Wealth Maximization vs Profit Maximization

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

#2 – Profit Maximization

Comparative Table

BasisWealth MaximizationProfit 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.
FocusFocuses 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.
RiskIt 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.
UsageIt 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.

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 – 

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Comments

  1. Komma Dinesh says

    Content is very good

    • Dheeraj Vaidya says

      Thanks for your kind words!