Cash cow, in business jargon, is a venture that generates a steady return of profits that far exceed the outlay of cash required to acquire or start it. Many businesses attempt to create or acquire such ventures, since they can be used to boost a company's overall income and to support less profitable endeavors.
Jargon is the specialized terminology associated with a particular area of activity. Jargon is normally employed in a particular communicative context and may not be well understood outside that context. The context is usually a particular occupation, but any ingroup can have jargon. The main trait that distinguishes jargon from the rest of a language is special vocabulary—including some words specific to it, and often different senses or meanings of words, that outgroups would tend to take in another sense—therefore misunderstanding that communication attempt. Jargon is sometimes understood as a form of technical slang and then distinguished from the official terminology used in a particular field of activity.
The term cash cow is a metaphor for a "dairy cow" used on farms to produce milk, offering a steady stream of income with little maintenance.
Cash cows are products or services that have achieved market leader status, provide positive cash flows and a return on assets (ROA) that exceeds the market growth rate. The idea is that such products produce profits long after the initial investment has been recouped. By generating steady streams of income, cash cows help fund the overall growth of a company, their positive effects spilling over to other business units. Furthermore, companies can use them as leverage for future expansions, as lenders are more willing to lend money knowing that the debt will be serviced.
The return on assets (ROA) shows the percentage of how profitable a company's assets are in generating revenue.
Cash cows can be also used to buy back shares already on the market or increase the dividends paid to shareholders. They usually bring in cash for years, until new technology or shifting market preferences renders them obsolete.
A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, the corporation is able to re-invest the profit in the business and pay a proportion of the profit as a dividend to shareholders. Distribution to shareholders may be in cash or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or share repurchase. When dividends are paid, shareholders typically must pay income taxes, and the corporation does not receive a corporate income tax deduction for the dividend payments.
Cash cows can act as barriers to entry to the market for new products, as entrants need to invest heavily in order to achieve the brand awareness required to capture a significant share of the market away from the dominant players.A higher pay out rate of earning in the form of share repurchase or cash/share dividend might also increase the risk of future dividend cut and is an indication of lack of growth opportunity.
In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or have not had to incur.
Brand awareness refers to the extent to which customers are able to recall or recognise a brand. Brand awareness is a key consideration in consumer behavior, advertising management, brand management and strategy development. The consumer's ability to recognise or recall a brand is central to purchasing decision-making. Purchasing cannot proceed unless a consumer is first aware of a product category and a brand within that category. Awareness does not necessarily mean that the consumer must be able to recall a specific brand name, but he or she must be able to recall sufficient distinguishing features for purchasing to proceed. For instance, if a consumer asks her friend to buy her some gum in a "blue pack", the friend would be expected to know which gum to buy, even though neither friend can recall the precise brand name at the time.
Share repurchase is the re-acquisition by a company of its own stock. It represents a more flexible way of returning money to shareholders.
Since the business unit can maintain profits with little maintenance or investment, a cash cow can also be used to describe a profitable but complacent company or business unit.
In his book The Innovator's Dilemma , Clayton M. Christensen argues that listening to existing customers' concerns can prevent a highly successful business from innovating, resulting in smaller competitors eventually producing disruptive innovations. This sentiment is expressed in the business aphorism "If I had asked people what they wanted, they would have said faster horses", which is misattributed to Henry Ford, a pioneering manufacturer of the automobile.
The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, generally referred to as The Innovator's Dilemma, first published in 1997, is the best-known work of the Harvard professor and businessman Clayton Christensen. It expands on the concept of disruptive technologies, a term he coined in a 1995 article Disruptive Technologies: Catching the Wave.
Clayton Magleby Christensen is an American academic, business consultant, and religious leader who currently serves as the Kim B. Clark Professor of Business Administration at the Harvard Business School of Harvard University. He is best known for his theory of "disruptive innovation"—first introduced in his first book, The Innovator's Dilemma—which has been called the most influential business idea of the early 21st century.
In business theory, a disruptive innovation is an innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market-leading firms, products, and alliances. The term was defined and first analyzed by the American scholar Clayton M. Christensen and his collaborators beginning in 1995, and has been called the most influential business idea of the early 21st century.
Successful products that satisfy the criteria for cash cows include: the Ford Transit and Pickup Trucks, Kellogg's Corn Flakes, Coca-Cola, the iPod and iPhone lines. Airport hangars that have reverted to airport ownership are often referred to as cash cows.
