Financial Analysis Assignment: Financial Decision-Making of SKANSKA PLC
The Financial Analysis Assignment Task:
SKANSKA PLC is a Construction Company based in UK. SKANSKA PLC started back in 1984. The company is planning to expand its operations to other countries in Europe in the next ten (10) years. The financial statements of SKANSKA PLC. are attached for your consideration and attention.
TASK 1: You are part of the Accounting and Finance team at SKANSKA PLC. Write a report to the Management of SKANSKA PLC, critically evaluating the importance of Accounting and Finance functions, duties and roles within SKANSKA PLC. Your evaluation must include some examples within the Company where appropriate.
TASK 2: Using the financial statements of SKANSKA PLC calculate the ratios required and comment on the company’s performance from an Investor with £1 million perspective.
The summarised financial statements of SKANSKA PLC, a Public company engaged in Construction, are shown below: Statement of profit and loss:
Task 2 - Required
a. Calculate the following five ratios for each of the two years:
(i) Return on capital employed
(ii) Net profit margin
(iii) Current ratio
(iv) Average Receivable days/ Debtors collection period (v) Average Payable days/ Creditors collection period
b. Comment on the performance of SKANSKA PLC. results from and position between the two (2) years from (a), mentioning possible causes, reasons and effects for the changes in the ratios.
The concept of financial decision-making explored in the segments of financial analysis assignment is a process wherein business managers take decisions about the finances of the company. These decisions are crucial in nature and are essential for the financial well-being of the business. These decisions are related in terms of acquisition of assets, raising and financing of funds, daily capital and expenditure management (Eastonet al., 2018). The financial decision, therefore, affects both the assets and liabilities of the company, causing an impact on the profits and revenue generation for the company. In this report, the financial decision-making of a construction company called Skanska Plc is undertaken based on the management accounting techniques like planning, controlling and decision-making.
Importance of Finance and Accounting
Finance and accounting are referred to as analyzing and recording the activities of the business as it helps in understanding the outcoming and incoming cash flow that further helps to make better decisions based on these recordings and also helps to avoid failure. As stated by Dimitriou (2020), finance and accounting are important for navigating the business as it impacts the performance of business management. Finance and accounting impact Skanska Plc. Management in many ways like it helps in keeping all the records, an accurate record of the finance of the company help the organization manage its financial future as well as understanding incoming and outgoing cash flow. Moreover, it also helps in avoiding legal problems as a poor financial record could lead the Skanska Plc. Land into unnecessary legal problems.
As opined by O'Leary (2021), it also helps in analysing performance and helps in communication-related to financial information while dealing with external parties. Apart from that, it also helps to build internal communication that helps the owners communicate necessary information with the internal stakeholders. In addition to that, it also benefits in developing strategy as good finances and accounting promotes better strategy. Furthermore, it also benefits in making a budget for Skanska Plc. as the budget helps in navigating the business towards future development and growth. Having in-depth knowledge about financial accounting can help in tracking the business related to financial transactions.
As quoted by Makarenko and Plastun(2017), collecting necessary data and information related to business activities and the transaction can give a proper view regarding the financial status, which further helps to determine the direction and strategy contributed to achieving the business objectives. It is with the help of data collected within the year through which three important statements are prepared, which are the balance sheet, income statement, and statement of cash flow. Hence, all these statements are important for Skanska Plc. in making necessary decisions for the company.
Importance of Finance and Accounting Functions
The main function of finance and accounting is to produce a general-purpose statement of financial nature. As discussed by Sjafjell (2019), the main functions of accounting are controlling financial policy, planning formation, preparing a budget, evaluating the performance of employees, cost control, and preventing frauds and errors. Moreover, the function of finance and counting is also to produce information which is used by Skanska Plc. The management team for making decisions, plans, and evaluation of the performance. Apart from that, producing statements of financial nature is important for meeting the regulatory requirements. However, most of the investors and shareholders refer to the financial statements of the company while making investments within the company. As quoted by Sepasi (2019), finance and accounting have been used as a tool for evaluating the performance of an organisation on which future decisions on investments on a particular project is made. Looking at the primary function concerning financial accounting, it measures the business activities of Skanska Plc.
Moreover, it further helps in communicating information about the activities to its respected investors along with creditors during the time of making decisions. As stated by Shbeilatand Al Harasees (2018), the main function of finance is seen during the time of making a budget, since preparing a budget is one of the important functions within the business that further allows in allocating funds to respective departments as per their requirements. Hence, applying all the necessary functions of finance and accounting, Skanska Plc. will be able to accomplish its goals and objectives. The functions related to finance in Skanska Plc. are taking investment decisions as it is one of the important functions to allocate capital intelligently within the assets of the long term. It also takes important decisions on the financial, dividend, and liquidity of Skanska Plc. for allocating the necessary number of dividends and financing the resources of the company.
