without a systematic approach, this system cannot make the decision-
making process easier? All kinds of financial information stores are bookkeeping functions;
that's why required data can be gathered anytime for Skanska Plc in an organised way.

Assures statutory compliance

Managing a business organisation proper is requires statutory compliance, and so is Skanska

Plc. Assuring compliance will help to assess and manage the growth of revenue with the
potential process of accounting.

Helps to evaluate the performance

Performance evaluation is another effectiveness of accounting. Accounting helps an

organisation to create a financial statement for evaluating performance in assets, liabilities

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and equity. Analysing those can help to assess the performance effectively for Skanska Plc
(Charles, 2018).

Duties and Roles of Accounting for Skanska Plc

Accounting plays a vital role in managing all kinds of business activities effectively. It is
effective to follow some duties and functions for better business operation. Some of the
potential significance of Skanska Plc are given below:

Making budget

Budget is the estimation of the future cost of sales for an organisation. Preparing a budget for
a business organisation is a vital task. A budget can be anything. For example, Skanska Plc
estimated £500 for the initial expansion in Europe. Here is a kind of budget. Accounting has
various sections, and making a budget is one of the duties and roles of accounting.

Preparing financial statement

A financial statement is the clear viewpoint of an organisation's assets, liabilities as well as

shareholder's equity. Accounting is a lengthy process. Every organisation is required to use
accounting. Without preparing a financial statement, an organisation cannot deal with a
financial institution or debt holder. From detecting transactions to closing entries, Skanska
Plc can get an overall idea about the asset, liability and shareholder's equity, and those will
reflect in the financial statement.

Performance control

Controlling performance is another potential characteristic of accounting. Using accounting

can help to prepare financial statements, income statements. That statement reflects the
performance in the short-term and long-term for an organisation. Using accounting can help
Skanska Plc to control performance effectively.

Helping other departments

Accounting has various types of the department such as financial accounting, management
accounting. Accounting helps to analyse all kinds of financial data for helping another
department to take proper business decisions. The manager of the accounting department can
provide information about cost accounting and management accounting by providing cost
and management information (Drury, 2017).

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Tax assessment

Accounting helps to prepare an income statement. Using an income statement helps to

calculate net income. Every organisation requires to assess the tax. In this situation,
accounting helps to calculate the tax and assess overall the year than a particular amount
needs to pay by an organisation and so Skanska Plc.

Reducing expense

Accounting also helps an organisation by reducing its cost. Without reducing cost, an
organisation cannot perform well and facing profitability is a rare option. Accounting is
serious about the uncertain and hidden cost for this reason all calculations are done very
preciously that's why cost gets reduced.

Definition of Finance
Finance is the blood circulation of a business. It is demonstrated as proper management of
money and a set of activities such as detecting financial funds, choosing investing factors,
borrowing, capital budgeting, cost of capital and choosing the best project for an
organisation. Understanding finance will help Skanska Plc to expand business efficiently.

Significance of finance for Skanska Plc

Finance is the most important item for an organisation. Without managing finance, no
organisation cannot run its operation a second. Today is the age of finance. Without
managing the significance of finance, expanding the business cannot be fulfilled. There is
some importance of finance that can be followed by Skanska Plc for better business
expansion.

Investment decision

Finance has various types of functions. Investment function is one of the major and effective
functions so finance (Gravy, 2017). Every profit-seeking organisation desires to invest in a
profitable project or any kind of project. Without understanding the investment decision, no
business cannot move an inch, and so Skanska Plc. Gathering required funds and investing
those funds in a profitable project is the function of investment decision of finance for
Skanska Plc.

Dividend decision

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Shareholders invest for seeking something in return. Without getting a dividend, a
shareholder's will not show interest to get a particular organisation's share. Dividend
decisions play the role and managing what amount of dividends need to announce and the
amount to keep retained earnings.

Financing decision

Financing is the initial task for every business organisation. Without financing, a business
cannot start its operation, such as managing internal costs. Operational activities and so many
things. Finance helps to undertake profitable business decisions and measures risk.

Liquidity decision

Liquidity decision is a vital element for an organisation. A business cannot run its operation
without keeping liquid money. If a business invests the full amount in a project, the business
will be unable to operate organisational activities. So finance creates the way to maintain
liquidity decisions and analyse the effective business decision.

Duties and Roles of Finance for Skanska Plc

Finance has various types of duties and roles, but some of the essential duties and roles
following can help to operate the business well. Choosing various types of financial decisions
is a vital task for Skanska Plc in the area of improvement before expanding the business in
Europe.

Financial planning

Planning is the mirror of an organisation. If the planning is a financial plan, it will be most
significant for every organisation, and so Skanska Plc (Horngren, 2014). The financial plan
for Skanska Plc needs to be managed well because selecting a source of business and
investing in a profitable project is part of the financial plan, and those need to perform better.

