Cash Cow
Categories: Company Management, Investing
"Cash cow" is a jargon term (that's slang you can use around your grandma without having to duck and cover) that has a couple different meanings. It can mean something you bought that now produces more than what you paid for it (profit)...you know, like you're milking it for cash. It can also simply be a business that produces a steady supply of profit (this context doesn't take purchase price into account).
The term originally came from a grid called the Boston Box (or BCG Matrix) in the 1970s. The cash cow represents a company that has a large market share and is sustaining itself on its own profit.
Let's look at rural areas near major roads. You know the ones...They all have a post office, a bar, a church (usually near each other, oddly), and a gas station so people can fill up to go to work in the city. Say the gas station in this little town is owned by a little old lady who wants to go to Florida, and she sells it off cheap. Everything is there, customers already established, all set. If the gas station makes enough to make the loan payments on the purchase, and has profits on top of it...it's a cash cow.
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Finance a la shmoop what is a cash cow? that feels good [Person milking a cow]
mmm that's the spot yep that's me I'm a cash cow and boy howdy does that ever
feel good in the morning well I'm a type of company that's a natural part of the
business cycle and which kind of goes like this [Business cycle chart appears]
early companies are cash pigs those pigs eat everything including tons of cash
and let me tell you what comes out of them
it ain't milk...young companies need cash capital to grow like to build server
farms yeah like that and you know different kinds of farms and oil rigs
and chemical synthesizing plants and tractors smelting factories and stamping
machines and massive robotic thingamabob makers those well those early companies
chew up tons of cash as they build their business early in their cycle building
revenues and they might burn, i dunno five million dollars in year 1 to make 1 [Stack of cash burning]
million dollars in revenues not profit that's just in revenues then they pig
out on 20 million dollars in losses in year 5 but by then maybe they have a
hundred million dollars in revenues then they begin to chill as they grow out of
being a pig into yes higher life-forms like me where they maybe start to break
even on 500 million in revenues and no losses and no profits just
breakeven and by the time they've truly evolved into me, way over here on the
bell curve of their lifecycle then they're producing tons of cash like this
CD company which now has three billion dollars of revenue in a billion bucks in [CD 'R' Us store appears]
cash profits unfortunately its future doesn't look all that great as revenues
have likely more than peaked and it'll produce a whole lot less cash in the
next decade as they you know kindly put it out to pasture so if it doesn't buy
more growth companies with its cash yeah then it becomes dinner [Butcher slicing meat and blood appears on camera lens]