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.


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.

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