In business, a cash cow is a product or a business unit that generates unusually high profit margin

Profit margin

Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.Net profit Margin = x100...

s: so high that it is responsible for a large amount of a company's operating profit. This profit far exceeds the amount necessary to maintain the cash cow business, and the excess is used by the business for other purposes.

A firm is said to be acting as a cash cow when its earnings per share (EPS) is equal to its dividends per share (DPS), or in other words, when a firm pays out 100% of its free cash flow (FCF) to its shareholders as dividends at the end of each accounting term. This also implies that the firm is not investing in product improvements (distributing all earnings) and is essentially considering itself not in a growth market. This could be the case if a company sees the future of a product line as bleak as a result of some other technology taking away its market share.

Risks of a cash cow include complacency, with management ignoring the need for change as market forces erode value; and ongoing turf war

Turf war

According to Wordnet the definition of a turf war is "a bitter struggle for territory or power or control or rights". For example: a turf war erupted between street gangs; the president's resignation was the result of a turf war with the board of directors. In larger companies Turf wars could...

s between the management in charge of the cash cow and other managers trying to garner support for other products.

That said, every business longs for a cash cow product. The BCG growth-share matrix developed by the Boston Consulting Group

Boston Consulting Group

The Boston Consulting Group is a global management consulting firm with offices in 42 countries. It is recognized as one of the most prestigious management consulting firms in the world. It is one of only three companies to appear in the top 15 of Fortunes "Best Companies to Work For" report for...

, still used by analysts in large companies, uses the term "cash cow" to describe business units experiencing high market share and low market growth.

Origins

The term was brought back from India to Britain by soldiers who noticed locals offering money to temple idols in the form of sacred cows.

Related meanings

"Cash cow" is also used sarcastically by sales and business people to describe a customer or organization that has no control over its spending. Quite often the term is used to describe government departments like Foreign Aid, and Highways and Social Security, where the spending is out of proportion to the services or goods received.

"Cash cow" is used in a Growth-share matrix

Growth-share matrix

The BCG matrix is a chart that had been created by Bruce Henderson for the Boston Consulting Group in 1968 to help corporations with analyzing their business units or product lines...

to represent one of the four quadrants in the matrix. A "cash cow" product has high market share in a slow-growing market. A corporation would want to have as many "cash cow" products as possible.

Signs of a cash cow

• Product variations
• Customer segmentation
• Pricing flexibility
• Cost reduction
• Targets specific competitors