Explain the structure of and terms used within financial statements.

Sample Answer

Financial Decision Making Report: Analysis of SKANSA PLC

Introduction

Financial decision making is a critical function within any organisation because it supports planning, performance evaluation, and long term strategic development. Investors, managers, and other stakeholders rely on financial information to understand the financial health and future potential of a company. Financial statements such as the statement of profit and loss and the statement of financial position provide key insights into organisational performance.

This report evaluates the role of accounting and finance functions within SKANSA PLC, a UK based construction company established in 1984 that plans to expand into European markets over the next decade. The report first examines the importance of accounting and finance functions in organisational management. It then analyses the financial performance of SKANSA PLC using key financial ratios from the financial statements for 2019 and 2020, providing interpretation from the perspective of a potential investor considering an investment of £1 million.

The Role and Importance of Accounting and Finance Functions in SKANSA PLC

Accounting and finance functions form the foundation of effective organisational management. These functions ensure that financial information is accurately recorded, analysed, and communicated to stakeholders. Within SKANSA PLC, these roles are particularly important because the construction industry requires substantial financial investment, careful cost management, and long term project planning.

Financial Recording and Reporting

One of the primary responsibilities of accounting departments is maintaining accurate financial records. Financial statements provide a structured summary of company performance and financial position. For SKANSA PLC, the preparation of the statement of profit and loss and the statement of financial position enables managers and investors to evaluate profitability, operational efficiency, and financial stability.

Financial reporting also ensures compliance with regulatory standards and accounting frameworks. Transparent reporting builds trust among investors and financial institutions that may provide funding for the company’s European expansion.

Budgeting and Financial Planning

Another critical function of accounting and finance is financial planning. Budgeting allows organisations to allocate resources effectively and control spending. For a construction company like SKANSA PLC, budgeting is essential because projects often involve high capital expenditure, labour costs, and materials.

Financial planning also supports long term strategic decisions. Since SKANSA PLC plans to expand across Europe, financial managers must forecast investment requirements, expected revenues, and potential risks associated with international operations.

Cost Control and Performance Monitoring

Management accounting techniques play an important role in monitoring organisational performance. Cost analysis enables managers to identify inefficiencies and control project expenses. For example, in construction companies, careful monitoring of material costs, labour productivity, and supplier payments can significantly influence profitability.

In SKANSA PLC’s case, the cost of sales increased from £3,450,000 in 2019 to £4,350,000 in 2020. This increase reflects higher operational activity as revenue grew. Finance teams must analyse whether these cost increases are proportionate to revenue growth and whether operational efficiency is maintained.

Supporting Strategic Decision Making

Finance departments also assist management in making strategic decisions. Financial analysis helps determine whether expansion projects, investments, or financing options are viable.

For SKANSA PLC, the increase in non current assets from £2,955,000 in 2019 to £6,000,000 in 2020 suggests significant investment in long term assets. This may reflect preparation for future expansion. Finance professionals must assess whether such investments will generate sufficient returns.

Risk Management and Funding Decisions

Finance departments are also responsible for managing financial risk and securing funding. Companies often rely on loans or external finance to support expansion. In SKANSA PLC’s case, loan notes increased from £1,500,000 to £3,000,000 between 2019 and 2020, indicating additional borrowing.

While borrowing can support growth, it also increases financial risk due to higher interest payments. Finance managers must balance growth opportunities with the ability to maintain sustainable debt levels.

Overall, accounting and finance functions provide the financial insight necessary for SKANSA PLC to manage resources effectively, monitor performance, and support strategic expansion into European markets.