Financial Management Assignment Analysing Financial Decision Making & Performance of SKANSKA PLC

Question

Task: The Financial Management Assignment Task:
Please note;
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.

Required
TASK 1 (1500 WORDS): 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 (1000 WORDS): 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.

Answer

Introduction to the theme of financial management assignment
The financial decision making is undertaken by the financial manager and his team to optimally use the available resources of the business for accomplishing the desired organizational goals. The financial decision is mainly focused on the borrowing of funds from banks, financial institutions, lenders and allocation of funds that are required for making investment decisions (AHMED, 2019). In this current study, SKANSKA PLC is a Construction based company in the UK that has been undertaking financial decision making based on its financial performance for the past two years- 2018 and 2019. Five critical ratios are calculated for both the years, and performance analysis is undertaken from the perspective of the investor holding £1 million stakes with the company.

Task 1
Meaning of Accounting and Finance
Accounting and finance are the core areas in a company, helping with the articulation and management of the financial data of the company. Accounting is a subset of finance. Accounting is helpful in ways to identify the financial status of the company, whereas finance is required to forecast the performance of the company and other companies in the near future. Accounting and finance are intertwined in such a way that a company cannot function without them for a long time (Aaltola, 2021). Both being core parts of the economy are mutually dependent on each other. Thus, it can be conveniently said that the end of Accounting is the beginning of the journey of finance. The summarized financial statements of SKANSKA PLC, a public company engaged in Construction, as shown, reflect the statement of profit and loss. Analyzing the same helps us draw a conclusion that SKANSKA PLC is showing growth.

Importance of Accounting and Finance
To run a smooth business, Accounting is a very important role that tracks the income and expenditures, ensures a predefined legal framework within which any given organization must function and delivers the exact quantitative financial data to the management, government and investors. It provides a systematic and detailed recording of the financial transactions of a company. The key statements provided by the records are a profit and loss statement, a balance sheet with a clear picture of financial position on a particular date, cash flow statement of a specific period of time. It also helps to compare the current data with the previous records and administer its budget. Proper Accounting Systems ensures a company is adhering to rules and regulations which vary from state to state. It helps in properly addressing the liabilities like sales tax, VAT, income tax pension funds and many others. The historical data of the business trends and projections play a crucial role in keeping the operations profitable with the help of a well-structured accounting process (Clearyand Quinn, 2016). Accounting helps in the filing of the financial statements of a business with the Registrar of Companies. These then fill them with stock exchanges and direct and indirect tax filing purposes. Companies operate on money, and so proper accounting helps to manage the flow of money and directs the business in the right direction. Good accounting practices keeps a company in compliance with the law by paying the right amount of taxes, avoiding overlooking minor details, which collectively helps to keep a business on a high level. Proper and healthy accounting records help us to avoid unnecessary trouble while under any legal scrutiny. Proper accounting practices help in proper budgeting, which helps them to anticipate revenue and develops the knowledge of how to grow and maintain a business.

This shows that a company will become infructuous without sound accounting and financial practices. Accounting practices need not only be in adherence to law but also to make presentable, to facilitate future references easy (Mequanint, 2019). Even a small business is required to have sound accounting records and a financial repository to enable its business to flourish; if not, then it becomes next to impossible to sustain the business in the long run. Thus, it can be continuously stated that the importance of establishing an accounting team and a financial team is as important as any other team unit in the company to ensure its stability and growth prospects.

Functions of Accounting and Finance
Inventory management, budgeting, reporting financial statements, legal acquiescence, financial control and record-keeping of a company. SKANSKA PLC, a construction company, based in the UK, so planning major functions of the accounting department includes account receivable and payable, payroll, smooth function to expand its company. The company functions account for the bulk of time, labour and resources spent by the department. The departments accounting and productivity can be improvised by using accounting software to automate theirinvoices, payments, payrolls, book-keeping and taxes (Chen, 2021). Here SKANSKA PLC would use advanced expense management software to track all the business expenses from one central platform. This software quickly and easily closes their books with real-time expenses reports.

The functions of accounting are divided into two major groups: Historical and Managerial functions. The economic activities of thecompany include accurate accounts of its business. Thefunction includes financial transactions records by categorizing, encapsulating, finding net results, displayingfinancial affairs, scrutinizing and communicatingfinancial information. Then theserecords arefabricated in a journal whichis later transferredto form ledger accounts where they are classified and recorded accordingly (El?Hajet al., 2019). These recordings are then transformed to trial balance which helps to form the trial balance of a particular period of a business organization. At last, a final balance sheet is prepared to cover all financial statements and data for interpretation and analysis.

