1 Cash versus Profit
It is important to realise the difference between these two concepts. Cash is a liquid asset owned by a business, enabling it to buy goods and services, whereas profit is only an accounting measure of the difference between sales revenue and business expenses. Tabulations in paragraphs 1.1 to 1.3 illustrate a worked example, showing how the two are related. If a project needs financing, it usually implies that cash is required.
1.1 Project Parameters
|Cost of Project||£150 m|
|Annual Revenue||£150 m|
|Annual Costs||£ 50 m|
|Life of Project||5 Years|
1.2 Cash Flow
|–50||100||100||100||100||0||Total £350 m|
|Cash||–50||65||65||65||65||– 35||Total £175 m|
1.3 Profit & Loss
|70||70||70||70||70||0||Total £350 m|
|Tax @ 50%||35||35||35||35||35||0|
|35||35||35||35||35||0||Total £175 m|
It should be noted that not only is the project short of (£50 m) cash to finance the project but also, (since the accountants have made a profit) needs £35 m cash to pay the taxman and a further £35 m has to be found to pay the shareholders a dividend.
Other costs can also ...