In accounting, equity is the difference between the value of the assets and the value of the liabilities of something owned. It is governed by the following equation:
Market penetration refers to the successful selling of a product or service in a specific market. It is measured by the amount of sales volume of an existing good or service compared to the total target market for that product or service. Market penetration is the key for a business growth strategy stemming from the Ansoff Matrix (Richardson, M., & Evans, C.. H. Igor Ansoff first devised and published the Ansoff Matrix in the Harvard Business Review in 1957, within an article titled "Strategies for Diversification". The grid/matrix is utilized across businesses to help evaluate and determine the next stages the company must take in order to grow, and the risks associated with the chosen strategy. With numerous options available, this matrix helps narrow down the best fit for an organization.
The Profit Impact of Market Strategy (PIMS®) is a project that uses empirical data to determine which business strategies make the difference between success and failure. It is used to develop strategies for resource allocation and marketing. Some of the most important strategic metrics are market share, product quality, investment intensity and service quality. One of the most surprising findings is that the same factors work identically across different industries. PIMS® "yields solid evidence in support of both common sense and counter-intuitive principles for gaining and sustaining competitive advantage" Tom Peters and Nancy Austin.
In business and accounting, net income is an entity's income minus cost of goods sold, expenses and taxes for an accounting period. It is computed as the residual of all revenues and gains over all expenses and losses for the period, and has also been defined as the net increase in shareholders' equity that results from a company's operations. In the context of the presentation of financial statements, the IFRS Foundation defines net income as synonymous with profit and loss. The difference between revenue and the cost of making a product or providing a service, before deducting overheads, payroll, taxation, and interest payments. This is different from operating income.
The growth–share matrix is a chart that was created by Bruce D. Henderson for the Boston Consulting Group in 1970 to help corporations to analyze their business units, that is, their product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis. Some analysis of market performance by firms using its principles has called its usefulness into question.
In business, operating margin—also known as operating income margin, operating profit margin, EBIT margin and return on sales (ROS)—is the ratio of operating income to net sales, usually presented in percent.
In finance, leverage is any technique involving the use of debt rather than fresh equity in the purchase of an asset, with the expectation that the after-tax profit to equity holders from the transaction will exceed the borrowing cost, frequently by several multiples — hence the provenance of the word from the effect of a lever in physics, a simple machine which amplifies the application of a comparatively small input force into a correspondingly greater output force. Normally, the lender will set a limit on how much risk it is prepared to take and will set a limit on how much leverage it will permit, and would require the acquired asset to be provided as collateral security for the loan. For example, for a residential property the finance provider may lend up to, say, 80% of the property's market value, for a commercial property it may be 70%, while on shares it may lend up to, say, 60% or none at all on certain volatile shares.
In corporate finance, the return on equity (ROE) is a measure of the profitability of a business in relation to the equity, also known as net assets or assets minus liabilities. ROE is a measure of how well a company uses investments to generate earnings growth.
In business, a strategic business unit (SBU) is a profit center which focuses on product offering and market segment. SBUs typically have a discrete marketing plan, analysis of competition, and marketing campaign, even though they may be part of a larger business entity.
Diversification is a corporate strategy to enter into a new market or industry in which the business doesn't currently operate, while also creating a new product for that new market. This is the most risky section of the Ansoff Matrix, as the business has no experience in the new market and does not know if the product is going to be successful
Profitable Growth is the combination of profitability and growth, more precisely the combination of Economic Profitability and Growth of Free cash flows. Profitable growth is aimed at seducing the financial community; it emerged in the early 80s when shareholder value creation became firms’ main objective.
Production is a process of combining various material inputs and immaterial inputs in order to make something for consumption. It is the act of creating an output, a good or service which has value and contributes to the utility of individuals. The area of economics that focuses on production is referred to as production theory, which in many respects is similar to the consumption theory in economics.
Quality investing is an investment strategy based on a set of clearly defined fundamental criteria that seeks to identify companies with outstanding quality characteristics. The quality assessment is made based on soft and hard criteria. Quality investing supports best overall rather than best-in-class approach.
According to PIMS, an important lever of business success is growth. Among 37 variables, growth is mentioned as one of the most important variables for success: market share, market growth, marketing expense to sales ratio or a strong market position.
A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
Dividend policy is concerned with financial policies regarding paying cash dividend in the present or paying an increased dividend at a later stage. Whether to issue dividends, and what amount, is determined mainly on the basis of the company's unappropriated profit and influenced by the company's long-term earning power. When cash surplus exists and is not needed by the firm, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program.
Corporate finance is an area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value. Although it is in principle different from managerial finance which studies the financial management of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.
William Lazonick is an economist who studies innovation and competition in the global economy.