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The role played by a “Cash Cow” component in your business portfolio is often undervalued and overlooked. Simply stated, the term “Cash Cow” is a term commonly used to describe a product or service which consistently generates positive cash flow. Typically “cash cows” are well established and within the mature stage of the business cycle. As such they offer limited opportunity for growth and require minimal new investment. “Cash Cows” are frequently vulnerable to changing market conditions such as new technologies, lower cost alternatives and changing customer tastes.

The longevity of a Cash Cow is impacted by the following factors.

Firstly, products and services supported by a strong brand identity may remain dominant for years or even decades e.g. Clorox Bleach, Bayer Aspirin and Coca Cola.

Secondly, in instances where there are substantial barriers to market entry, such as proprietary “know-how”or a large required investment, competitive incursion will be discouraged.

Thirdly, the life span of the Cash Cow can be extended through enhancements to the basic product or service. An example is Gillette which has continually introduced incremental upgrades to its line of razors. Interestingly, while the core Cash Cow market position may eventually erode, new niche opportunities such as “after market” parts will emerge.

This brings us back to the question, why is the “Cash Cow” an important member of your portfolio of products or services?

Firstly, it can serve as a reliable stream of cash to cover basic operating costs during periods of soft consumer demand. For example license agreements or long term leases will serve as a predictable source of cash flow throughout business cycles.

Secondly, it can provide the funds for investment in new product or service development and launch related expenses. Supporting a pipeline of new products or services is critical to sustaining company growth and profitability.

Thirdly, In order to respond to accelerating demand for the new “stars” it may be necessary to invest in manufacturing plant expansion, inventory, new equipment and support staff additions. Look toward your “Cash Cow” to provide these investment dollars

Fourthly, during periods of accelerating product or service growth timing differences between cash receipts and cash outlays can create a cash shortfall. Whereas actual cash receipts may be on a thirty-forty day cycle, payments to employees and suppliers may be on a shorter cycle. The revenue generated by the “Cash Cow” can fill this gap.

A characteristic of a healthy business model is maintaining a balanced portfolio of products and services. Nurture the “Cash Cows” who will support your future “stars”.

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