How To Balance Profit And Wealth Maximization
Building a sustainable and profitable business results in increased investment in research and development, attracting investors for additional funding, and further growth. Profits earned can be distributed to business owners and shareholders or reinvested into the business.
Using tried and tested strategies to improve these profits can be looked at it in two ways – the focus on short-term earnings, or the value of the business over time. See how to balance profit and wealth maximization here…
What is business profit maximization?
Profit maximization is defined as the management of financial resources aimed at increasing profitability in the short term. Risks and uncertainty aren’t considered within the business model as the incentive is to make the day-to-day business operation more profitable. This form of management is typically limited to the current financial year.
Profit maximization means setting realistic and achievable goals that immediately increase profits. Expenses are minimised and products are priced as high as possible to increase profit margins. Capacity planning ensures that just enough finances are allocated to handle existing sales and a possible short-term sales forecast.
Why is profit maximization by itself an inappropriate goal? This is basically due to the risk involved when the focus is solely on short-term gains. Disregarding the time value of money and compromising values in the desire to get the highest profit margins can cause the reputation of the business to suffer, impacting negatively on both customers and employees.
What is wealth maximization investment?
Wealth maximization is defined as the management of financial resources aimed at increasing the value of the company in the long term. This increase of worth can be distributed to the shareholders due to increases in market prices of the company’s shares over time. This additional investment creates the perfect balance to sustain the business and consistently produce high-quality products and services.
Discretionary expenses are always paid for and the risk of loss is reduced through risk mitigation. Prices may be cut in order to build market share, and heavy spending will ensure long-term sales projections can be met. Steady reinvestment into the business helps with growth management and results in a stable business environment.
This is why wealth maximization is superior to profit maximization because it takes into account the need for building reserves for future growth and expansion. Maintaining the market price for the company’s share will benefit shareholders, creditors, lenders, and employees. The goals are always to increase the wealth of the shareholders of the company who have invested their capital, with expectations of high returns.
There is one drawback to wealth maximization and this is time management. It requires a great deal of planning, so needs precise time and project organisation, but this is necessary in order to achieve long-term wealth.
What are your goals?
Deciding whether you want a successful business in the short term that you can sell and move on, or if you’re in it for the long haul and want to use the profits for the life you’ve always dreamed of are both achievable. Mixing profit and wealth maximization will provide you with realistic present-day profitability and a clear vision of long-term wealth.
Outsource CFO services
Using a Chief Financial Officer will save you both time and money. You’ll get invaluable guidance and advice on your present finances using accurate data, and help with planning for the future. Being able to make the right decisions and devising an annual strategy will be just two of the guaranteed advantages of getting exactly what you need – and provide you with a greater understanding of how to balance profit and wealth maximization.