Financial Management Assignment: Financial Decision Making at Skanska Plc

Question

Task: The Financial Management AssignmentTask:
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

Executive Summary
As evident in this financial management assignment, the management of finance is one of the essential functions in organisations. The day-to-day activities and future operations require financial support, and the financial position is critical to the business's survival. The efficient management of finance and funds are performed through proper accounting and financial management. Hence both departments play an essential role in the financial management of companies. The accounting department deals with the documentation, reporting, and compliances of the standards and principles for reporting financial transactions. At the same time, the finance department deals with the company's long-term and short-term financial planning and makes relevant decisions for investment. The performance of the company is relevant to attract investors to the business. Ratio analysis is one of the methods used by investors to measure performance before making a decision. The importance of accounting and finance departments functions are analysed through Skanska Plc. Further, relevant ratios are calculated to understand the financial position and decide on investing in the company.

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Topic: Financial Decision Making

Introduction
Skanska Plc is a UK-based company that is involved in the construction and development of infrastructure. The company's activities include civil engineering, plaster works, services to ceilings, and other engineering works (Group.skanska.com, 2021). The company belongs tothe services sector and supports the industries and society by providing construction and engineering services. Skanska has a wide variety of construction products, including residential developments, infrastructural and industrial developments. The company is headquartered in Sweden, and the stocks are traded in NASDAQ. The company has done major projects in Europe and the United States, and innovation of the World Trade Centre and the United Nations headquarters were projects of Skanska Plc. The income for the year 2020 was SEK 9897 million, and the number of employees has decreased to 33,585 as of 2020 (Group.skanska.com, 2021). The company is widely recognised as the green constructor, and it is one of the group's strengths against competitors. However, increased costs are decreasing the operating margin, and it weakens the company's financials. The company has more opportunities in the US and UK due to urbanisation and increased construction. However, the competition from rivals is a threat to the opportunities. The ethical decision-making and analysis on each opportunity will help the management in grabbing opportunities over threats. The report is presented to the management of Skanska related to the functioning and importance of the accounting and finance team in the company. Moreover, the report analyses the investment choice of an investor on investing in the share.

Task 1
The accounting and financing department deals with the financial position of the company. The finance department functions are the allocation of cash and management of cash resources required for daily operations and long-term plans. The importance, role, and functions of both departments are discussed in the section.

1. Accounting department
The accounting department makes the management of receivables, payables, financial statements, payroll, inventories, finance control, and record-keeping. The functions of the accounting department include financial accounting, managerial accounting, tax functions, and auditing functions (Wild, 2019).

• Financial accounting
Financial accounting deals with recording, classifying, and summarising the company's transactions (Wild, 2019). The function not only includes the documentation of the transactions but also extends to reporting. The financial accounting activity prepares various reports and provides the reports for management to make decisions and understand the business's financial position (Wild, 2019). The decisions of the managers are supported by the evidence provided through financial accounting. For instance, the preparation of the consolidated income statement of Skanska is an essential financial accounting function of the accounting department. The preparation of the statement using accrual methods and recognition of expenses and income will help the management identify the company's operating income. In addition, the analysis of the income statement helps Skanska Plc management make decisions related to operations (Group.skanska.com, 2021). Further, the company's financial accounting assures the preparation of statements using accounting principles and compliance with the IFRS standards in the reporting of statements. The application of financial accounting ensures fair representation of the company's facts and ensures reliable communication to relevant stakeholders (Wild, 2019). Thus, it can be said that the function of financial accounting plays a significant role in the accounting department.

• Management accounting
Management accounting deals with the analysis and interpretation of financial information to managers. The managers make decisions based on the interpretations from the financial reports, and, usually, top management might not get time to read and analyse each and every aspect of financial statements. Hence, one of the functions of the accounting department deals with analysing and summarising the company's financial position to managers. In addition, the processing of data and budgeting are critical functions of management accounting (Weetman, 2019). Data processing involves continuous analysis of the financial data to make meaningful and valuable interpretations.

Further, the forecasting of sales, expenses, and identification of future requirements are part of the budgeting process. Management accounting deals with making plans and policies for the budgeting and allocating resources for each department, such as production and marketing. For instance, the preparation of managerial reports of Skanska Plc requires the support of management accounting for interpreting the numbers and facts (Group.skanska.com, 2021). The discussion report is an analysis of the financial statements and future decisions based on the findings. The company's annual report comprises the management discussion report, and hence management accounting ensures communication of managers' decisions to stakeholders.

• Tax function
One of the other important functions of the accounting department is compliance with tax regulations. The company has to deal with many tax regulations such as income-related taxes, tax deducted at source, social security taxes, and federal and state taxes (Rahmayuni, 2018). Further, the department also deals with the tax regulation of different countries based on the subsidiary locations. Furthermore, the departments analyse the income and make sure that payments are made to relevant tax offices as per the corporate rates of each country. In addition, the accounting department must ensure the payment of the taxes on a timely basis. The tax function of the accounting department is not only limited to complying with tax regulations but also to analyse the operational efficiency before and after making taxes. For instance, the earnings before tax and profit after tax are analysed by Skanska Plc to determine the company's profitability (Group.skanska.com, 2021). Further, the preparation of statements for meeting tax purposes such as depreciation adjustment, appropriation of other tax-related functions are functions of the accounting department. Finally, ensuring tax compliance and paying taxes to related agencies are duties of the accounting department.

