WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Blog
  • Free Video Tutorials
  • Courses
  • All In One Bundle
  • Login
Home » Accounting Tutorials » Shareholders Equity Tutorials » Wealth Maximization vs Profit Maximization

Wealth Maximization vs Profit Maximization

By Melvin SewakMelvin Sewak | Reviewed By Dheeraj VaidyaDheeraj Vaidya, CFA, FRM

The key difference between Wealth and Profit Maximization is that Wealth maximization is the long term objective of the company to increase the value of the stock of the company thereby increasing shareholders wealth to attain the leadership position in the market, whereas, profit maximization is to increase the capability of earning profits in the short run to make the company survive and grow in the existing competitive market.

Difference Between Wealth and Profit Maximization

Wealth Maximization consists of a set of activities that manage the financial resources intending to increase the value of the stakeholders, whereas, Profit Maximization consists of the activities that manage the financial resources intending to increase the profitability of the company.

In this article, we look at Wealth vs. Profit Maximization in detail.

What is Wealth Maximization?

The ability of a company to increase the value of its stock for all the stakeholders is referred to as Wealth Maximization. It is a long-term goal and involves multiple external factors like sales, products, services, market share, etc. It assumes the risk and recognizes the time value of money given the business environment of the operating entity. It is mainly concerned with the long-term growth of the company and hence is concerned more about fetching the maximum chunk of the market share to attain a leadership position.

Popular Course in this category
Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)
4.9 (1,067 ratings)
250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
View Course

Wealth-Maximization-vs-Profit-Maximization

What is Profit Maximization?

The process of increasing the profit earning capability of the company is referred to as Profit Maximization. It is mainly a short-term goal and is primarily restricted to the accounting analysis of the financial year. It ignores the risk and avoids the time value of money. It is primarily concerned as to how the company will survive and grow in the existing competitive business environment.

Wealth Maximization vs. Profit Maximization Infographics

Wealth-Maximization-vs-Profit-Maximization-info

Key Differences

The critical differences between are as follows –

#1 – Wealth Maximization

  • Wealth Maximization is the ability of the company to increase the value for the stakeholders of the company, mainly through an increase in the market price of the company’s share over some time. The value depends on several tangible and intangible factors like sales, quality of products or services, etc.
  • It is mainly achieved throughout the long-term as it requires the company to attain a leadership position, which in turn translates to a larger market share and higher share price, ultimately benefiting all the stakeholders of the company.
  • To be more specific, the universally accepted goal of a business entity has been to increase the wealth for the shareholders of the company as they are the actual owners of the company who have invested their capital, given the risk inherent in the business of the company with expectations of high returns.

#2 – Profit Maximization

  • Profit Maximization is the ability of the company to operate efficiently to produce maximum output with limited input or to produce the same output using much lesser input. So, it becomes the most crucial goal of the company to survive and grow in the current cut-throat competitive landscape of the business environment.
  • Given the nature of this form of financial management, companies mainly have a short-term perspective when it comes to earning profits, and that is very much limited to the current financial year.
  • If we get into the details, profit is actually what remains out of the total revenue after paying for all the expenses and taxes for the financial year. Now to increase the profit, companies can either try to increase their revenue or try to minimize their cost structure. It may need some analysis of the input-output levels to diagnose the operating efficiency of the company to identify the key improvement areas where processes could be tweaked or changed in their entirety to earn larger profits.

Comparative Table

Basis Wealth Maximization Profit Maximization
Definition  It is defined as the management of financial resources aimed at increasing the value of the stakeholders of the company. It is defined as the management of financial resources aimed at increasing the profit of the company.
Focus Focuses on increasing the value of the stakeholders of the company in the long term. Focuses on increasing the profit of the company in the short term.
Risk It considers the risks and uncertainty inherent in the business model of the company. It does not consider the risks and uncertainty inherent in the business model of the company.
Usage It helps in achieving a larger value of a company’s worth, which may reflect in the increased market share of the company. It helps in achieving efficiency in the company’s day-to-day operations to make the business profitable.

Conclusion

Profit is the basic building block of a company to accrue capital in the shareholder’s equity. Profit maximization helps the company in surviving against all the odds of the business and requires some short-term perspective to achieve the same. Though in the short term, the company can ignore the risk factor, it can not do the same in the long-term as shareholders have invested their money in the company with expectations of getting high returns on their investment.

Wealth Maximization takes into account the interest concerning shareholders, creditors or lenders, employees, and other stakeholders. Hence, it ensures building up reserves for future growth and expansion, maintaining the market price of the company’s share, and recognizes the value of regular dividends. So, a company can take any number of decisions for maximizing profit, but when it comes to decisions concerning shareholders, then Wealth Maximization is the way to go.

Recommended Articles

This article has been a guide to Wealth Maximization vs. Profit Maximization. Here we discuss the top difference between Wealth Maximization and Profit Maximization along with Infographics and comparison table. You may also have a look at the following articles – 

  • Entrepreneurship vs Management
  • What is Profitability Index?
  • Calculate Economic Profit
  • Compare Profit vs Revenue
8 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Download Coursera IPO Financial Model

By continuing above step, you agree to our Terms of Use and Privacy Policy.
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Free Accounting Course

You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!

* Please provide your correct email id. Login details for this Free course will be emailed to you

Coursera IPO Financial Model & Valuation Free Download