Difference Between Profit Maximization and Wealth Maximization

Difference Between Profit Maximization and Wealth Maximization

4 mins read48.3K Views Comment
Rashmi
Rashmi Karan
Manager - Content
Updated on Jul 1, 2024 13:30 IST

Financial management is all about properly utilizing funds to increase the value plus profit of the business. Among the primary objectives of financial management are Profit and Wealth Maximization. Profit Maximization refers to increasing the company’s profit, while Wealth Maximization aims to accelerate the entity’s value. Profit maximization is the primary goal since profit is the measure of efficiency, while wealth maximization aims to increase stakeholder value. Learn the important differences between profit maximization and wealth maximization.

2022_11_MicrosoftTeams-image-95.jpg

Content

Tabular Comparison – Profit Maximization vs Wealth Maximization

Quickly explore the aspects of difference about profit maximization vs wealth maximization.   

Aspect Profit Maximization Wealth Maximization
Primary Goal Maximize short-term profits Maximize long-term shareholder wealth
Time Horizon Short-term focus Long-term focus
Measurement of Success Focuses on immediate profits Considers overall financial well-being
Emphasis Primarily on current income Takes into account future income and capital gains
Risk Tolerance May prioritize riskier strategies Tends to be more risk-averse
Decision Making May lead to decisions that sacrifice long-term sustainability for short-term gains Focuses on sustainable growth and value creation
Stakeholder Consideration May not prioritize the interests of all stakeholders Considers the interests of shareholders, employees, and other stakeholders
Flexibility in Strategy May not be flexible in adapting to changing market conditions Adapts strategies to achieve long-term success
Accounting Methods Often relies on accounting profits and short-term financial metrics Considers economic value added (EVA) and total shareholder return (TSR)
Use of Financial Ratios May focus on metrics like Return on Investment (ROI) and Net Profit Margin Considers metrics like Price-to-Earnings (P/E) ratio and Price-to-Book (P/B) ratio
Approach to Risk Management May involve risk-taking for immediate gains Emphasizes risk mitigation and sustainability
Impact on Corporate Reputation May lead to short-termism and a negative public perception Generally promotes responsible and ethical business practices

Explore top government certifications to improve your chances of getting into top government job oriented courses after 10th for a successful career in the public sector.

What is Profit Maximization?

Profit Maximization is the firm’s ability to produce the maximum return with limited input or use the minimum input to produce the claimed result. It is termed the main objective of the company.

Profit maximization is a company’s economic objective to increase the company’s value. This increase in the company’s value is what shareholders and investors seek, who expect their investment to be profitable.

Explore finance courses

In the business world, profit maximization involves considering the level of production of goods or services faced by a particular firm and its costs. This production should be directly related to the sales price and the company’s profits from selling these goods or services to the public.

The profit is calculated by deducting the total cost from the total revenue. Through profit maximization, a company may be able to determine the input-output levels, which give a tremendous amount of profit.  

Learning The Important Functions of Financial Management
Learning The Important Functions of Financial Management
Financial management refers to the application of management principles to financial resources to better manage them. It is a management skill to plan, organize, direct and control the financial activities...read more

Methods of Depreciation and Their Uses
Methods of Depreciation and Their Uses
Depreciation is an accounting method used for allocating the cost of a physical asset over its life expectancy. It represents the used value of an asset and it helps companies...read more

What is Wealth Maximization?

Wealth maximization is a company’s ability to increase the market value of its common stock over time. The company’s market value is based on many factors, such as goodwill, sales, services, product quality, etc.

The primary objective of the company and the highly recommended criteria is to evaluate the organization’s performance. This will help the company increase its market share, achieve leadership, and maintain consumer satisfaction, among other benefits.

The company is also expected to increase the wealth of its shareholders, who invest in its shares with the expectation that it will give some return after one year. This states that the company’s financial decisions should be made in such a way as to increase the Present Net Value of the company’s earnings. The value is based on two factors:

  • Earning rate per share
  • capitalization rate

Wealth maximization means maximization of the market price of the company’s shares.

What is the Circular Flow Of Income?
What is the Circular Flow Of Income?
Learn about the circular flow of income, the model of the circular flow of income, and why it is important for an economy to grow.
Current Assets: Definition, Types, Formulas, Components
Current Assets: Definition, Types, Formulas, Components
Current assets are a category of assets on a company’s balance sheet. They are essential components of a company’s working capital and provide insight into its short-term liquidity and ability...read more

Acquire in-depth knowledge of financial strategies, asset management, and wealth preservation. Enroll to our top courses from the best colleges in India today to take the next step in your wealth management career!

Check out the top finance interview questions

Total earnings are not as important as earnings per share. Even maximizing earnings per share is insufficient because it does not specify the timing or duration of expected returns. Furthermore, it does not consider the risk of uncertainty of future earnings. Therefore, wealth maximization is appropriate and possible by maximizing the market price per share.

According to Professor Ezra Soloman, wealth maximization also maximizes achieving other goals. Maximizing the company’s wealth implies the value maximization of the owner’s capital stock. Therefore, the operational objective of financial management implies maximizing the market price of the shares.

Recommended Reads

Difference Between Foreign Trade and Foreign Investment
Difference Between Foreign Trade and Foreign Investment
The key difference between foreign trade and foreign investment is that foreign trade is between two or more countries, while foreign investment is made by a particular organization or individual...read more
Difference Between Finance and Accounting
Difference Between Finance and Accounting
Finance and accounting are two important domains. Without their existence, our economies would collapse.
Difference Between National Income and GDP
Difference Between National Income and GDP
National Income and Gross Domestic Product (GDP) are two important economic indicators often used to measure a country’s economic performance. Although they are related, the two concepts have some key...read more
Difference Between Accounting And Auditing
Difference Between Accounting And Auditing
The main difference between accounting and auditing is that accounting is the process of recording and summarizing financial transactions, while auditing is about verifying the accuracy and completeness of financial...read more

FAQs

What is wealth maximization?

Wealth maximization is trying to maximize the value added of all goods and services, whether they are traded in formal markets.

What is maximizing the wealth of a company?

To maximize the company's value is to increase the market capitalization (share price at a given moment multiplied by the number of shares outstanding) or the debt value of the company.

How to maximize profits?

To maximize profits -

  • Cut expenses
  • Find out where the money is being spent
  • Optimize production and warehouse
  • Review your business plan
  • Plan smart outsourcing
  • Optimize your marketing plan
  • Provide payment plans

What is meant by maximization?

Maximization is the action and effect of making something reach its maximum performance.

About the Author
author-image
Rashmi Karan
Manager - Content

Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio