Cash cow
From The Art and Popular Culture Encyclopedia
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| - | [http://www.g-o.be/Net_eMagazineHome/Pages/eMagazineArtikel.aspx?Id=4608] | ||
| - | The murderer is a [[writer]] who starts to kill because he wants to kill the [[cash cow]] of the publisher he works for as a [[ghost writer]]. The [[motive]] is the rejection of his [[manuscript]]. | + | In business, a '''cash cow''' is a product or a business unit that generates unusually high [[profit margin]]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. |
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| + | 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. | ||
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| + | Risks of a cash cow include complacency, with management ignoring the need for change as market forces erode value; and ongoing [[turf war]]s between the management in charge of the cash cow and other managers trying to garner support for other products. | ||
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| + | That said, every business longs for a cash cow product. The [[BCG growth-share matrix]] developed by the [[Boston Consulting Group]], still used by analysts in large companies, uses the term "cash cow" to describe business units experiencing high market share and low market growth. | ||
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In business, a cash cow is a product or a business unit that generates unusually high profit margins: 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 wars 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, still used by analysts in large companies, uses the term "cash cow" to describe business units experiencing high market share and low market growth.