• Auditing functions
Auditing the financial statements of the company is an important activity of the accounting department. The department must ensure internal and external auditing of the financial statements to assure the accuracy and correctness of the reports. Further, the department's auditing function helps make a fair representation of the financial reports by ensuring the compliance of all principles and standards in the preparation and reporting of the financial statements (Pierre, Peters, and de Fine Licht, 2018). Further, the auditing function helps the department, and the management helps identify the risks associated with the financial statements. For example, the omission of any receipts for expenses can be identified through auditing. The misrepresentation or fraud in financial statements can also be identified through auditing. The annual report of Skanska Plc comprises the auditor's report. The report ensures the compliance of principles, valuation method of inventory, accounting policies, and serious concerns of the transactions audited by the auditing company of Skanska Plc (Group.skanska.com, 2021). For instance, the auditors' limited assurance on the greenhouse gas and health plans of Skanska Plc gives additional responsibility to the management. Thus, the auditing function of the accounting department ensures the accuracy of the published financial data to stakeholders.

2. Finance department
The finance department of the company is responsible for taking decisions for the future of the company. Simply, it deals with the long-term financial planning of the company. In addition, the department deals with investments, dividend policy, and other financing functions.

• Investing function
The primary activity of the finance department is to maximise the shareholder's wealth. The company is using the capital resource provided by shareholders, and the company must increase the wealth (Alkaraan, 2020). Therefore, identifying investment opportunities and evaluating the potentiality and profitability of the investments are concerns of the finance department. The activity of making appropriate investment decisions is the investing function of the department. The department is responsible for identifying the assets or investments, or projects which can make maximum yield from the capital expenditure is identified through the investing function (Alkaraan, 2020).

Further, the department assesses the risk associated with each opportunity and identifies how the risk increases the value of the business and affects the profits. The department makes investment decisions and analyses the potential of current investment and decides whether to continue or divest from a project. For instance, the investments made in housing plans in Sweden by Skanska Plc and divestment in the Elizabeth River Crossings in Virginia are part of the investment decisions made by the department. It is known that ten investments and twelve disinvestments made by the company during different quarters in 2020 are part of the wealth maximisation goal of the company (Group.skanska.com, 2021).

• Financing function
The identification and analysis of the potential projects are made through the investment function. First, the company has to find enough funds for investing in a selection of projects. The financing decision of the departments deals with the pooling of the funds. It is a decision that determines whether to use company funds or outsourced funds such as debts or borrowings to fund the project or investment (Sebastian and Gnanakumar, 2021). Before selecting the fund resource, the risk associated with each project, the returns from the investments, and the payback period are considered. The interest rate on borrowings and cost of capital are also considered for an appropriate selection of funds. Then, the financing function of the company decides whether to increase the shares or make buybacks from the shareholders. For instance, the cash flow statement of Skanska plc shows that the company made more borrowings in 2020 to make investments and repaid more borrowings in the year (Group.skanska.com, 2021). The analysis of the cash flow statement shows that the company made more cash outflows on investment activity. The decision to pay back the liabilities is part of the financing decision of the company.

• Dividend function
Another essential function of the finance department is to determine the dividends. Dividends are the part of profits that are paid to shareholders. The finance department makes decisions related to the retained and distribution portions of the profits. The decisions related to dividends are essential because the funds for plans are accumulated from the present profits (Triani and Tarmidi, 2019). It is also essential to maintain a constant or growth dividend policy to attract more investors and show that the company has a good return from the business. Dividends are one of the attractions to investors and hence dividend management and dividend policy are important functions of the finance department. Further, the department must decide how the company is planning to pay a dividend in the form of cash or stock. For example, Skanska Plc had paid less dividend in the financial year 2020 compared to the financial year 2019. It states that the company's increased profits are retained for future investment activities of Skanska Plc (Group.skanska.com, 2021). Thus, it can be said that plans are also considered while determining the company's dividend policy.

• Working capital function
The department deals with long-term financial planning and manages the working capital or short-term financial requirements of the company. The working capital includes the current assets and current liabilities, and the management of the current position is required to ensure the continuous flow of operations. The company must meet the current obligations, collect the receivables within a short period, and take advantage of payable time and inventories as part of the working capital management (Morshed, 2020). The position of working capital determines the profitability of the company. For instance, the cash flow from operating activities is related to the company's current assets and current liabilities. Thus, a delay in the collection of receivables impacts the earning capacity of the company. The operating cash flow of Skanska Plc has increased in the financial year 2020, and it can be said that management of working capital increases the cash flow position (Group.skanska.com, 2021).

The functions of the accounting and finance department of the organisation help in managing and directing the business. Further, it can be said that the accounting department deals with recording and preparation of financial statements, and the finance department deals with planning, decisions, and cash flow position of the organisation.

