What is the single most important need for any business? There will be many answers to this question, however, they all boil down to the need for cash. A steady stream of finance in the business is the key to solving all the problems and ensuring that there is never a liquidity crunch. Therefore, if a business has such a source of meeting their financial needs in-house, they will not need to look for external sources and be heavily debt-strapped. Such cash-rich companies can milk the revenues virtually forever and therefore, are also known as cash-cow companies.
Given below are details related to the cash cow companies and their important characteristics.
Many businesses have cyclical products or products that move through different stages of the life cycle right from their introduction in the market to stagnation and eventual decline. However, there are also some products that are evergreen, i.e., the demand for them never ceases.
The companies having these products have already put in the hardwork and have managed to create a profit making product through years of research and development as well as understanding the market dynamics. The resultant product is a market leader and has created success stories over and over again. Such companies need not put in too many efforts to drastically change their products or find new variations to attract consumers.
They simply need to fine tune their products or strategies to fit the current market conditions. These products become a money making machine for the company and are, therefore, also referred to as cash-cow products and the companies being cash-cow companies. This term is usually used in the BCG matrix and coined by them to classify companies and their business models.
As mentioned, cash-cow companies have products that usually enjoy an undisputed maximum market share. The income from such products is usually twice its overall expenses and can help fund other operations of the business. This eliminates the need for excessive external finance and helps in reducing the cash outflow from the business in the form of huge interest payments and ultimately reducing the overall cost of capital.
Investing in a cash-cow company can be beneficial for the investors as well. For this, they need to understand the key characteristics of such companies that can help in identifying them. Some of the key characteristics of a cash-cow company and the ways to identify it are highlighted below.
Some of the ke advantages of cash-cow companies are mentioned below.
Limitations are part of every market or industry and some of the key limitations of cash-cow companies or products are mentioned below.
It is ideal for a company to have atleast one cash-cow product that can generate a steady source fo revenue to meet all its obligations and also fund research and development in other areas of the business. Such companies or products do not need continual excessive capital investment and can therefore be beneficial to the business and the investors alike for almost perpetuity.
The current ratio of cash-cow companies is usually 2 or more.
Other classifications as per BCG matrix includes question marks, cash-cows, stars and dogs.
The classic characteristic of cash-cow companies is having a strong product that enjoys market dominance and is low maintenance at the same time.
A new entrant in a companies cash-cow product segment can destroy the market by introducing a new technology or a similar product with better market innovation that can potentially change the industry altogether.
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