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.


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.

  1. Depreciation

    1. A method of allocating the cost of a tangible asset over its ...
  2. Wasting Asset

    An item that irreversibly declines in value, as a function of ...
  3. Appreciation

    An increase in the value of an asset over time. The increase ...
  4. Capital Project

    A long-term investment made in order to build upon, add or improve ...
  5. Initial Cash Flow

    The amount of money paid out or received at the start of a project ...
  6. Business Asset

    A piece of property or equipment purchased exclusively or primarily ...
Related Articles
  1. Markets

    How Low Interest Rates Affect the British Economy

    Explore the impact of historically low interest rates on the British economy, while discovering the reasons for and against raising rates.
  2. Markets

    What You Should Know About Inflation

    Find out how this figure relates to your investment portfolio.
  3. Markets

    10 Ways to Improve Cash Flow in Construction

    Improving cash flow in construction requires some sector-specific strategies.
  4. Managing Wealth

    Project Manager: Job Description & Average Salary

    Discover more about the specific tasks that project managers are responsible for and the average salary that can be expected in such a position.
  5. Investing

    5 Warnings Signs of Risk for a Small Business

    Learn how to keep on the lookout for these five potential warning signs of risk that your small business is stalling out or failing.
  6. Managing Wealth

    Project Manager: Career Path & Qualifications

    Learn more about what project managers job, the qualifications necessary for the position and the most common careers for these professionals.
  7. Retirement

    Retiring On Investment Interest: Can It Be Done?

    Spending investment interest in retirement can be a viable strategy, but it won't work for everyone.
  8. Markets

    Finding Value in the Selloff Rubble

    Globally and in the United States, stocks are now in correction mode, with the recent erosion in equities in emerging markets and Europe in a bear market.
  9. Markets

    How Governments Influence Markets

    The biggest influence in the markets today can create some unintended consequences.
  10. Markets

    How to Improve Your Cash Flow in Manufacturing

    Here are 10 ways to to improve a manufacturer's cash flow.
  1. How does the current interest rate risk affect bondholders in the US?

  2. How does the performance of the stock market affect individual businesses?

    Learn how stock markets affect individual businesses by influencing consumer spending levels and affecting the way companies ... Read Answer >>
  3. How do you use the profitability index rule when scoping out a project?

    Understand the parameters of the profitability index rule and how this rule is used in corporate capital allocation to determine ... Read Answer >>
  4. Are current assets liquid or capital?

    Take a deeper look at liquid current assets for businesses and individuals, and learn how they differ from other types of ... Read Answer >>
  5. What's more important, cash flow or profits?

    Learn about the different effects that cash flow and profit have on a business so you can decide which aspect to focus on. Read Answer >>
  6. What is the difference between profitability and profit?

    Calculating company profit and profitability are not one and the same, and investors should understand the difference between ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center