There are several different ways to approach success of a business. When it comes to how financial management experts perceive success, it often comes down to how much money a business is either making or capable of making. These two approaches are epitomized by the profit maximization method of financial management and the wealth maximization method.
Understanding the pros and cons of profit maximization vs. wealth maximization understanding how they differ, while figuring out which one is best for your business will depend on what your business values most. While profit and wealth are certainly related in most people’s minds, they are distinct approaches of financial management.
Profit Maximization vs. Wealth Maximization
Profit maximization is often seen as a more short-term approach. Businesses who use this financial management system focus on how the business can increase profits and reduce both losses and risk. Here are some of the common features of profit maximization in financial management:
- Measured by money made over shorter periods of time
- Helps organizations understand their operational efficiencies
- Primarily focused on how to increase earnings – companies may choose to not spend money on certain expenditures such as marketing, advertising, research, or sometimes even hiring to maximize profits
- Companies who engage in profit maximization may choose to increase prices to gain as much per transaction as possible
Wealth maximization is considered a more modern, long-term approach that is focused on creating value over time and using acceptable risk to make wealth-creating investments and increase cash flow of a business.
Here are some of the primary differentiators in wealth maximization:
- Measured by wealth created over a longer time period
- Attempts to create more value in market shares, as opposed to pure business revenue
- Companies who choose financial management with wealth maximization in mind will likely engage in strategies that will help them build an audience over time and will likely utilize marketing and other brand awareness strategies
- Companies will often use lower or reduced prices on products and services to gain more market share
- Financial managers and other business leaders focus on what goods and services are valued in the market so that they can identify what is likely to drive customer interest and capture market share
- Wealth maximization considers the “time value of money”, seeing the benefit in taking steps over a longer period of time to create more money than otherwise. It also considers factors like economy fluctuations, inflation, and more as part of considering risk and making decisions for the future
Profit is clearly a chief concern of any business. It’s ultimately necessary to continue operations at any level. If a business is struggling to keep the lights on, it’s much harder to approach their organization with a long-term strategy to grow the business’s wealth when the real concern is to make enough money to stay operational. Profit building is about minimizing uncertainty to create a profitable foundation to one day begin making longer-term moves for the business.
So, which is better for your business when comparing profit maximization vs. wealth maximization?
Plenty of businesses focus primarily on profit at the start of their organization and then move the focus to long-term wealth management strategies somewhere down the line depending on the growth of their business. Short term strategies are not always short-sighted as they can give businesses the ability to keep functioning and growing, and at
some point, the opportunity to potentially be stable enough to consider higher risks and more long-term plans.
While profit maximization might be a slower approach to business growth, it is also often working with fewer, more certain, and more straightforward variables, which is why some businesses still choose this approach in their financial management.