Wealth maximization is a financial management technique that concentrates its focus on increasing the net worth of a company or firm. This approach contrasts with the more traditional method of management that seeks out increased profits above all other pursuits. Those who pursue this technique also seek out profits, but they concern themselves with cash flow, earnings per share of shareholders, and the social value of any financial initiatives as well. By including all of these disparate aspects of a company's operations, this process takes more of a long-term approach to financial management.
The financial management of a company must be focused on a number of different factors to gain the maximum amount of capital for those people who have an ownership share in the company. In the process of conducting business, it's obvious that management would try to make the most possible profits by pulling in a great deal of revenue and incurring minimal costs. But profits are transitory, and they might not be the most accurate representation of financial strength. As a result, wealth maximization has become an increasingly popular goal for financial managers.
When pursuing this strategy, it is crucial for management to try to get shareholders the most earnings per share. This is a true reflection of the company's worth, since the company that gets its shareholders the most wealth is one that would likely attract the most investors. Cash flow is another crucial aspect, since the amount of cash a company has is affected by many other factors in addition to profits.
There are some times when the search for profit can be problematic for shareholders. For example, a certain initiative might bring in a great deal of profit for a company, but it might do some sort of environmental harm to the surrounding community. Many shareholders would prefer to neglect the profit and prevent the environmental issues. Those who follow wealth maximization are aware of the fact that a socially responsible company is more valuable to many shareholders than other firms who neglect social issues.
In many cases, the difference between wealth and profit maximization comes down to a question of time. Those seeking profits are often more concerned with an immediate return on investments, without looking very far ahead. By contrast, maximizing wealth requires more of a long-term approach for financial managers. These managers feel that the ups and downs of temporary profit-seeking will ultimately be subordinated in importance to the long-term wealth of the company.
