Financial Decision Making

Introduction

Financial decision-making refers to the identification of potential inferences hidden within the business transactions for a fiscal period for making a competitive decision regarding sales, liquidity, profitability, solvency, and efficiency management (Nigam, et al., 2018). In making an efficient financial decision, accounting and finance functions or departments play a significant role as they help in collecting and analyzing significant financial information, and respective outcomes are used to take corrective financial performance management-related action.

The assessment is about recognizing the significance of roles, duties, and functionality of accounting and finance functions in an organizational context and for understanding its implication, this is evaluated in the reference to Skansa Plc. Skansa Plc is a renowned construction engineering company in the UK and this was founded as a subsidiary company of Skansa in 1984 in Hertfordshire (Skanska, 2023). The research work illustrates the importance of finance and accounting functions, roles, and duties within Skansa Plc along with the contribution of the wings in overall financial decision-making.

Further, the economic position of Skansa Plc is analyzed for the FY (Fiscal Year) 2020 and 2021 using appropriate accounting ratios like profitability, liquidity, and efficiency, and respective quantitative results are analyzed whether an investor will invest £ 1 million in its business expansion plan or not. Apart from it, the management of Skansa Plc is recommended regarding improvement in its financial policies so that it might meet its funding and business expansion-related objectives without any obstacles.

Organizational Significance of Finance and Accounting Functions

Overview of Accounting and Finance Functions

Accounting functions include the business transaction recording, storing, compiling, evaluating, tracking, and reporting related practices of an organization and this plays a significant role in making competitive financial decisions using relevant inferences (Hopwood, 2019). The significant functions which are performed by the accounting team of an entity like Skansa Plc are mentioned as follows-

• Identification of relevant business transaction 
• Recording of significant financial transactions in books of accounting following accounting framework and standards 
• Classification and summarization of business transactions 
• Analysis of the compiled financial transactions 
• Interpretation of potential inferences hidden within an organizational financial transaction 
• Communication or reporting of interpreted outcomes regarding a business transaction for an FY to the management to make an informed decision 

Finance functions refer to the department of an organization that helps in planning and controlling the financial resources so that determined operational or business activities might be performed without facing any funding shortage and low return-related issues (Gomber, et al., 2017). The important roles and duties which are performed by the finance function of a company like Skanska Plc are listed as follows-

• Investment decision- Finance function helps in deciding which investment option should be selected to maximize return on employed capital 
• Liquidity Decisions- Finance function assists entities in making a financial decision regarding the optimization of cash and credit sale policy to meet current obligations.
• Capital structure decision- Finance function is accountable for deciding on the ratio of debt and equity during funding activities.
• Cash management and funding decision- Finance function is liable for estimating and allocating cash or capital along with deciding its source of funding.
• Estimation of Capital Expense- Finance function is accountable for forecasting the amount of working capital needed for executing future activity and preparing a budget for the future.

Discussion of the Importance of Accounting and Finance Functions and Roles in the Context of Skansa Plc 

According to Teru, et al., (2019), the accounting function is important for an organization in identifying and recording appropriate kind of financial data related to its business transaction so that competitive decisions might be made. As per the principle of financial management, the competency of an entity in making competitive financial decisions depends on its ability to collect and analyze relevant data and this is only possibility with the augmented efficiency in the recording and identification-related role of accounting (Al Muhairi & Nobanee, 2019).

The accounting wing is accountable for collecting essential business transactions that occurred during a given fiscal period so that they might be used by management to make efficient cost and profitability-related decisions effectively. For example, the accounting team of Skansa Plc communicates with its entire wings including marketing, operation, HR, and sales for identifying and recoding necessary financial transactions within its books of accounting and this is performed every week (Skanska, 2023). On the contrary, Richardson & Yigitbasioglu, (2018) states that the accounting team helps management to identify the performance of a company in cost and profitability management and this assists in making a competitive financial decision.

