Profit Maximization vs Wealth Maximization: What’s the Difference?
We’re living in a world where profit maximization rules. But is the “make as much money as you possibly can right now” strategy the best way to run your business? Or should you take a different approach?
To be fair, there is value in profit maximization — but not when it’s the sole strategy powering your business.
That’s why, today, we’re going to look at the difference between profit maximization and wealth maximization, and how to use both strategies to build a sustainable and profitable business.
The Short-term Strategy: Profit Maximization
When surveying the state of your finances, there are two ways you can look at it. The first approach is called profit maximization, which asks:
How much money are you making? And what can you do right now to increase your returns?
Although this approach may seem short-sighted, it does have some benefits. Let’s take a closer look at the good and the bad of profit maximization:
Goal-setting: Rather than charge full-steam ahead into your business without any plan except to make money, profit maximization forces you to step back and set realistic and actionable short term goals.
Real-time feedback: It can be frustrating to work towards a long-term goal if you have no real sense of the progress along the way. With short-term goals, though, you can see the effects on your business in real time.
Efficiency: Profit maximization is directly linked to greater efficiency. That’s because you have to be able to effectively handle larger volumes of work simultaneously.
Reinvest in your business: With more cash flowing into your business, you won’t have to delay the scaling your business. It can start as soon as you’re ready for it.
Stepping stone to success: Short-term success doesn’t mean anything if you can’t sustain it. But profit maximization does teach business owners about the importance of being profitable from Day 1.
Sellability: If you can demonstrate short-term success with your business (in addition to longterm viability), it’ll be much easier to sell it down the road.
Non-existent long-term goals: There is a tendency for some business owners to focus solely on short-term gains. This is a very risky way to run one’s business.
Disregards the time value of money: When calculating how to maximize profits today, business owners can lose sight of the fact that money becomes more valuable the longer you have it. Which means that charging of outlandish prices today won’t lead to as great a monetary value as reasonable prices charged over the long term.
Compromised values: When your only goal is to widen the gap between your earnings and your costs, decisions are no longer made for the good of your company. Values are compromised in the quest for the highest profit margins.
Cut corners: The only way to achieve a true profit maximum is by cutting costs so low that the integrity of the services or products suffers. When you cut corners, it’s not just the customers who will suffer. It will be the reputation of your business, too.
Low team morale: In an effort to cut costs, teams are either thinned out to the point of everyone being overworked or they’re all paid a measly wage while being expected to work longer hours.
Bottom line: While short-term profit maximization has its benefits, it’s just not a practical or sustainable approach for business. At least, not on its own.
The Long-term Strategy: Wealth Maximization
The alternative approach to finance management is called wealth maximization, which asks:
How much money can you make? And how do you build a business today that ensures you reach that point of sustained success?
Let’s take a closer look at the good and the bad of wealth maximization:
Goal-setting: Wealth maximization gets you into a good habit of breaking up goals into incremental pieces that get you from Point A to Point B, and on schedule, too!
Better business practices: You can’t create a sustainable business without the right tools, the right team, or the right processes. This approach will force you to strategize carefully and implement accordingly for the desired results.
Cash flow-focused: It’s not about profit. Wealth maximization is about creating the perfect balance in your cash flow that can actually sustain your business over the long term.
Value-focused: You can’t increase the value of your company — and, in turn, its sellability — without sustained success, which means you have to consistently produce high-quality services or products.
Healthier mindset: Wealth monetization isn’t about removing things now or cutting costs low so you can pocket more money. It forces you to constantly think about the future of your business, your team, and how you can help those you serve.
Accounts for time value of money: You’ll have a better grasp of the time value of money. In other words, the money you make today will have more value down the line if you can sustain your success.
Risk-averse: This strategy mitigates for the risks of being in business. Considering how much the digital landscape changes as well as the natural ebbs-and-flows of working in a creative field, this is the only way to safely navigate them.
Stable reinvestment in business: Rather than try to experience exponential growth all at once, wealth maximization allows you to steadily reinvest money into your business so you can more effectively manage its growth.
Time management: The only real drawback to wealth monetization is that it requires a lot of planning and execution. If you struggle with time or project management, this might be a problem for you.
Bottom line: The benefits of wealth monetization are overwhelmingly clear. Just keep in mind that profit maximization (on a reasonable scale) is a necessary part of acquiring long-term wealth.
What’s your goal?
Do you want to create a business so successful, with a team so reliable, that you’ll one day be able to step back and solely focus on the things you enjoy doing?
Do you want to create a business so successful, with a team so reliable, that you’ll one day be able to sell it and use those profits to live the life you’ve always wanted?
Either way, you win. As does anyone who’s come into contact with your business along the way, be they employees, clients, partners, and so on.
However, the only way to achieve this is with a healthy mix of goals aimed at present-day profitability and long-term wealth. With both in place, and with a clear vision of where you want to take your business, you’re sure to go far.
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