In my previous post, I talked about the importance of understanding your source of income and how it is generated.
Now for those businesses that take a long period before the investment has started to yield profit, it is important for the entrepreneur to create a cash cow business that will sustain some operations during the time of production.
Cash Cow is a venture that generates a steady return of profits that far exceed the outlay of cash required to acquire or start it. So, it is important for a business to create or acquire such ventures since they can be used to boost a company’s overall income and to support less profitable endeavors or long-term return ventures.
Long-term returns ventures are business like mining, construction, agriculture, and other sectors in manufacturing. These are businesses that some time of production before it starts give returns. A farmer will wait for a period of 3 to 4 months for harvest in order to sell.
A constructor will wait to complete a certain stage of construction in order to claim a payment. In mining, there is a process of digging shafts persue the trace to reach the mineral underground in order to extract the minerals and sell. In manufacturing, there is a process and time taken in producing a product until it is ready in the market for sales.
In the period during processing, there are a lot of expenditures that require money, working capital, and it constrains the business. So there is a need to create a cash cow venture.
My advice is that a cash cow venture should be aligned with the core business. For example, if you are into farming, your cash cow should be aligned to agriculture. You can start a Piggery or egg layers business.
Why , this type of business will compliment your farming. You will use the manure to feed your farm and use your grains to feed the chickens or pigs. With eggs, you can make sales every day and receive money on a daily basis.
If you are in mining, you can sell explosives, drill bits, or any mining related consumables. While selling to others, when you need such consumables for your production, you can buy from your own venture.
If you are in construction, you can run a hardware outlet. When you need building materials for your construction, you can buy from your own shop.
A cash cow business should be something aligned to the core business so that in case you don’t manage to sell to other people, you can still use the stock in your own operations. This way, you will avoid getting your money stuck in something absolutely different from your core business.
In every process of production, you will need working capital. It is difficult to get working capital to support operations for months before the business gives returns, so most businesses of this nature survive on borrowing. Now, by the time they reach a time of sales, most of the revenue that they will generate at that time will be used to pay debts that were created during production. This will present as if the business doesn’t make a profit. The entrepreneur will remain with very little profits that will force the cycle to be repeated and delay growth.
Imagine if a farmer get all inputs on credit, seeds, fertilisers, money to cultivate the land, soon after selling the produce, most of the income revenue will be channelled to clear those debts, the money that will remain for continuity is very limited, the farmer is likely to borrow again for the next production.
The same applies to mining. If explosives and air compressors were sponsored on credit, upon selling the minerals, the miner will remain with very little to continue with production.
This is why it is important to create a cash cow venture that can sustain operations and avoid borrowing for working capital. Working capital should never be borrowed. It should be generated from within the business.
I know this is a complicated process that needs to be mastered very carefully. But it’s important for business continuity.
The Herdboy C.E.O, Dr
Also Read: Revenue Management.