Importance of Finance and Accounting Duties
The main duties of a financial accountant within Skanska Plc. are preparing monthly loss and profit reports and reports of balance sheets. As opined by Ordynskayaet al. (2021), the responsibilities and duties of a financial accountant are also to process inventory and report tax. Moreover, analysing and collecting data which is further used for preparing monthly and weekly estimates, is also necessary. It also takes full responsibility in advising over estimates required for project funding. Creation of KPI report is also one of the duties that are to be followed by finance accountant of Skanska Plc. Apart from this, preparation of weekly statements of cash flow and controlling expenditure and inflow and outflow of cash. As discussed by Hertatiet al. (2020), assistance while preparation of statutory accounts and year-end accounts also comes under the duties of finance accounting. In addition to that, the finance accountant of Skanska Plc. also responds to financial inquiries regarding interpreting and gathering data. This further helps the company in making appropriate decisions for operating its operations in other parts of the country in Europe. It also ensures that financial records mainly comply with the policies of Skanska Plc. and the principles of accounting. Assisting in payable activates and account receivables are also one of the important duties of finance accounting. As quoted by Dimitriou (2020), the other duties related to finance accountants are examining the financial reports for checking their accuracy to identify any misrepresentation or false representation of records being made within the years for certain transactions or activities. It also conducts internal audits like wage reviews through which Skanska Plc. management identifies any unnecessary amount credited to employees or other members of the company. As stated by O'Leary (2021), lastly, it takes the responsibility of training the staff as per the requirements. On following all the duties related to finance accountant within the Skanska Plc. it leads the company to achieve success within the stipulated period.
For example, the Skanska Plc. helps the business to keep a track record of all the transactions. This is the reason behind the company being financially sound and taking every decision wisely and effectively. However, Skanska Plc. is one of the world's major construction groups and project development, which creates sustainable solutions. Hence, the company needs to take necessary actions and follow its duties and responsibilities in compliance with the legal proceedings. As opined by Hertati, Nazarudin, and Fery(2020), the financial manager ensures to keep all the records and transactions in a proper manner for making it accountable for its investors. Therefore, it is the responsibility of Skanska Plc. in managing all the necessary data to reach on time with full detail of the transactions.
Roles of Finance and Accounting within the company
Finance and accounting play an important role in business management that helps them create business models and strategies along with budgeting. Plans are formulated about the financial data of the company.The business organisation must control its money and use it in the best possible way for gaining profits. Likewise, Skanska Plc. has also been following the role of finance and accounting, such as obeying the order and law as good practices of accounting have practical advantage that helps the company comply with the law. As discussed by Makarenko and Plastun (2017), in case the company suffers from any kind of legal scrutiny due to poor records of financial information leads the company into unnecessary trouble. For example, Skanska Plc. follows the legislation of Swedish corporate for obeying the order and law within the management. Moreover, it also creates financial records and budgets by understanding the cash flow of Skanska Plc. with proper practices of accounting, and budgeting can be prepared. It is believed that budget is said to be the culmination of decent keeping of financial records. The other role of accounting and financing in Skanska Plc. is analyzing the financial performance to improve the value of the company. It is observed that applying the right information within the business can make a difference positively with informed decisions. As quoted by Sjafjell (2018), it also helps the company in identifying various areas of expenses occurring and thus limits those expenses to pay larger dividends later on.
Apart from that, it also develops the necessary strategy required by Skanska Plc. as most of the company’s goals are to make a profit. Here, financial data can be regarded as an important tool if a proper understanding of the economic landscape within the market being operated is known; this tool could be beneficial for the company in the long term. Therefore, the company must manage its expenses and income in a proper way for creating strong potential growth and leads to better access to strategies helping the customers overall. As stated by Sepasi (2019), the main role of finance and accounting is to stabilize and analyse the economics of the company for providing all the necessary information related to finance to other departments for making decisions. Hence, accountant plays a key role in the finance department, such as interpretation and measurement for all the necessary financial information.
a. Calculation of ratios
(i) Return on capital employed
(ii) Net profit margin
(iii) Current ratio
(iv) Average receivable days
(v) Average payable days
b. Performance evaluation of Skanska Plc
From the summarized financial statement of Skanska Plc, five ratios for each of the two years- 2018 and 2019 is calculated. Firstly, return on capital employed is computed for Skanska Plc that reported 16% for 2018 and 12% for 2019. The ROCE is a financial ratio that assesses the overall profitability of the business and capital efficiency. It can be observed that Skanska Plc has experienced a decrease in profitability and capital efficiency from 2018 to 2019. Although the net profit and share capital has increased for the business, the proportionate increase in CL is far higher for Skanska Plc. This indicates Skanska Plc's has generated less profit from its capital employed in 2019. According to DANI?MAN (2018), a good ROCE is more than 10% for all kinds of industries. In the given case, the ROCE of Skanska Plc is more than 10% for 2018 and 2019 and, therefore, termed to be a profitable business. In the long run, it is expected that Skanska Plc shall derive adequate profits by employing its capital and assets simultaneously in the business. The reason for the decrease in ROCE from 16% to 12% is due to higher current liabilities for the company. Too much hike in CL shall lead to a decrease in ROCE and overall profitability index of the business.
