When a company has multiple business units, each of them may have different profit margins. A cash cow is a profitable unit that generates lots of cash for the company but not much in terms of operational expenses. Conversely, a non-cash cow unit is an unprofitable entity that needs monetary support from the rest of the company to continue operations. These terms refer to the profitability of a business unit and not a literal farm animal. When you take into account all costs associated with running a business, some make more money than others do. Those are cash cows – profitable businesses that aren’t resource-intensive to keep running. On the flip side, non-cash cows are businesses that don’t generate much profit but require significant investment to maintain.
What are cash cows?
A cash cow is a business unit that has high profit margins and low operational expenses. When taken together, these factors result in significant cash flow. Therefore, a cash cow can be thought of as a “milk cow” that generates more money than it costs to maintain. Because of their high profitability, cash cows are important to the health of a company. Beyond the business context, the term “cash cow” is also used metaphorically to describe an asset that generates a large amount of revenue. For example, a popular social media platform might be described as a cash cow because it makes money from advertising revenue. In this context, a cash cow is any source of income that’s easy for an organization to operate but brings in a significant amount of revenue.
Why are cash cows important?
A company’s cash cows are responsible for much of its profit. Therefore, these high-earning units are crucial to the company’s overall health and ability to function. Cash cows generate a lot of revenue and don’t require much in the way of expenses to do so. In other words, they don’t cost the company much to produce a significant amount of profit. Therefore, cash cows can make money for the company without requiring additional support. If a company’s cash cows are strong, they can cover the costs of other unprofitable business units. Some businesses might have a few cash cows while others might have many. The more cash cows a company has, the more resilient it is to changes in the market. The company will be able to weather financial difficulties better if it has several high-earning units.
Types of cash cows
There are two types of cash cows: Product cash cows and marketing cash cows. Product cash cows have high profit margins and low operational expenses. This happens when a company has a significant amount of market share in one or more industries. A healthcare product manufacturer, for example, might have a product that’s used in almost every hospital in the country. If that device is profitable, it’s a product cash cow for the company. Marketing cash cows are units that have low operational expenses but are still profitable. For example, a company that spends millions of dollars on advertising to generate sales is a marketing cash cow. Although the company is spending a lot of money, it’s still bringing in a significant amount of revenue. Marketing cash cows are common in industries where companies spend more on advertising than they earn in revenue. For example, the commercial airline industry earns less in ticket sales than it spends on advertising as a whole.
Why might a company have non-cash cows?
Not every business unit a company has will be a cash cow. Some units are unprofitable, though they still require money to continue operating. A non-cash cow is a business that costs more money than it brings in. Non-cash cows often have high operational expenses, meaning the business needs to use lots of money to keep running. A non-cash cow might be something that a company has to support but isn’t bringing in a significant amount of profit. A non-cash cow is any business unit that isn’t profitable. A company might have non-cash cows if it has several high-cost but unprofitable ventures. For example, a company that spends a lot of money researching new technology is a non-cash cow. The research may be valuable for the company but it’s not producing any significant revenue.
Implications of having cash cows and non-cash cows
Having only cash cows isn’t a good thing. If a company has only high-earning but unprofitable business units, it won’t be able to survive long-term without outside help. Even high-earning units need some sort of support from the rest of the company. Companies need to pay for overhead expenses like office space, supplies, and employee salaries. Because cash cows generate so much profit, they can support the unprofitable businesses that need monetary assistance. Conversely, companies with unprofitable but costly business units need to support those units with money from the cash-producing businesses. When a company has only cash cows, it can cover the costs of other business units without having to dip into its reserves. When a company has both cash cows and non-cash cows, it’s more likely to go bankrupt because it has to use money from its profitable units to fund the unprofitable ones.
Bottom line
Companies that have only cash cows are more resilient to changes in the economy. They can withstand financial strain and continue to generate revenue because their most profitable business units are self-sustaining. Even if the overall economy does poorly, these companies may have to scale back their operations but won’t go bankrupt. On the other hand, companies with only non-cash cows are in a precarious financial situation. When the economy is doing well, these companies may be fine. However, when the economy falters, these companies can’t survive because they don’t have enough revenue to stay afloat. The longevity of a company’s business units is important when determining its overall health. Cash cows are crucial to the daily operations of the company and provide a lot of the revenue that allows it to function. If a company only has cash cows, it will be more financially resilient than one with only non-cash cows.