A cash cow is a product or service or venture that is involved in generating huge profits is also utilized for making money by supporting other less profitable business activities. It is a business jargon used for ventures that generate consistent returns of profits that surpass the expense of money needed to acquire it. It is an analogy for a dairy cow utilized on farms for producing milk, and it refers to offering a constant flow of income while needing little to no maintenance.
It also refers to products or services that have accomplished market leader status. They offer positive incomes and a huge ROA or return on assets that surpasses the market growth rate. The whole concept is that such items produce benefits long after the initial investment has been recovered. With the help of the constant flows of income, cash cows assist with financing the overall growth of a company and channelizing their positive outcomes to other business units. Besides, businesses might involve cash cows as leverage for future extensions of the business. , as moneylenders are more able to loan cash realizing that the obligation will be adjusted.
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What is Cash Cow?
A cash cow is one of the four groups within the BCG’s growth matrix suggesting a business having a large market share in a low-growth industry. It also refers to assets that keep on giving steady cash flows throughout their lifespan.
It is associated with dairy cows producing milk over a lifetime with next to no maintenance and in this way, it talks about a company that also needs next to no maintenance. The contemporary cash cows need minimal investment capital and they offer steady positive cash flows that might further be distributed to other divisions of a company.
Understanding Cash Cow
As a metaphor, the cash cow refers to a company that is like a dairy cow. The way a cash cow keeps on producing milk throughout its life and expects next to zero maintenance, a cash cow business is additionally comparatively low-maintenance but keeps on offering steady income. Some of today’s cash cow businesses need little capital and they perpetually give positive incomes that can further be designated to different divisions of a company. Such businesses are generally safe, high-profit ventures.
You need to understand here that cash cows are one of four quadrants in the BCG matrix which is the business unit organization method presented by the Boston Consulting Group in the mid-1970s. It is also called the Boston Box or Grid and it puts businesses or products of a company into one of four categories- star, cash cow, question mark, and dog. It assists businesses with understanding where their business remains as far as their market share and industry growth rate are concerned.
Importance of Cash Cow
A cash cow is used for showing the strong potential of a business, product, or venture in terms of returns in a low-growth market. The rate of return from such businesses is typically more noteworthy than the market growth rate.
An organization doesn’t need to invest much in a cash cow business excepting the initial expense. When the organization recovers its initial investment, it will not need to invest more money to keep the business growing. A gold mine is a term utilized in the Boston Consulting Group (BCG) network.
In the growth-share matrix model, a business may either turn into a cash cow in the event that it turns into a market leader in its industry or a dog that refers to a low market share as well as a low growth rate.
Cash cows generate amounts of cash that are utilized to finance other product portfolios of a business. It tends to be utilized for funding the R & D needs of a business along with growing market share and decreasing the overall debt burden on the organization. It can also be used for paying the dividend to the shareholders or investors. The company can likewise use the cash to buy back shares.
Advantages of Cash Cows
A cash cow refers to a company that has an enormous market share in a low-growth industry.
It is associated with an asset or a business that will keep on giving consistent incomes all through its life expectancy until paid off.
A cash cow is additionally a reference to a product or service that was once gained and paid off, will deliver steady incomes over its life expectancy
It makes a profitable business be low-maintenance and they are popularly known as low risk and high reward investments.
Disadvantages of Cash Cow
Cash cows sometimes act as barriers to entry to the market for new items because new entrants have to invest intensely to accomplish the brand awareness goals to catch a good portion of the market away from the existing players.
The higher payout rate of earning as share repurchase or cash/share dividend could likewise expand the risk of a future dividend cut and it will be an indication of a lack of growth opportunity. As the business unit can keep up with profits with little investment or maintenance, or effort, the cash cows can likewise be utilized to depict a productive yet self-satisfied or complacent unit.
Example of Cash Cow
There are so many successful products that fulfill the criteria for cash cows such as the Ford Transit and Ford’s pickup trucks, Coca-Cola, Kellogg’s Corn Flakes, Google’s YouTube, and the iPod and iPhone lines. Air terminal hangars that have returned to air terminal ownership can also be understood as cash cows.
As a final observation, it is clear that a cash cow refers to a business or unit that whenever it has been paid for keeps on producing consistent income over its life expectancy.
It is an integral element of mature as well as slow-growing industries that have an enormous share of the market but require negligible investment to flourish.
Now, considering all of these, how will you define a cash cow? How important do you find cash cows for modern companies? Share your opinion with us in the comment section below.
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