The net profit margin talks about the financial relationship between the net income and revenue of the business for a year (Robinson, 2020). The net profit margin for Skanska Plc in 2018 was 13% and 11% in 2019. A fall in the net profit margin is observed in 2019 as the profits did not increase largely in comparison to the revenue of Skanska Plc. The net profit in 2018 and 2019 was £600 and £675 respectively, whereas the sales income was £4800 and £6000 in 2018 and 2019. A fall in the net profit margin for Skanska Plc indicates that the company is using an effective cost structure and poor pricing strategy. Therefore, the net profit margin has shown a low margin. A low net profit margin causes concerns to the business managers of Skanska Plc as well as the stakeholders of the company. It is due to the fact that net profit provides a big picture about the overall profitability of the business, and the dividends attributable to the shareholders are based on the net profit. Therefore, a low profit% cause's worry to both the stakeholders of the company. Skanska Plc needs to improve its operating efficiency that shall be at par with the revenue-generating capacity of the business (Heng-Jie, 2018). The company needs to decrease its operating and financial costs to leverage its net profit, and it shall reflect a higher net profit margin % at the end of the year.
The current ratio is one of the predominant liquidity performance measures of the company. It compares the current assets to the current liabilities of the business. Skanska Plc has computed this ratio to measure the capability of the business to meet its short-term obligations that are due within a year (MbonaandYusheng, 2019). The optimal current ratio is 2:1, whereas Skanska Plc computed its current ratio as 2.35:1 in 2018 and 0.93:1 in 2019. It can be seen that there is a decline in the liquidity performance of the business within a year by 1.42, which causes concern to the business.
It is due to an unexpected rise in the current liabilities from 2018 to 2019; however, the current assets did not increase proportionately. Therefore, it signifies that in the year 2019, the current assets of Skanska Plc were less effective in meeting the current liabilities. Moreover, in 2019, the current ratio did not meet the standard benchmark of the current ratio due to enormous current liabilities. It causes concern to the liquidity performance of the business and might require liquidating non-current assets to make payment to current liabilities. The creditors and lenders are very interested to know about the liquidity performance to determine their risk of investment to the business.
The accounts receivable days in the number of days that the debtors take to clear their invoices to the company. Higher receivable days allows the company to have a strong liquidity and solvency performance, whereas low receivable day means that the company is suffering from arranging liquid cash resources (BerthildeandRusibana, 2020). Skanska Plc reported its receivables days as 68 days and 73 days, respectively, for 2018 and 2019. This means Skanska Plc had a credit period of 68 days given to its debtors to make payment of their credit sales. In the following year, that is, in 2019, the receivable days were 73 days for the debtors of Skanska Plc. An increase in accounts receivable days indicates that the company is showing flexibility in the credit period and could result in the possibility of bad debt.
The effects of the extension of credit days from 68 days to 73 days suggest that Skanska Plc is more effective in processing credit (KaraömerandÖzbirecikli, 2019). As accounts receivable days is a part of the cash conversion cycle, higher receivable days suggests that the company is experiencing delays in receiving due payment. This causes the cash flow performance of the company and causes trouble in turnover performance as well. The accounts payable days are the actual number of days that the company takes in clearing off its dues to the creditors and lenders in the market. Skanska Plc recorded its payable days as 60 days in 2018 and 176 days in 2019. There has been a steep increase in the payable days for the company from 60 days to 176 days within a year, suggesting that the company is paying slowly to the creditors and is on the verge of worsening the financial conditions. A favorable payable day is 17 days. However, the company has a greater number of days for both years.
A high payable days outstanding means that the company is taking longer for making payments against its bills and creditors (ZdanovskisandPilvere, 2019). Although, it is advantageous for the business to delay the payment so that the additional cash in hand can be used for making short-term investment decisions. However, too long payable days suggest a higher chance of making default by the company. This results in slowing down of receiving short-term debt from the creditors due to poor credit rating achieved by the company. It also causes high financial leverage for the business and lower debt options available in the market due to too high accounts payable days.
It can be concluded that the financial decision is essential for Skanska Plc as the overall financial performance of the company stands out to be extremely critical in the year 2019. The accounting ratios states that the profitability, liquidity and efficiency performance of the business is at risk due to high current liabilities and extended payable days. The newly improved financial decision shall allow the business to focus on three critical areas that currently Skanska Plc is suffering from. These are crucial elements of the financial decision-making process for Skanska Plc that includes financial decision based on the choice between the equity financing and debt funds and their associated cost. Secondly, the investment decision wherein the company needs to make a choice of purchasing long-term assets and operating decision considering either to re-invest profits backed into the business and/or to redistribute the profits to the owners in the form of dividends. It is important to plan for Skanska Plc’s financial success and always weigh the costs against the indirect benefits and risks when making decisions. Financial information has a significant impact on many business decisions. Financial statements take into account the past, which doesn't always show future prospects with 100% accuracy, but can be very important in reviewing and evaluating your past financial decisions. To perform financial statement analysis, each owner-manager must review past and current financial information about the business, industry metrics, and key competitive financial metrics. Key financial metrics allow it to analyze a company's solvency, company liquidity, profitability, ability to pay short- and long-term debt, and more.
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