Creating budget

Budget is the forecast of cost or income. Without using finance, the role and duties cannot
perform better in creating a budget. Finance work in a systematic way, and budget is very
significant to run a business properly in future. For example, if Skanska Plc plans to expand
the business in Asia and estimates 50 million costs for the expansion that can be a proper
budget.

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Forecast

Future forecasting is a potential role of finance. Skanska Plc is required to forecast the cost,
income and operational expenses in a new environment of Europe. It is essential for Skanska
Plc to forecast future plans and manage the business properly (Garside, 2019).

Financial control

Managing invested funds is a potential task of a financial manager. Without financial control,
no organisation perform better in the completion in the new area. This is the age of the
modern business arena. Without controlling finance, businesses will face various types of
inefficiency such as lack of return, profit etc.

Fund management

Finance deals with various types of activities. Fund management is one of the effective duties
and roles of finance. Managing proper funds and understanding the type of fund such as
short-term, long-term, and so mid-term essential to manage funds effectively on behalf of
Skanska Plc.

Choosing suitable project

Finance has a great role that is choosing the best project. Finance guides and organisations
from detecting funds to investing those funds in an effective project and choosing the best
project (Needles and Powers, 2013). Skanska Plc can choose a suitable project and expand
business in a new environment of Europe for better business operation.

Accounting and finance both are an integral part of an organisation, and so is Skanska Plc.
Understanding the definition, importance, duties and roles of finance and accounting will aid
Skanska Plc to expand the business by thinking about all kinds of potential factors and
evaluating the performance after expansion in a new environment like Europe.

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 Task-2

Calculating ratio analysis for Skanska Plc

I. Return on capital employed (ROCE)

Formula 2018 (£000) 2019 (£000)

Net operating profit / (Total =750.00 / (4470.00-645.00) =975.00 / (8070.00-2220.00)
assets-Current liabilities)
Result = 16.78% = 12.08%

II. Net Profit Margin

Formula 2018 (£000) 2019 (£000)

Net income / Total assets =600.00 / 4800.00 = 675.00/6000.00
Result = 12.500% = 11.2500%

III. Current Ratio

Formula 2018 (£000) 2019 (£000)

Current asset / Current = 1215.00 / 645.00 2070.00 / 2220.00
Liabilities
Result = 2.3400:1 0.9300:1

IV. Average receivable days

Formula 2018 (£000) 2019 (£000)

(Average accounts = 450 / 4800 *365 = 600/6000*365
receivable / total credit
sales) *365
Result =34.21 days = 36.5 days
Average accounts receivable (2018) = 900/ 2 = 450

Average receivable (2019) = 450+750 / 2 = 600

V. Average payable days

Formula 2018 (£000) 2019 (£000)

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

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Average payable (2018) = 570/2 = 285

Average payable (2019) = 570+2100/2

Analysing the calculation of ratios for Skanska Plc

Return on employed capital (ROCE)

Return on capital employed is an essential financial analysis ratio that depicts a particular
organisation's profitability and capital efficiency. Analysing return on capital employed or
ROCE helps an organisation to check the effectiveness of profitability and capital. It is very
effective for Skanska Plc because after expanding business in Europe, it is required to follow
the importance of profit generation and Capital efficiency (Robert and Edwin 2016).

The above calculation of the return of capital employed or ROCE shows that 2018 and 2019's
capital and profitability performance. In the year 2018, Skanska Plc was able to get 16.78%,
and in the year 2019, it was able to get 12.08%. It is very demotivating for Skanska Plc
because the rate decreased in 2019 than 2018. As a result, the liquidity and capital efficiency
will be affected by the rate of 2019. Skanska Plc needs to tackle those for a better business
operation because it may cause the satisfaction of share and bondholders.

Net profit margin

Profit margin is another important ratio analysis that helps an organisation to justify the
degree of business activities that bear money and operate the business well. It is calculated in
percentage of sales in returning into profits. Every business decision is better profitable to
meet the objectives easily. But a balance profit margin should analyse before expanding the
business for Skanska Plc (Skanska, 2019).

The calculation of net profit margin shows that in 2018 the profitability rate was 12.50%, and
in 2019 the profitability rate was 11.25. It is a matter of tension for Skanska Plc that the rate
decreased in 2018 that is very dissatisfactory. Having a lower rate of net profit margin shows
that the organisation is ineffective in managing costs, and without managing, the cost-profit
margin will get reduced.

Current ratio

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The current ratio is the ratio of current assets and current liabilities. Current assets and current
liabilities are some crucial financial items to manage short-term debt efficiency and
operational effectiveness (Sindhu, 2014). Current ratio calculation helps an organisation to
check the liquidity effectiveness and the ability to pay the short-term debt. Every business
organisation need to keep a minimum amount of liquidity because it is a vital part of an
organisation to perform well. Skanska Plc is a large construction company in the UK, and
that is thinking to expand the business in Europe. A thing that needs to be considered for
Skanska Plc is that it should work centring on the current ratio. After expanding the business,
keeping liquidity amount and financial aspects will be crucial to expand well.

