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 moneyTime Value Of MoneyThe Time Value of Money (TVM) principle states that money received in the present is of higher worth than money received in the future because money received now can be invested and used to generate cash flows to the enterprise in the future in the form of interest or from future investment appreciation and reinvestment.read more 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.
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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
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Key Differences
The critical differences between are as follows –
#1 – Wealth Maximization
- Wealth MaximizationWealth MaximizationWealth maximization means the maximization of the shareholder’s wealth as a result of an increase in share price thereby increasing the market capitalization of the company. The share price increase is a direct function of how competitive the company is, its positioning, growth strategy, and how it generates profits.read more 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 inherentRisk InherentInherent Risk is the probability of a defect in the financial statement due to error, omission or misstatement identified during a financial audit. Such a risk arises because of certain factors which are beyond the internal control of the organization.read more 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 structureCost StructureCost Structure refers to those costs or expenses (fixed as well as variable costs) which businesses will incur or will have to incur to produce the desired objective of the business; such costs include the cost of purchasing the raw material to the cost of packaging the finished products.read more. 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 dividendsValue Of Regular DividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more. 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.
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