Task 2
Part a: Calculation of ratios

Part b: Analysis of ratios
i. Return on capital employed
Return on capital employed is also known as return on investment. The ratio helps in identifying the overall profitability of the company from the capital investment. The ratio shows the relationship between net profit and capital investment (Maeenuddina et al, 2020). The operational efficiency of the business and the policy on debts can be measured through the ratio. The ROCE for Skanska Plc was 19.61% in 2018 and 16.67% in 2019. The ROCE of the company has decreased by 18% and it shows the decrease in efficiency of the operations. A decreased ROCE states that the company will not get a greater return from reinvesting the profits in business. A higher ROCE ensures a good return on investments. The long-term borrowings and equity have increased in 2019 compared to 2018 but an equivalent increase in profits was not seen. The lower rate of profits has impacted the ROCE of Skanska Plc. An increase in the cost of sales has decreased the profit and hence, companies can try to decrease the cost of sales in the future. For instance, making trade allowances from suppliers will reduce the cost of raw material.

ii. Net profit margin
Net profit margin shows the profit earned from £1 of sales. The ratio indicates the efficiency of the business in converting sales to profits (M Allo, 2021). The net margin for Skanska Plc in 2018 was 12.50%, and in 2019 was 11.25%. The company had a decreased net profit margin compared to the previous year. The net profit decreased by 11%, and the income statement analysis shows that an increase in both direct and indirect expenses of the year decreased the net margins even after the company made a 20% increase in sales. Expenses of the company covered the sales revenue and did not result in making good profits. Management of expenses and reducing the debt or finance cost can help the company make more profits in the future.

iii. Current ratio
The current ratio shows the ability of the company to meet short-term obligations. The ratio measures the relationship between the company's current assets and current liabilities (Bordeianu and Radu, 2020). The company's current ratio in 2018 was 2.35, which states that the company had £2.35 current assets to meet every £1 current liability during the year. However, the rate has decreased in 2019 below the ideal rate of 2:1 and stood at 0.93. As a result, the current ratio of Skanska Plc has decreased by 153% on a year-over-year basis. The increase in current liabilities and the unproportionate increase of current assets affected the company's liquidity position. The current liabilities have been incurred by 71% and analysis on the balance sheet shows that increase of trade payables has severely impacted the position. However, depending on long-term financing and management of receivables and payables will improve the company's liquidity position.

iv. Debtor's collection period
The debtor's collection period helps identify the average time taken by the business to collect back the receivables from trade debtors (Rashid, 2018). A longer debtors collection period states a liberal credit policy of the company. The average collection period was 68.44 for 2018 and it increased to 73 days in 2019. An average increase of 6% is witnessed on a year-over-year basis. The increased debtor's collection period shows that the company is taking too much time to convert the sales into cash. It affects the cash flow position and cash from operating activities. An increased credit sales and liberal credit policy impacted the ratio. Making a better credit policy and collecting cash from debtors in a short period will improve the situation.

v. Creditor's collection period
The creditor's collection period is the time taken by the company to pay the debt to creditors. A long creditors collection period benefits the organisation by taking advantage of the period and by making slow cash outflow. However, the payables will be shown in the balance sheet and impact the liquidity position. The company has around 78 days of credit period in 2018 and it increased to 160 days in 2019. It means the company is making payments to creditors for purchases after five months. Such a lengthened credit policy will delay the cash outflow from the business, but it has impacted the company's liquidity position (Rashid, 2018). It was identified that the company's current ratio has gone below the ideal rate due to increased trade payables. Hence, the liberal credit policy of the creditors is not reasonably benefiting the company. Skanska Plc can try to make trade payables within three months or less to avoid the pile of trade payable from the balance sheet and can strengthen the liquidity position.

Conclusion
The operating cash position of the company plays a major role in determining the ability of the company to pay back loans. Ratio analysis of the company is one of the ideal ways to measure the performance of the company and it enables comparison and efficiency with industry.Providing loansto Skanska Plc is not a recommended action. The measure of return on capital employed shows that Skanska Plc is not using the capital efficiently to make profits compared to the previous year. However, the performance was below 20% in 2019 and hence cannot be said it was doing good in previous years too. Further, the liquidity position has gone below the ideal rate due to inefficiency in managing the creditor's collection period. The decreased rate may affect the operations and working capital of the business. The cash position can also be affected due to delayed debtors' collection; the receivables might turn to bad debts, resulting in losing cash from the business. Moreover, the company's sales could not make many profits, and conversion of sales to profits is not efficiently done due to inefficient cost management. Thus, it can be said that the performance of Skanska Plc is not better compared to previous year. The increased volatility analysed in the financial performance within a year of Skanska Plc is not a good indicator regarding consistent performance of the company. The inconsistent returns and fall in profit margin affect the financial position of the company. Thus, from the light of performed ratio analysis, it is recommended not to provide loan Skanska Plc and can consider the future performance and may change the decision by Camden Limited.

References
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