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Financial Decision Making Assignment sample

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Pages: 13

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Task1.

1. Accounting department:

Financial Accounting- Financial accounting is the systematic process or way of properly summarizing, recording, and reporting all the financial transactions of the business. Financial accounting involves the income statement, balance sheet, statement of cash flow, and statement of owners' equity change. In Skanska Company also the financial accounting is very important with the help of this they can manage their all financial statement and this gives them a clear image of their cash inflow and outflow. Their financial position in the market that how much they are strong in terms of money. This helps them making further future decisions for their growth and success. The income statement of the Skanska Company will help them to know how much profit the company is making and how they can improve it.

  • Management Accounting- Management accounting is the way of making reports about all the accounting records or transactions of the overall business operation. This helps the Skanska Company manager for the making decisions and planning of their future long and short-term goals and objectives of the company (Kintonova et al, 2019). In this, the manager manages all the accounts of all the departments of their company Skanska like their marketing, operation, manufacturing, and other departments. By this, they will be able to coordinate all the activities of the business. This also helps the Skanska Company for adopting the opportunity for their business so that they can convert that into their profitability. By this the Skanska Company manager able to measure, analyze all their business accounts so that they can interpret their information for the growth and expansion of their company.
  • Tax Function- The tax function is very important for every type of organization as with the help of this the manager can manage and file their tax return on a timely basis. This helps the Skanska Company also by filling their tax return on time by properly planning about all the tax which their company has to pay. With the help of this Skanska, the Company manager is also able to reduce their overall tax of the company by properly analyzing all their company accounts and reducing the burden of their company tax (Oyewo, 2017). This also helps in gaining more profit for their company as when their tax liability will be reduced. With the help of the different tax rules, the Skanska Company manager will be able to manage the taxes of all the departments and all their expenses properly.
  • Auditing Function- The auditing function is very important for the successful growth and running of any company. As with the help of the auditors, they can examine and evaluate all the financial accounts properly, so that they can find out if there any mismatching of the accounts is there or not. If all the transactions of the finance are properly recorded or not. In the Skanska Company, this auditing function is also very important. As the manager will be able to find out if the Skanska Company departments are properly recording and maintaining their financial accounts or not. If they are manipulating their financial accounts or not. This helps the Skanska Company to make their future decisions better and they have a clear picture of their current financial position of the company (Oussii & Taktak,2018).

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2. Finance Department:

  • Investment Function- The investment function is the way through which the company finance team research and examine all the possible good opportunity in terms of investment for the company they select. After that, they properly select the best project for the company investment in which they will be able to get a good amount of return from it. As same in the Skanska Company, their finance team selects the products or some projects of construction in which they will be able to earn more from it. This helps them in earning more for their construction projects. Through this, they will be able to amount of profit or return they will be able to get from it and then select and invest in the best construction project. Different types of methods are used by the Skanska Company to evaluate their investment plan properly so that they have a good future for their company.
  • Financing Function- The financing function is related to the proper planning and controlling of all the financial resources which are available for the company (Esswein & Chamoni,2018). It is the way through which any company decides the different modes of finance for their company and selects the best mode which will be best beneficial for their business. In which they have to pay less interest on their borrowing and which will be more secure and perfect. As same in the Skanska Company, their manager or owner decides the best way of financing either through taking a loan from banks or taking from another way of financing which will be less risky and more beneficial for their project of the construction. As the Skanska Company can generate the funds from the equity sources also by selling their shares of the company to the public and generate funds from it.
  • Dividend Function- The dividend function means in which the company pays the dividend to its shareholders. The dividend is the portion of their company profit from which they take some portion for their dividend distribution to their shareholders. It is decided by the top management of the Skanska Company. They decide either they have to pay the dividends or not (Officer,2020). Skanska Company can put their profit in their retaining profit account so that they can use that for their future or they can decide to give the dividend to their shareholders if the Skanska Company doesn't have any plan for the future expansion of their business.
  • Working Capital Function- This function tells the companies about their difference between their company's current liabilities and current assets and gives a clear picture of which is more and which is less. With the help of their company's current assets, they made their payment of the current liabilities. The Skanska Company manager also examines their balance sheet statements so that they can know that they have enough current assets or not to pay their current liabilities. According to this they make their future decisions of spending and taking further funds from the outside. As for the good goodwill of the Skanska Company, they have to pay their current liabilities on time so that they don't have many burdens in the future related to money. Payables, receivables, inventory, and cash are the components of the working capital which the finance team has to keep in mind for their better business operation (Hipp, 2016).

