Effective Project Management

Section G Financial Appraisal⁷

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
End Value	Nil

1.2 Cash Flow

Year:	1	2	3	4	5	6
Revenue	150	150	150	150	150	0
Costs	50	50	50	50	50	0
Capital	150	0	0	0	0	0
–50	100	100	100	100	0	Total £350 m
Tax 50%	35	35	35	35	35
Cash	–50	65	65	65	65	– 35	Total £175 m

1.3 Profit & Loss

Revenue	150	150	150	150	150	0
Cost	50	50	50	50	50	0
Depreciation	30	30	30	30	30	0
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

1.4

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.

1.5

Other costs can also ...