The managerial functions include control of financial policy andplanningand preparing a budget, cost control, assessing the job performance and prevention of errors and swindling. Various financial policies are formulated and presented before the management in order to plan future activities of accompanying. Based on the future activities, the estimated statements of the budget are prepared. This provides necessary financial information to prepare the budget. A standard cost is estimated, which is later compared to the actual cost, which is obtained from the accounting records. The task is then allotted to the employees of various departments, where it is later evaluated (Cockcroftand Russell, 2018). The necessary information is provided by the accounting department. The accounting system is managed in such a way as to avoid errors and fraud.Hence the main function is to keep an accurate record of financial transactions, create a journal of expenditure and prepare statements and data required by law. Hence SKANSKA PLC is also applying all the major guidelines to enhance its company within the given period of time.

Duties and Roles of Accounting and Finance
Accounting and finance play a very important role in the processing and management of any business unit. Business entities operate on money, and the money is only channelized through the understanding of finance and accounts. The art of controlling money, channelizing it in the right direction and displaying it skillfully affirms and guarantees the smooth functioning of the business (Conleyet al., 2018). By proper accounting of the company's functioning, the management of the flow of money is better handled, ensuring correct direction to the company's future.

Accounting of a company, if done properly, has a direct advantage to the business because they are in compliance with the law, and further, with no violations, it secures any apprehensions of prosecution. Good accounting principles keep the company in conformity with the laws, and standard compliances enhance reliability and build a good image. Poor accounting principles can overlook minor errors, which can bring drastic changes in the overall performance report reflections.With proper accounting practices and financial understanding, the company can start sound budgeting. Budgeting can help the company in anticipating revenue, and hence, decision making can be better (Bianchiet al., 2020). Budgets are a culmination of good financial records keeping; that is, they are like blueprints, which allow the company to progress and ensure stability and success.

Analyzing financial performance is an art, which involves reading from past records and making future decisions. Accounting records are means and tools for it. The company should ensure to learn from the past activities reflected from the records and act in a more judicious manner to secure its future (Osmaniet al., 2017). Reading and analyzing the accounting records is a task that the financial analyst performs for the company. By reviewing the company's financial records, one can develop on their strategies or modify the same. Directing the money in the right direction is very important and can be done by flowing sound accounting habits. The reason why accounting and financial analysis is considered to be of utmost importance is because of its use in developing business strategies. SKANSKA PLC, a public company, engaged in Construction, has paid significant attention to this fact. It has not only focused on its accounting principles but also expanded into the finance team by exploring that sector. The company, belonging to the construction industry, has a main focus on Construction, but the company has explored the use of finance in their sector by way of investment (Morshed, 2020). They have developed on this aspect by understanding the various industries and investing in them to gain monetary gains so that could help the company for its contraction business further. This approach will not only benefit their main course of business, that is, Construction, but also attract employment and growth and diversity of the company.

TASK 2
a. Five ratio calculation
(i) Return on capital employed

(ii) Net profit margin

(iii) Current ratio

(iv) Average receivable days

(v) Average payable days

b. Ratio performance of SKANSKA PLC
Return on capital employed (ROCE): SKANSKA PLC evaluated the returns generated by the construction business for the years 2018 and 2019 as 16% and 12%. It implies that from the total capital invested by the business, 16% of the profit was generated in the year 2018, and it decreased down to 12% in 2019. ROCE is a financial metric that measures the overall profitability of the company (Haddadet al., 2020). It can be viewed that the generic profit margin of ROCE fell down by 4% within a year due to high current liabilities from £645 to £2220 within a year. From the perspective of a prospective investor, who is interested in investing into SKANSKA PLC of £1 million, is advised that to postpone his investment. A decline in the ROCE is a signal of losing off the competitive advantage of the business.

ROCE determines the profitability of the company with regards to invested capital, and therefore, it is important for capital-intensive companies like construction businesses that require a large investment to produce goods and services (Liand Wang, 2017). Hence, it is advised to delay the investment plan of £1 million. The reasons for the decline in ROCE for SKANSKA PLC are mainly two- overstatement of non-current assets for the business from £4470 to £8070 in one year and a large increase of current assets from £645 to £2220 for the same period. A consistent decline in the ROCE of the business creates a negative impact on the existing investors doubting the profit-generating capacity of the company leading to the withdrawal of investment. Net profit margin: The NP margin measures the amount of net income generated by the business as a percentage of revenue (Ajeigbeet al., 2021). SKANSKA PLC computed its net margin as 13% for 2018 and 11% for 2019. In other words, the net profit margin for the business illustrates how much of each pound in revenue is collected by the company in translating into profits. The NO margin is known to provide a synopsis of the profitability index of the business. A decline in the profit margin of an entity does not foster making new investments. Thus, the investor should detain his idea of investing £1 million into the company. The cause of decreasing net profit for SKANSKA PLC is that the proportionate increase in revenue is too high in comparison to the rise in net profits.

