What is 'Erosion'

Erosion can include any negative impact on a company’s associated assets or funds. Erosion can be experienced in regards to profits, sales, or tangible assets, such as manufacturing equipment. Erosion is often considered a general risk factor within an organization’s cash management system as the losses may be slow and occurring over time.

BREAKING DOWN 'Erosion'

Erosion more often applies to longer term downward trends, especially those that seem to be accelerating. Often, short-term losses are not categorized as erosion. Standard anticipated depreciation, or the cyclical nature of certain product sales, are often considered a normal part of business functions. These are more likely to be referred to as downward trends.

Profit Erosion

Profit erosion can refer to 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.

The risk involved in erosion of this nature is generally reflected in the company’s profit margins, as the monies are used to fund areas that may or may not be profitable in the future.

Additionally, profit erosion can occur even when sales numbers are comparable to previous levels. This can occur when the cost of producing a particular product rises, possibly due to increases in the costs of materials or labor, but the sales price of the product is not raised to compensate.

Asset Erosion

Certain assets lose value over time, a process often referred to as depreciation. Though much asset depreciation is accounted for within the business’s figures, unexpected asset erosion can occur. These losses can occur due to general use of equipment or technological advances that make the current assets less valuable. These losses can lower the perceived value of the business as a whole as it lowers the book value of the assets associated with the company.

Sales Erosion

Sales erosion refers to the process of steady, long-term declines in overall sales numbers. These differ from temporary sales declines as these losses are often considered fairly widespread, possibly qualifying as a long-term trend within the business’s activities.

Sales erosion can be experienced due to a number of factors, including new entries into that particular product’s market, or price undercutting on the behalf of the competition. Technology advances in the field can also lead to sales erosion if newer product developments make the current company offering seem obsolete.

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