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Understanding the Cash Cow Concept

Cash Cow Concept

What Is a Cash Cow, Exactly?

In the growth-share, BCG matrix, a cash cow is one of the four classifications (quadrants) that symbolizes a product, product line, or firm with a significant market value in a mature market. A cash cow is also a term used to describe a company, product, or asset that, once purchased and paid for, would generate steady cash flows over time.

Recognizing Cash Cows

A cash cow is a term for a dairy cow that provides milk and requires little to no care throughout its lifespan. The term is used to describe a firm that needs minimal maintenance. Modern-day cash cows need low initial investment and consistently generate positive cash flows, which can be used to fund other divisions within a company. They are investments with minimal risk and a great return.

The BCG matrix, established by the Boston Consulting Group in the early 1970s, has four dimensions, with cash cows being one of them. The BCG matrix, often known as the Boston Box or Grid, assigns a star, question mark, dog, or cash cow to an organization’s operations or products. The matrix can assist companies to figure out where they are in terms of profitability and market growth. It is a relative review of a company’s potential as well as an assessment of the industry and market.

Nonetheless, some companies, particularly big companies, recognize that the businesses and products in their inventory fall into one of two groups. This is particularly the case for product lines at various stages of their life cycle. Dogs and question marks consume resources inefficiently, whereas cash cows and stars complement one another.

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Scenario

A cash cow is a mature slow-growth industrial company or business unit. Cash cows account for a significant portion of the market and entail minimum investment. Apple’s (AAPL) cash cow, for instance, is the iPhone. Apple can deploy the surplus income earned by the iPhone into other initiatives or products since its asset turnover is considerably better than its market growth.

Cash cows like Microsoft (MSFT) and Intel (INTL) pay dividends and can raise them due to their large free cash flows, which are defined as cash flows from operations minus capital expenditures. These businesses are more established and don’t require as much funding to expand. High-profit margins and substantial cash flows distinguish them. Slow-growing corporations or business units with well-known industry brands can also be cash cows.

Important Note About the BCG Matrix:

A company that achieves a high market share in high-growth markets is referred to as a star in the BCG matrix. Stars cost a lot of money to start, but they can pay off big time. Stars can become cash cows if a successful technique is implemented.

In a high-growth industry, question marks represent business units with little market share. To grab additional market share or maintain their current position, they need a lot of cash. Question marks can appear in any of the other quadrants, depending on the firm’s approach.

Finally, dogs are low-market-share business units in low-growth markets. They don’t cost a lot of money to get started, and they don’t earn a lot of money. In an attempt to save the company, dogs are frequently phased out.

The Author

Oladotun Olayemi

Dotun is a financial enthusiast who specializes in first-in-class financial content, including crypto, blockchain, market, and business, to educate and inform readers.