How to Choose Between Investing in your Cash Cow or a New Product
Maybe it’s time for your company to stop investing in your cash cow and move onto a new product?
Budgeting for a new financial year is much more than predicting and accounting money for future expenses; it’s about defining what comes first for the company. Naturally, businesses grant the largest sum towards sectors they believe will reap the highest returns.
But a major dilemma for companies is deciding which area deserves the most investment. What’s more important? Should they invest in their current, highest-selling product (aka their cash cow), or should they place their bets on a new product? After all, there are no calculations to go on, only predictions. And we all know that predictions are not guaranteed to come true.
Making a decision as important as this requires thought and consideration. We propose a framework in
Cash Cow vs. New Products, What Should Receive the Most resources Next Year? to help you ask the right questions and make the best decision for your company.
Proposed Management Decision Framework:
- Economic: A Net Present Value for each Product should be considered. Theoretically, the project with the highest Net Present Value should be prioritized which would be your cash cow. Also, a simpler exercise should be a Return on Investment (ROI) calculation.
- Budgetary Constraints. Does the company have excess funding to pay for the new project? If so how much?
- Access to Capital. Does the company have access to capital sources that could be used to fund the new project?
- Expectations of Investors. Are the investors looking for current income, dividends, and near-term cash flows? Alternatively are they looking for the company to grow in value and potential? Will they be patient?
- Mid- to Long-Term Company Goals. What is the long-term strategy of the company? Is it just survival and focused on near-term cash or is it looking to develop a broad array of products that will diversify and grow the firm?
- Competitive Defense and Differentiation. How long is the IP on the current product vs. the other products? Alternatively, if there is no IP what is the current competitive landscape and market share? How likely will it change in the future (with and without) the new product?
- Organizational Culture. Are employees and managers more interested in near-term stability, or are they motivated by innovative ideas?