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 ...