Example of a profitable company forced into liquidation
The moral of the story is the importance of cash flow as well as profits
ManPlace plc starts business after the founders put in total equity capital of £2m by buying new shares. It also borrows £3m from the bank on 1 January. It buys £4m of machinery and hires 25 workers.
The machinery is expected to have a useful life of 10 years and is depreciated (an expense) at a rate of £400,000 per year. In the first year the company is profitable – see Figure 12.2.
Figure 12.2 ManPlace plc profit and loss account
Despite reporting a profit, the company runs out of cash and is forced by its bank into ...
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