Task2.

(a)  Calculation of ratios of Skanska Plc of their two years:

 

 

 

Ratio

Formula

2018

2019

ROCE

Operating profit/Total assets-current liabilities  *100

19.61%

16.67%

Net profit margin

Net profit/Sales*100

12.50%

11.25%

Current Ratio

Current assets/current liabilities

2.34 times

0.93 times

Average receivable days

Receivables/Sales *365

68.43 days       

73 days

Average Payable days

Payables/Purchases * 365

77.05 days    

159.68                      days

 

 

(b). Analysis of Ratios

1. Return on capital employed

  1. The return on capital employed ratio help in the proper analysis of how perfectly the companies are making a profit from their capital used in their business. With the help of this, the manager can know if their return is good or not from the capital they invested and this also helps the investors to decide in which company they have to invest for a better return.
  2. This ratio indicates that if the company can making a good profit or not during a year and this also shows their performance in terms of profit. Is that good or bad and according to that, they improve their performance to sustain and grow in the market.
  3. By comparing Skanska Company ROCE ratio it is found out that they have less return in the year 2019 they 16.67% have as compare to 2018 they have 19.61%. This shows their operation performance is low due to which the sale is low and they earn less which reduce their ROCE in 2019.
  4. This happens due to not paying their total debt on time which increases their total liabilities (Umobong & Agburuga, 2019). Not selling their unused machine on time. Also, help due to reduction of their sales of the company.
  5. They can improve their ROCE if they will sell their unused assets and try to do good marketing of their product so they can increase their sell and with the increase in sell they will be able to make more profit and their ROCE will be improved.

2. Net profit margin

  1. The net profit margin shows the company's actual profit they have earned during their annual fiscal year. It is expressed in the form of a percentage and also represents in form of a decimal. This shows the total revenue a company earns and the total flow of cash they have.
  2. This ratio tells about the company's performance in terms of their total revenues they made. The company debt payments they have made or due which shows their performance. This shows how much total profit the company made after reducing all the expenses and other costs.
  3. The net profit of the company in 2018 they have 12.50% and in 2019 they have 11.25% which is low from their previous year. This is change due to their increase in the operating expenses and finance cost in the 2019 year.
  4. Their value is down in 2019 because their sales go down and their operating expenses and other expenditure by the company goes rise and due to which they make less net profit margin in 2019.
  5. The company can improve this by reducing their expenses and cost of their process of manufacturing products. By investing in more profitable projects so they can earn more profit (Hutapea & Saerang, 2017).

3. Current ratio

  1. The current ratio defines the company's ability or capability to meet their obligations of short term or those obligations which come within their financial year. This shows how much liquidity the company has. It tells if the companies have enough resources for properly meeting their obligations or not.
  2. This ratio indicates how effective and efficient a company has to meet its short term obligations. The high current shows show good performance of the company and the low current ratio show the bad position of the company.
  3. 2.34 is the current ratio of the year 2018 and 0.93 is their 2019 current ratio which is very low and this shows that the company is not even in the position to meet their obligations of short terms in the 2019 year.
  4. The current ratio goes down due to the company increase its debt in short term. Their current assets got decreased in the year 2019 due to which the ratio goes down (Firmansyah, 2017).
  5. Reduce the cash payments so that company has enough liquidity for their business. By reducing their current withdraw from the company which they take for their personal use. By this, they can improve their current ratio of the company.

4. Average Receivable days

  1. The average receivable days mean that it shows that how the performance of the company is in terms of their credit ability to their customers and how effectively they are in receiving the payments from their customers in how much period. This also defines if the company wants to increase its creditability or not.
  2. This ratio tells how effectively the company can receive the payments from their customers to whom they give the credit. In how many days they receive the payments and what their condition of credit to their customers, this indicates their performance in terms of credit capacity.
  3. In the year 2018 the company was able to receive their money from their customers in 68.43 days and in the year 2019 they take 73 days which shows that their average receivables days are more in 2019 and this shows the company is not well suitable for extending their credit facilities.
  4. Their customers are not paying them timely. Their policies may get changed related to credit.
  5. Reducing the period of the credit facility to the customer. Limit their credit facilities (Kinuthia, 2020).