The accounting wing of an entity is liable for interpreting and reporting the significant highlights of the business transactions performed in an FY so that valuable inferences might be utilized by decision-makers to make competitive decisions. For example, the accounting team of Skansa Plc reports the income, expense, assets, liability, cash flow, and equity-related highlights to its different department heads and CEO (Chief Executive Officer) every quarter, 6 months, and 12 months (Skanska, 2023). 

With the periodic reporting duty and functionality of the accounting wing, the management of the British construction company has been efficient in making a competitive financial decision to curb unnecessary construction activities and this has helped it to limit its direct expense by 2.9 % in 2019 over 2018 (Skanska, 2023). It means that the accounting function is not only responsible for identifying, compiling, and analyzing financial transactions of an FY but it also supports management in making a corrective financial decision by communicating significant inferences.

According to Zoni & Pippo, (2017), the finance function is an important wing of an entity for making a risk-free investment decision because it is accountable for finding the profitability of different investment options. For making a competitive investment decision, it is necessary for an organization to understand the competitiveness of available investment options from the perspective of metrics like return rate, and payback period and these inferences are supported by the only finance function. For example, the finance department of Skansa Plc evaluates the profitability of each construction project in terms of the amount of initial investment, return on employed capital, payback period, and net present value before making any investment decision.

With the analysis of the financial competence of each construction project using different investment appraisal tools, Skansa Plc has been efficient in mitigating return related risk of its investment decision to 2.71 % in 2021 over 2017 and this has eventually augmented the number of its potential investors (Skanska, 2023). 

On the contrary, Kembauw, et al., (2020) states that the finance function is important for an organization in knowing and optimizing its liquidity so that future current obligations might be managed appropriately without any change in its capital structure. The finance department of an entity is liable for analyzing the competence of its ongoing credit sale and cash sale policy in the context of the capability of clearing current liability using only cash. For example, the finance team of Skansa Plc reports to its administrations about its liquidity position for every quarter and FY period along with highlighting the ways through which it can improve its respective competence (Skanska, 2023).

With the strategic liquidity evaluation related duty of finance function, the management of Skansa Plc has been successful in augmenting its current ratio up to industry standard (1) in 2019 over 2017 and this has eventually helped it to have favorable investment decisions from its investors. According to Nielsen & Kristensen, (2020), the finance department is accountable for assisting an entity to optimize its capital structure along with making an effective decision on budgeting.

The finance wing of a corporation is liable for assisting its management to decide whether a defined amount of working capital should be sourced using the debt or equity method so that the cost of capital might be minimized to maximize the return on capital employed. For example, using the optimum ratio of debt and equity in the funding process, the Uk based construction company has been successful in maintaining its capital structure in optimal ratio and this has eventually assisted it to leave a favorable impact on the investment behavior of its potential investors (Skanska, 2023).

Apart from it, the duty of the finance department is to estimate the current and future cash flow based on historical income and expense trends, and these inferences are eventually utilized to make a competitive budget. It means that the finance function is important is not only in the context of investment, liquidity, and capital structure decision-making process but also assists in making a competitive budget along with allocating surplus capital to each functional unit.

Performance Evaluation of Skansa Plc

Calculation of Performance Analysis related Accounting Ratios

As per the case study, Skansa Plc is planning to expand its business operation in European countries in the next 10 years for which it needs an investment of at least £ 1 million. Hence, for understanding whether the economic position of Skansa Plc is efficient enough or not from an investor's perspective, its financial performance (FP) is evaluated for FY 2020 and 2021 using its respective annual report and accounting ratios. Accounting ratios are used as a strategic tool for interpreting the financial competence of an entity for a given tenure in the context of metrics like sales, cost, payable, receivables, liquidity, and solvency, etc (Haddad, et al., 2020). The significant accounting ratios for estimating the economic situation of Skansa Plc are calculated as follows in tabular form-

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