Financial management is about utilizing the funds to increase the profit of the business. Profit and wealth are the primary objects of financial management. Profit maximization means increasing the profit of the company whereas wealth maximization is to rev the value of an entity. Increasing the profit of the company is the primary goal as it measures efficiency while wealth maximization is for increasing the stakeholder value. Let us talk about profit maximization vs wealth maximization.
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Profit maximization refers to the process of increasing the profit-earning capacity of the company. This is restricted to the accounting analysis of the financial year and is a short-term goal. It doesn’t care about the risks and avoids the money’s time value. Its concern is the company’s survival and growth in the competitive environment.
Profit is the basic foundation of the company to accrue funds in the shareholder’s equity. It helps the company survive in all the odds of the business and it needs only some short-term perspectives to achieve it. Sometimes the company ignores the risk factors in the short term but it cannot do the same in the long term as shareholders have invested the money. Shareholders expect high returns on the investment made.
There are both pros and cons of the Profit Maximization. Let’s have a look at them:
Develops the financial sustainability of the business.
Violates social responsibility and ethical standards.
Increases shareholder value by facilitating earnings growth.
Focus on the short term.
Improves operational efficiency by promoting effective resource allocation.
Go on high-risk projects to maximize profits.
Develops a strong financial foundation.
Wealth maximization refers to the ability of the company to increase the value of its stock for the stakeholders. It is a long-term goal that involves various factors like sales, products, services, market share, and more. It knows the time value of money that is given to the business environments. It is connected with the long-term growth of the company and focuses on getting the maximum chunk of the market share for leadership positions.
It is concerned with shareholders, creditors, lenders employees, and stakeholders. It maintains the market price of the company and recognizes the value of regular dividends. Decisions for maximizing profits can be taken at any time but when the decisions are about shareholders then Wealth Maximization is a way to go.
Focuses on long-term sustainability.
Depends on the profit of the business.
Focuses on cash flow rather than profits.
Can make business goals suffer
Takes into account the time value of money.
Tactics are prospective as they lack clarity.
Delivers accurate results by considering risk and uncertainty factors.
Differences Between Profit Maximization and Wealth Maximization
Profit Maximization means operating efficiently for producing maximum output with less input or for producing the same output using less input. It is the crucial goal of the company for growth and survival in the cut-throat competitive business world.
Most financial management firms have a short-term perspective when it comes to profits and is limited to the current financial year.
Profit is what remains out of the total revenue earned after paying all the expenses for the financial year. To increase profit, some companies increase their revenue or cut their cost structure. It needs analysis of the input-output levels for diagnosing the efficiencyandidentifying the improvement areas for earning more profits.
Many companies want to make instant profits so they choose not to pay for expenses like advertising, research and maintenance expenses, and more.
Profit maximization favors the need to increase product prices to keep the margins as high as possible it is not like wealth maximization. This is the best way to make profits.
The businesses focus on maximizing profits for managing sales and productivity. They focus on short-term goals which sometimes create problems for long-term goals. These companies minimize expenditure and they become unprepared for the hurdles coming in their way.
Wealth maximization increases the value for the stakeholders of the company by increasing the market price of the company’s shares. It depends on various tangible and intangible factors like sales, quality of products or services, and more.
These are achieved in the long-term as the needs company to get a leadership position that reaches a larger market share and high share price giving benefits to stakeholders.
The goal of the business should be universally accepted and the wealth of the shareholders of the company as they are the real owners of the company with high returns expectations.
Companies aiming to maximize wealth focus on risk mitigation measures to avoid the risk of losses in the future.
It is a long-term objective that is ready to pay for expenses like research and maintenance.
For maximization of the wealth companies choose to reduce the prices and have market shares as the backup.
Some companies focus on expenses by keeping in mind the long-term sales objectives. They believe that these expenditures will increase the value of the business.
Which is Better- Profit Maximization or Wealth Maximization
Both profit maximization and wealth maximization have pros and cons. So, the answer depends on the financial objectives of the business.
For instance, if one company needs to establish its financial base in the market or earn revenue for the future it may choose profit maximization. The reason behind choosing is that the company needs funds and this can come by maximizing profits.
If a company wants to become the market leader in their field and increase the wealth of the shareholders then wealth maximization is the option. These work on cashflows and take the time value of money seriously as it helps businesses in achieving their objective. It is quite difficult to know which is better Profit Maximization vs Wealth Maximization.
Profit maximization is a short-term strategy for business that can be detrimental in the long run while wealth maximization is good for the long term. It also increases the worth of the company and gives amazing results. Hence, profit maximization vs wealth maximization is an ongoing debate. Choose wisely according to the needs or demands of the company. But wealth maximization wins the race according to the experts.