Cash Cow

What Is a Cash Cow?

A cash cow is one of the four categories (quadrants) in the growth-share, BCG matrix that addresses a product, product line, or company with a large market share inside a mature industry.

A cash cow is likewise a reference to a business, product, or asset that, once acquired and paid off, will create predictable cash flows over its lifespan.

Understanding Cash Cows

A cash cow is an illustration for a dairy cow that produces milk throughout its life and expects practically no maintenance. The phrase is applied to a business that is likewise comparably low-maintenance. Cutting edge cash cows require little investment capital and lastingly give positive cash flows, which can be allocated to different divisions inside a corporation. They are low risk, high reward investments.

Cash cows are one of four quadrants in the BCG matrix, a business unit organization method presented by the Boston Consulting Group in the mid 1970s. The BCG matrix, otherwise called the Boston Box or Grid, puts an organization's businesses or products into one of four categories: star, question mark, canine, and cash cow. The matrix assists firms with understanding where their business remains in terms of market share and industry growth rate. It fills in as a comparative analysis of a business' true capacity and an evaluation of the industry and market.

In any case, a few firms, especially large corporations, understand that businesses/products inside their portfolio lie between two categories. This is especially true with product lines at various points in the product life-cycle. Cash cows and stars will more often than not complete one another, though dogs and question marks use resources less effectively.

A cash cow is a reference to a business, product, or asset that produces steady cash flow over its lifespan; it's likewise a reference to one of the four quadrants in the BCG Matrix, a business unit organization method.

Cash Cow Example

A cash cow is a company or business unit in a mature slow-growth industry. Cash cows have a large share of the market and require little investment. For instance, the iPhone is Apple's (AAPL) cash cow. Its return on assets is far greater than its market growth rate; subsequently, Apple can invest the excess cash generated by the iPhone into different undertakings or products.

Cash cows, like Microsoft (MSFT) and Intel (INTL), give dividends and have the capacity to increase their dividend due to their adequate free cash flows calculated as cash flows from operations minus capital expenditures. These companies are mature and don't require as much capital to develop. They are marked by high-net revenues and strong cash flows. Cash cows can likewise be slow-growth companies or business units with deep rooted brands in the industry.

Special Considerations

As opposed to a cash cow, a star, in the BCG matrix, is a company or business unit that understands a high market share in high-growth markets. Stars require large capital outlays yet can generate critical cash. On the off chance that an effective strategy is adopted, stars can transform into cash cows.

Question marks are the business units encountering low market share in a high-growth industry. They require large measures of cash to capture a greater amount of or support their position inside the market. Contingent upon the strategy adopted by the firm, question marks can land in any of different quadrants.

In conclusion, dogs are the business units with low market shares in low-growth markets. There is no large investment requirement, and they don't generate large cash flows. Frequently, dogs are phased out with an end goal to salvage the organization.

Highlights

• Cash cows are part of mature, slow-developing industries, have a large piece of the market share and require negligible investment to flourish.
• A cash cow is likewise one of four quadrants in the BCG matrix, which checks out at the value of various units inside a corporation.
• A cash cow is a business or unit that, whenever it has been paid for, will deliver consistent cash flow over its lifespan.