The calculation of the current ratio of Skanska Plc of 2018 and 2019 shows that in 2018 the
current ratio was 2.34:1, and in 2019, the current ratio was 0.93:1. It is clear that the company
acquired higher current liabilities than current assets. If this consistency runs for a long time,
Skanska Plc will lose its efficiency, and the plan of expanding the business will be uncertain.
Keeping a balance on current asset and current liabilities need to be performed to get a
suitable business result. By expanding the business in Europe with consisting this ratio
analysis of 2018 and 2019 because of current liabilities, the ratio will fall (Stuffy and Strunk,
2019).

Debtor’s collection period

Debtor’s collection period is another essential ratio analysis that implies the period to get the
credit sales into cash. Business is a dynamic platform (Subramanian, 2014). But sometimes,
performing credit sales can happen for keeping the name and fame of business to regular
customers and giving them credit sales. The credit sales are related to the debtor's collection
period. Debtor's collection period need to be the lowest for effective organisational operation.
Skanska Plc needs to perform this overall process and receivable turnover to get a suitable
business output.

The calculation of the debtor's collection period of Skanska Plc shows that the debtor's
collection period in 2018 and 2019 was 34.21 days and 36.5 days. It is a thing to notice from
the output of average receivable days that in 2018 the collection period was 34.21 days, but it
decreased in 2019 to 36.4 days which is very unprofessional for Skanska Plc. Because having
the higher time of receivable period tend an organisation is lack liquidity and ability to pay
the short-term debt.

Creditor’s payable period

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Credit purchase is a common phenomenon for a running business organisation. Business is a
continuous process. The creditor's collection period is the way to detect the period of paying
the suppliers. Suppliers are the helping hand of an organisation. Having higher credit sales
isn't good, but it is essential to pay credit to the supplier for keeping the balance of assets. It is
essential for Skanska Plc because after expanding the business, it can be a problem to
purchase on cash because operational activities will be limited, so there is no alternative
except credit purchase from suppliers (Williams, 2015).

The calculation of the creditor's collection period shows a two-year calculation. In the year
2018, the payable credit period was 30 days. After a year in 2019, the payable days increased
to 112 days. A huge difference can be seen in those calculations. Skanska Plc is taking too
much time for paying the credit to the suppliers. It is essential to take enough time for
repaying but taking too much time can increase current liabilities and affect the current ratio
as well as the liquidity of Skanska Plc.

Recommendation
Skanska Plc is a construction based company in the UK. This business is thinking of
expanding business in Europe. But some precautions should be followed before expanding
the business in Europe, and those are keeping balance on current assets and liabilities,
following proper significance of accounting and finance, don't take too much time for
repaying credit, planning thousand times before expanding finally to operate a market in a
new environment effectively.

Conclusion
Decision making is the blueprint of success for an organisation. Every business desires to get
success and meet objectives properly. Decision making on a financial platform such as
business is required to check the potentiality of finance, accounting, roles of finance and
accounting, analysing the ratio, calculating the ratio and listening to the managers. Besides,

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those following proper guidance of finance and accounting will work as a guide before
expanding a business. This report evaluated each factor for choosing a proper profit-oriented
decision.

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References
Allen, D.E. (2014). Risk and Managerial Finance. Managerial finance, 21(1), pp.3–14.

Anthony, R.N. and Pearlman, L. (2015). Core concepts of accounting. Upper Saddle River,
Nj: Prentice-Hall.

Charles, E. (2018). Profit planning and the measurement of return on capital employed.
London, Macdonald.

Drury, C. (2017). Management and cost accounting. 10th ed. Andover: Cengage Learning.

Gravy, J. (2017). Financial Ombudsman’s statutory powers and statutory compliance. Journal
of Financial Regulation and Compliance, 15(4), pp.487–491.

Horngren, C.T. (2014). Accounting. Toronto: Pearson Canada.

L Garside (2019). Modern business correspondence. London: Pitman.

Needles, E. and Powers, M. (2013). Financial accounting. Mason, Oh: South-Western

Cengage Learning.

Robert and Edwin (2016). The investment decision: an empirical study. Cambridge: Harvard
University.

Skanska PLC (2019). Skanska UK | www.skanska.co.uk. [Online] www.skanska.co.uk.

Available at: https://www.skanska.co.uk/.

Sindhu, B. (2014). Duties and Roles of Accounting in business. Journal of Accounting,

Auditing & Finance, 9(3), pp.423–444.

Stuffy, W. and Strunk, J. (2019). Financial ratio analysis: an effective management tool. Ann
Abor: Industrial Development Division, Institute Of Science and Technology, University Of
Michigan.

Subramanian, K.R. (2014). Financial statement analysis. New York, NY: McGraw-Hill.

Williams, G.R. (2015). Financial decision making. Kendall Hunt.

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