The reason for a low or decreasing net profit margin suggests that SKANSKA PLC uses a poor cost management strategy and pricing strategy resulting in inefficient management of profits. SKANSKA PLC needs to immediately cut down on its operating expenses to keep the construction business operation at normal capacity and improve the net profit margin. The effect of declining profit margin from 13% to 11% is negative, especially to the investors of the company. They shall receive lower dividends against their investment, causing them to switch to different companies to venture out for higher returns (Larojan, 2021). Moreover, new investors shall not be interested in making an investment in SKANSKA PLC as a result of decreasing profit margin %. Current ratio: The current ratio is the most common liquidity ratio of the business. As said by Tascónet al. (2018), the current ratio measures the potential of the entity in paying off its short-term debt using the available current assets that are due in a year. SKANSKA PLC reported its current ratio as 2.35 in 2018 and 0.93 in 2019. It is evident that there is a major decline in the liquidity performance of the business in a year. The industry standard of the current ratio is 2:1 that is well-achieved by SKANSKA PLC in 2018. However, in the following year, with a sharp increase of current liabilities from £645 to £2220, the current assets fell short, resulting in a fall in the current ratio.

The cause of the fall in the current ratio for SKANSKA PLC is that the proportionate rise of current liabilities is too high in comparison to the rise in current assets. The effect of fall in the current ratio on SKANSKA PLC states that there is an issue with the stock management of the company, ineffective and flexible credit policy for collecting dues from the receivables and excessive cash burn rate (Daruty, 2019). Similarly, an exceedingly high current liability causes SKANSKA PLC's current ratio to fall below one that indicating the company does not have enough liquid assets to pay off its liabilities. The effect of the low current ratio for SKANSKA PLC is that that company has a reduced potential of generating adequate cash for company. Accounts receivable days: It is the number of days that a customer invoice is outstanding for payment before it is collected. The lower number of receivable data measures the high effectiveness of the company's debt collection efforts in allowing credit to only reputable customers and collecting such debt in a timely manner (Tianand Yu, 2017). SKANSKA PLC's receivables days were 68 days in 2018 and 73 days in 2019. In the year 2018, SKANSKA PLC experienced high receivable days meaning that the company enjoyed excessive liquidity and debtors were allowed excessive credit as well as extra time to make payment.

On the other hand, in the following year, due to a decrease in liquidity performance of the company, the receivable days was brought down to 73 days. From an investor's perspective, it is beneficial as the company is tightening its credit terms as high receivable days suggest general problems of debt collection and higher chances of incurring bad debt (Wadhwa, 2019). The decrease in receivable days for the company is due to a proportionate rise in debtors is low in comparison to the sales increase in the business. The effects of a decrease in receivable days imply that SKANSKA PLC is re-assessing its credit policies to ensure that the receivables timely make the payment of its dues.

Accounts payable days: It is the number of days that the company takes in making payments to its suppliers against the short-term liabilities. SKANSKA PLC observed a rise in the payable days from 2018 to 2019, which means that the company is paying slowly to its suppliers and is on the verge of facing a critical financial condition. The payable days computed for SKANKSA PLC are 60 days and 176 days in 2018 and 2019. It can be seen that that company has been paying too slow to its lenders in 2019, indicating a difficult time for the company in arranging payment of its dues.

As a result of slow payment to creditors, the investors' are worried about whether the company shall be paying adequate returns on investment in a timely manner or not (Adjirackoret al., 2017). A persistent delay in payables days causes the investors to withdraw their investment from the business. The causes of delayed payable days are the inadequate liquid cash available with the business, too high current debts for the business, and working capital is very high for the company. The reason for SKANSKA PLC to delay its payable days as the company procured excess current liabilities in 2019, which are beyond the capacity of the business to make payment.

Conclusion
It can be concluded that the financial performance of SKANSKA PLC in the year 2019 is very critical. Except for the receivable days, none of the financial ratios showed excellent performance for the company. Therefore, the company needs to re-assess its financing decisions which are the utmost important decisions that a business makes to use its financial resources. The financial decision-making process is essential for SKANSKA PLC to maintain its long-term growth and efficiency in the construction industry of the UK. The financial decisions for the company shall be concerned with the use of non-current assets to generate adequate income and profit for the business. As SKANSKA PLC is into the construction business, a large number of funds are involved invested by the shareholders. In return, the investors expect to derive a high return. However, in the year 2019, the company failed to provide an adequate return to the business due to low-profit margin and poor liquidity performance. Therefore, the financial manager must improve its decision regarding the fixed assets of the company with regards to the capital budgeting technique. An overvaluation of the total assets of the business caused the company to decline its ROCE margin, and thus, the business is at high risk.

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