Erosion

AAA

DEFINITION of 'Erosion'

The gradual redirection of funds from profitable segments or projects within a business to new projects and areas. Although managers almost always consider money flowing into new projects as investments in long-term growth, the short-term effect is a slow erosion of cash flow.

INVESTOPEDIA EXPLAINS 'Erosion'

Erosion is often used to refer to profit margins, but it all comes down to a business taking money from profitable areas and using it to fund areas that may or may not be profitable in the future. If the investments work out, then erosion isn't an accurate term. However, many good businesses have been eroded into ruin by aggressive expansion into new, less profitable areas simply for the sake of seeming active. The balance between good expansion and profit erosion can be hard for even the savviest management team to handle.

RELATED TERMS
  1. Capital Expenditure (CAPEX)

    Funds used by a company to acquire or upgrade physical assets ...
  2. Game Changer

    1. A person who is a visionary. 2. A company that alters its ...
  3. Research And Development - R&D

    Investigative activities that a business chooses to conduct with ...
  4. Organic Growth

    The growth rate that a company can achieve by increasing output ...
  5. Return On Innovation Investment

    A performance measure used to evaluate the effectiveness of a ...
  6. Inorganic Growth

    A growth in the operations of a business that arises from mergers ...
RELATED FAQS
  1. How is minimum transfer price calculated?

    A company that transfers goods between multiple divisions needs to establish a transfer price so that each division can track ... Read Full Answer >>
  2. What is the effective interest method of amortization?

    The effective interest method is an accounting practice used for discounting a bond. This method is used for bonds sold at ... Read Full Answer >>
  3. What does an unfavorable variance indicate to management?

    In managerial accounting, an unfavorable variance is discovered when a company's management performs a comparison between ... Read Full Answer >>
  4. Is there a way to include intangible assets in book-to-market ratio calculations?

    The book-to-market ratio is used in fundamental analysis to identify whether a company's securities are overvalued or undervalued. ... Read Full Answer >>
  5. What are some of the limitations and drawbacks of using a payback period for analysis?

    Limitations, or disadvantages, of using the payback period method in capital budgeting include the fact that it fails to ... Read Full Answer >>
  6. What are common concepts and techniques of managerial accounting?

    The common concepts and techniques of managerial accounting are all the concepts and techniques that surround planning and ... Read Full Answer >>
Related Articles
  1. Active Trading Fundamentals

    Evaluating A Company's Management

    Financial statements don't tell you everything about a company's health. Investigate the management behind the numbers!
  2. Markets

    Cash: Can A Company Have Too Much?

    Cash is something companies love to have. But if they are not using it there could be problems.
  3. Markets

    Get Tough On Management Puff

    Company managers are often skilled at fooling investors. Be critical and don't believe the hype.
  4. Options & Futures

    Governance Pays

    Learn about how the way a company keeps its management in check can affect the bottom line.
  5. Investing

    Top 9 Questions Investors Should Ask Management

    Find out how to get the answers you want without getting the company line.
  6. Economics

    Calculating Net Realizable Value

    An asset’s net realizable value is the amount a company should expect to receive once it sells or disposes of that asset, minus costs from its disposal.
  7. Investing Basics

    Calculating Unlevered Free Cash Flow

    Unlevered free cash flow (UFCF) is the free cash flow of a business before interest payments.
  8. Economics

    Understanding Implicit Costs

    An implicit cost is any cost associated with not taking a certain action.
  9. Economics

    What are Deliverables?

    Deliverables is a project management term describing an object or function that must be provided or completed by a certain due date.
  10. Economics

    What Does Capital Intensive Mean?

    Capital intensive refers to a business or industry that requires a substantial amount of money or financial resources to engage in its specific business.

You May Also Like

Hot Definitions
  1. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  2. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  3. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  4. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  5. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  6. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!