In a diversified company’s lineup, the various businesses can be classified as cash hogs or cash cows.
What are cash hogs and cash cows? The terms cash hog and cash cow relate to the financial strengths of the different business units. A cash hog is a business unit that generates too little cash flow to completely fund its own operation.
A cash hog often must get cash from another source or another business unit to survive. For example, if a cash hog needs to purchase new equipment or upgrade its computer system to keep up with orders, the parent company will need to provide capital through a business loan or from a cash cow.
In comparison, a cash cow is a business that generates more than enough cash flow to support itself. Cash cows are usually mature businesses and market leaders. The extra cash generated by cash cows can be used for acquisitions, paying dividends, investments, etc. A cash cow can often supply enough cash to invest in a promising cash hog.
Ideally, given enough time, a cash hog will grow into a cash cow. If a cash hog continues to be a financial drain on the company with little outlook for improvement, management may have to consider its options.