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Key Differences

Know the Differences & Comparisons

Difference Between Profit Maximization and Wealth Maximization

profit vs wealth maximizationFinancial Management is concerned with the proper utilization of funds in such a manner that it will increase the value plus earnings of the firm. Wherever funds are involved, financial management is there. There are two paramount objectives of the Financial Management: Profit Maximization and Wealth Maximization. Profit Maximization as its name signifies refers that the profit of the firm should be increased while Wealth Maximization, aims at accelerating the worth of the entity.

Profit maximization is the primary objective of the concern because of profit act as the measure of efficiency. On the other hand, wealth maximization aim at increasing the value of the stakeholders.

There is always a conflict regarding which one is more important between the two. So, in this article, you will find the significant differences between Profit Maximization and Wealth Maximization, in tabular form.

Content: Profit Maximization Vs Wealth Maximization

  1. Comparison Chart
  2. Definition
  3. Key Differences
  4. Video
  5. Conclusion

Comparison Chart

Basis for ComparisonProfit MaximizationWealth Maximization
ConceptThe main objective of a concern is to earn a larger amount of profit.The ultimate goal of the concern is to improve the market value of its shares.
Emphasizes onAchieving short term objectives.Achieving long term objectives.
Consideration of Risks and UncertaintyNoYes
AdvantageActs as a yardstick for computing the operational efficiency of the entity.Gaining a large market share.
Recognition of Time Pattern of ReturnsNoYes

Definition of Profit Maximization

Profit Maximization is the capability of the firm in producing maximum output with the limited input, or it uses minimum input for producing stated output. It is termed as the foremost objective of the company.

It has been traditionally recommended that the apparent motive of any business organisation is to earn a profit, it is essential for the success, survival, and growth of the company. Profit is a long term objective, but it has a short-term perspective i.e. one financial year.

Profit can be calculated by deducting total cost from total revenue. Through profit maximization, a firm can be able to ascertain the input-output levels, which gives the highest amount of profit. Therefore, the finance officer of an organisation should take his decision in the direction of maximizing profit although it is not the only objective of the company.

Definition of Wealth Maximization

Wealth maximizsation is the ability of a company to increase the market value of its common stock over time. The market value of the firm is based on many factors like their goodwill, sales, services, quality of products, etc.

It is the versatile goal of the company and highly recommended criterion for evaluating the performance of a business organization. This will help the firm to increase its share in the market, attain leadership, maintain consumer satisfaction and many other benefits are also there.

It has been universally accepted that the fundamental goal of the business enterprise is to increase the wealth of its shareholders, as they are the owners of the undertaking, and they buy the shares of the company with the expectation that it will give some return after a period. This states that the financial decisions of the firm should be taken in such a manner that will increase the Net Present Worth of the company’s profit. The value is based on two factors:

  1. Rate of Earning per share
  2. Capitalization Rate

Key Differences Between Profit Maximization and Wealth Maximization

The fundamental differences between profit maximization and wealth maximization is explained in points below:

  1. The process through which the company is capable of increasing earning capacity known as Profit Maximization. On the other hand, the ability of the company in increasing the value of its stock in the market is known as wealth maximization.
  2. Profit maximization is a short term objective of the firm while the long-term objective is Wealth Maximization.
  3. Profit Maximization ignores risk and uncertainty. Unlike Wealth Maximization, which considers both.
  4. Profit Maximization avoids time value of money, but Wealth Maximization recognises it.
  5. Profit Maximization is necessary for the survival and growth of the enterprise. Conversely, Wealth Maximization accelerates the growth rate of the enterprise and aims at attaining the maximum market share of the economy.

Video: Profit Vs Wealth Maximization

Conclusion

There is always a contradiction between Profit Maximization and Wealth Maximization. We cannot say that which one is better, but we can discuss which is more important for a company. Profit is the basic requirement of any entity. Otherwise, it will lose its capital and cannot be able to survive in the long run. But, as we all know, the risk is always associated with profit or in the simple language profit is directly proportional to risk and the higher the profit, the higher will be the risk involved with it. So, for gaining the larger amount of profit a finance manager has to take such decision which will give a boost to the profitability of the enterprise.

In the short run, the risk factor can be neglected, but in the long-term, the entity cannot ignore the uncertainty. Shareholders are investing their money in the company with the hope of getting good returns and if they see that nothing is done to increase their wealth. They will invest somewhere else. If the finance manager takes reckless decisions regarding risky investments, shareholders will lose their trust in that company and sell out the shares which will adversely effect on the reputation of the company and ultimately the market value of the shares will fall.

Therefore, it can be said that for day to day decision making, Profit Maximization can be taken into consideration as a sole parameter but when it comes to decisions which will directly affect the interest of the shareholders, then Wealth Maximization should be exclusively considered.

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Comments

  1. Ganapathi says

    May 13, 2016 at 12:24 pm

    Good. update is required

    Reply
  2. IMNASUNEP says

    June 1, 2016 at 8:38 pm

    This helped me alot…..””THANK YOU”’

    Reply
  3. s.aakash says

    June 8, 2016 at 9:51 pm

    very beautiful explanation about profit maximization and wealth maximization.This article looks like even layman also can understands easily. Thanks For Your contribution to the society.

    Reply
  4. Mokarrom says

    August 27, 2016 at 1:10 pm

    The core concept of the problem is discussed here. Thanks the writer.

    Reply
  5. shaaziera says

    September 7, 2016 at 10:49 pm

    this help me a lot…thAnks……

    Reply
    • Reyaj says

      February 4, 2023 at 7:39 pm

      Thank you 💕 for this site
      once more, thank you so much.

      Reply
  6. Shiku Lucy says

    September 20, 2016 at 8:33 pm

    A wonderful defintion of the difference between profit and wealth maximization.
    It has been of great help. Thankyou .

    Reply
  7. Shubham says

    September 27, 2016 at 12:46 am

    This is very useful a lot of thanks to the author

    Reply
  8. Likae says

    May 25, 2017 at 6:34 pm

    This is really beneficial, I find it really helpful and now I have a clear understanding of what profit maximization means, thank you

    Reply
    • Surbhi S says

      May 26, 2017 at 9:40 am

      Thank you so much to all the readers for sharing your views with us. We are really glad to know that the article helped you. 🙂

      Reply
  9. Dipesh Limbu says

    November 12, 2017 at 11:09 pm

    Which one is better?

    Reply
    • Surbhi S says

      November 13, 2017 at 10:11 am

      Wealth maximization is better

      Reply
  10. Royston says

    March 22, 2018 at 4:51 pm

    Thanks…it helped a lot

    Reply
  11. Gareema Agarwal says

    May 30, 2019 at 3:21 am

    This was the only helpful article. Thankyou so much 🙂

    Reply
  12. JUNAID says

    November 8, 2019 at 10:52 am

    GOOD JOB I FULLY GOT IT AND UNDERSTAND

    Reply
  13. Kumar L says

    November 29, 2019 at 5:59 pm

    This is very helpful for me.for prepared report of seminar.tq

    Reply
  14. BUDDHIKA says

    November 25, 2020 at 12:21 pm

    THIS ARTICLE IS VERY HELPFUL

    Reply
  15. Moses Ogwal says

    December 19, 2020 at 12:16 pm

    Perfect, the explanation is so clear and understandable. Short decison profit maximization, long term decision that protect shareholders interest wealth maximization.

    Thank you agains

    Reply
  16. Preethi says

    March 31, 2022 at 4:34 pm

    Thank you it was helped me to understand the concept

    Reply
  17. Mohit Lahri says

    June 5, 2022 at 11:42 pm

    thanks a lot

    Reply

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