What is ‘erosion’
Erosion can include any negative impact on the businesses of the related assets and funds. Erosion can be experienced in relation to profits, sales, or tangible assets such as production equipment. Erosion is often regarded as a General risk factor within the Organization’s management system money as losses can be slow and occurs over time.
Erosion can also occur when some financial assets, such as contracts, options and warrants decrease in value over time (known as ‘recession’).
Breaking down the ‘erosion’
Erosion is most often used for a long-term downward trend, especially those that seem to be accelerating. Often, short-term losses are not classified as erosion, but listed as a lump sum or one-time losses. Standard expected depreciation, or the cyclical nature of certain of selling the product, often considered a normal part of the business function. It will likely be referred to as the downward trend.
Erosion Of Profit
Erosion of profit may refer to the gradual reorientation of funds from profitable segments or projects within a business to new projects and directions. Although managers almost always consider money flowing into new projects as investments in long-term growth, the short term effect leads to a gradual loss of funds.
The risk associated with the erosion of this nature is generally reflected in the profits of the company, as the cash used to Fund areas that may or may not be profitable in the future.
In addition, the erosion of profits can occur even if the sales figures were comparable to previous levels. This can occur when the production costs of a particular product increases, perhaps due to the increase in the cost of materials or labour, but the sale price of the product is not raised to compensate.
Erosion Of Assets
Some assets lose value over time, the process is often referred to as depreciation. Although a large depreciation of the assets recognised in business performance, the unexpected erosion of assets can still occur. These losses may arise due to common use of equipment or technological developments that make current assets less valuable. These losses can reduce the perceived value of the business as a whole, as it reduces the carrying amount of the assets associated with the company. Intangible assets such as patents or trade marks which have a shelf life, and their value decreases over time, especially because the date is approaching. For pharmaceuticals, especially where Generic producers can enter the market, it is a real problem. Depreciation is a common accounting process, in which the value of intangible assets is reduced through time.
Contracts, options, and warrants extended to the managers or employees can also be subject undermines the value over time. These contracts usually come with a date of expiry where the rights stipulated in these contracts should be implemented before the deadline. As the expiration date approaches, the time value (or special value) of these contracts breaks down in a process known as time decay. Options employee stock began a major balance sheet item for many large companies, and therefore, this form of loss of value in time is essential in the analysis of financial statements over time.
Erosion Of The Sales
Erosion of sales refers to the process of sustainable, long-term decline in the total number of sales. They differ from the temporary decline in sales, as these losses are often seen widely enough may qualify as a long-term trend in the enterprise.
Erosion may be achieved by a number of factors, including a new entry to that specific product at the market, or cheap name for the contest. Technological advances in the field can also lead to erosion of sales for new developments the current company offering seem outdated.