What Is a Cash Cow?

A cash cow is probably going one of many 4 lessons (quadrants) throughout the growth-share, BCG matrix that represents a product, product line, or agency with a giant market share inside a mature enterprise.

A cash cow generally is a reference to a enterprise, product, or asset that, as quickly as acquired and paid off, will produce fixed cash flows over its lifespan.

Understanding Cash Cows

A cash cow is a metaphor for a dairy cow that produces milk over the course of its life and requires little to no maintenance. The phrase is utilized to a enterprise that may be equally low-maintenance. Modern-day cash cows require little funding capital and perennially current constructive cash flows, which may be allotted to totally different divisions inside a company. They’re low hazard, extreme reward investments.

Cash cows are one amongst 4 quadrants throughout the BCG matrix, a enterprise unit group methodology launched by the Boston Consulting Group throughout the early Seventies. The BCG matrix, additionally known as the Boston Discipline or Grid, places an organization’s corporations or merchandise into one amongst 4 lessons: star, question mark, canine, and cash cow. The matrix helps firms understand the place their enterprise stands by the use of market share and enterprise progress cost. It serves as a comparative analysis of a enterprise’s potential and an evaluation of the enterprise and market.

However, some firms, notably large corporations, discover that corporations/merchandise inside their portfolio lie between two lessons. That could be very true with product strains at completely various factors throughout the product life-cycle. Cash cows and stars tend to complement each other, whereas canine and question marks use sources a lot much less successfully.

Cash Cow Occasion

A cash cow is a corporation or enterprise unit in a mature slow-growth enterprise. Cash cows have a giant share of the market and require little funding. For example, the iPhone is Apple’s (AAPL) cash cow. Its return on belongings is manner greater than its market progress cost; due to this, Apple could make investments the excess cash generated by the iPhone into totally different duties or merchandise.

Cash cows, resembling Microsoft (MSFT) and Intel (INTL), current dividends and have the aptitude to increase their dividend ensuing from their ample free cash flows calculated as cash flows from operations minus capital expenditures. These firms are mature and don’t need as rather a lot capital to develop. They’re marked by high-profit margins and strong cash flows. Cash cows may be slow-growth firms or enterprise gadgets with well-established producers throughout the enterprise.

Specific Issues

In distinction to a cash cow, a star, throughout the BCG matrix, is a corporation or enterprise unit that realizes a extreme market share in high-growth markets. Stars require large capital outlays nevertheless can generate important cash. If a worthwhile approach is adopted, stars can morph into cash cows.

Question marks are the enterprise gadgets experiencing low market share in a high-growth enterprise. They require large portions of cash to grab further of or preserve their place all through the market. Counting on the approach adopted by the company, question marks can land in any of the other quadrants.

Lastly, canine are the enterprise gadgets with low market shares in low-growth markets. There is no such thing as a such factor as an enormous funding requirement, they normally don’t generate large cash flows. Often, canine are phased out in an effort to salvage the group.