IB Business Management HL 3.7.2 Working capital Question Bank

Practise IB Business Management SL/HL 3.7.2 by applying working capital concepts to exam-style questions.

[Maximum number: 4]

Davidson Studios Ltd. (DS)

Davidson Studios Ltd. (DS) is a private limited company created in 2018 and equally owned by two sisters, Emma and Laura Davidson. Both recent graduates, they design and produce fantasy board games, which are sold to local retailers.
Emma specializes in game design and Laura is the operations manager. The design of a new game takes 12 months. DS's first board game was a success and enabled DS to rent workspace and hire employees. The second game, Held Captive, was a massive commercial success.
DS had to move to larger premises and recruit more design, marketing and production staff. DS's organizational culture empowers employees to solve problems and gives them the opportunity to manage tasks. Employees also enjoy modern office spaces, generous breaks and competitive salaries. Quality circles and job rotation are common. Labour turnover is low and employee morale is high.
As production increased, however, DS ran into problems. With more employees to pay and invoices due, D S had almost run out of working capital (see Table 4).

Table 4: Selected financial ratios for DS

Two options are being considered to avoid further liquidity problems and continue DS's rapid expansion:
- Option 1: Accept an offer from Big Game Industries (BGI), the market leader, to purchase 51 % of DS's shares. BGI would keep the DS brand and install a chief executive officer (CEO). Emma and Laura would have reduced roles in DS.
- Option 2: Accept an offer from a venture capitalist to purchase 35 % of shares. This would provide a cash injection sufficient for the next 12 months.

Explain two reasons for the working capital problems at D S.

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3.7.2—Working capital question 1