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cash trap

Derek F. Channon


This refers to a business whose strategic position is such that it needs all the cash generated from operations to maintain its position. Such a business is not creating shareholder value and may actually be destroying it. Cash‐trap businesses tend to have a high level of capital intensity and limited or uncertain cash flows. The typical manufacturing company with typical growth rates and asset turnover must have a pre‐tax profit of around 7 percent or the entire company becomes a cash trap. High growth and high capital intensity businesses require even higher margins. At maturity, such businesses will tend to convert themselves into cash traps. Such businesses have a tendency to accept that change cannot happen owing to difficulty in modifying corporate culture. Ironically, this attitude may create a window of opportunity for a new competitor that is not afraid to challenge the existing rules. This will almost invariably mean changing one or more aspects of product market positioning. For example, capital intensity can be reduced by outsourcing , a technology bypass may negate experience curve expectations; a reconfiguration of the value chain ( see value chain analysis ) may be possible; and reengineering may be possible ( see business process reengineering ; value‐driven reengineering ). In general, cash‐trap businesses exhibit a low share and high capital intensity in markets ... log in or subscribe to read full text

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