5. Average Payable days:

  1. This shows the company's position in terms of their payments which they made to their supplier. This is shown in the company balance sheet and this, they are under current liabilities. The better the company pays to its suppliers it will show that the company is doing good business.
  2. This ratio indicates how much they are capable of repaying their suppliers whom they take raw materials on credit. This shows the company's performance in terms of financially how good they are.
  3. In 2018 the company pays in 77.05 days to their suppliers and in 2019 they pay in 159.68 days which shows their payable condition is very poor in the year 2019. They are not in the good condition to take more raw materials on credit.
  4. The ratio goes down in the year 2019 because their sales go down or they are not able to earn more profit from their investment due to which they face the downfall in the ratio in the 2019 year as compared to the year 2018.
  5. The company can improve its ratio if they will limit their credit purchase and improving their sales of the product which will bring profit for them. With their supplier, they can negotiate also to increase their credit limit and also by taking a discount on their early payment (Sunjoko & Arilyn, 2016).

 

 

Conclusion

From the above report, it can be concluded that the accounting and financing department is very important for the Skanska Company. As with the help of these departments the company can make good financial decisions for their growth and success of the business. With the use of different ratios in the Skanska Company, they will be able to know about their payable and receivable payments condition where their business stands. With the help of the current ratio, they will be able to know how much they have liquidity with them to meet their obligation of the short term. With the help of net profit margin, they will be able to know that Skanska Company is are making a good profit or not, and with the use of Return on capital employed they will know the capital they invested according to that they can get a return or not.

 

 

References

Esswein, M, and Chamoni, P, 2018, 'Business Analytics in Finance Department-A Literature Review', Muticonferenz Wirtschaftsinformatik, Luneburg.

Firmansyah, I, 2017, Comparison Analysis Of Influence Of Current Ratio On Financial Performance', Jurnal Akuntansi12(2), pp.165-176.

Hipp, C, 2016, 'Dividend payment with ruin constraint', Risk and Stochastics: Ragnar Norberg at70.

Hutapea, A,W, and Saerang, I,S, 2017, 'Pengaruh Return On Assets, Net Profit Margin, Debt To Equity Ratio, Dan Total Assets Turnover Terhadap Harga Saham Industri Otomotif Dan Komponen Yang Terdaftar Di Bursa Efek Indonesia', Jurnal EMBA: Jurnal Riset Ekonomi, Manajemen, Bisnis dan Akuntansi5(2).

Kintonova, A,Z, Yermaganbetova, M,A, Abildinovaa, G,M, Ospanova, N,N, Abdugulova, Z,K, and Glazyrina, N,S, 2019, 'Optimization of business processes based on the supply chain management in an accounting department', International Journal of Supply Chain Management8(3), pp.369-379.

Kinuthia, D,N, Maimba, J,K, and Mwangi, L,W, 2020, 'WORKING CAPITAL MANAGEMENT AND FINANCIAL PERFORMANCE OF LISTED MANUFACTURING COMPANIES IN KENYA', International Journal of Business Management and Finance3(2).

Officer, C,F, 2020, 'Finance Department.', Mount Isa Hospital, Mount.

Oussii, A,A, and Taktak, N,B, 2018, 'The impact of internal audit function characteristics on internal control quality', Managerial Auditing Journal.

Oyewo, B, 2017, 'Predictors of the effectiveness of management accounting function in Nigerian firms', Scientific Annals of Economics and Business64(4), pp.487-512.

Sunjoko, M,I, and Arilyn, E,J, 2016, 'Effects of inventory turnover, total asset turnover, fixed asset turnover, current ratio and average collection period on profitability', Jurnal Bisnis dan Akuntansi18(1), pp.79-83.

Umobong, A,A, and Agburuga, U,T, 2019, 'Agency Cost of Equity and Growth Rate in Relation to Returns on Capital Employed and High and Low Leveraged Firms in Nigeria', International Journal of Economics, Business and Management Studies6(2), pp.318-337.

 

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