Wealth Maximization vs Profit Maximization

The key difference between Wealth and Profit Maximization is that Wealth maximization is the
company’s long-term objective to increase the value of the stock of the company, thereby
increasing shareholder’s wealth to attain the leadership position in the market. In contrast, 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 activities that manage the financial resources to increase the
stakeholders’ value. In contrast, Profit Maximization consists of the activities that manage the
financial resources intending to increase the Company’s profitability.

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. It recognizes the time value of
money given the business environment of the operating entity. It is mainly concerned with the
company’s long-term growth and hence is concerned more about fetching the maximum chunk
of the market share to attain a leadership position.

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 primarily concerns
the company’s survival and growth in the existing competitive business environment.

Key Differences

The critical differences between are as follows –

#1 – Wealth Maximization

 Wealth Maximization 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 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 translates to a larger market share and higher share price,
ultimately benefiting all the stakeholders.
 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

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Wealth Maximization vs Profit Maximization

the company who have invested their capital, given the risk inherent 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 this form of financial management, companies mainly have a short-term
perspective when it comes to earning profits, which 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 profit,
companies can either increase their revenue or minimize their cost structure. It may
need some analysis of the input-output levels to diagnose the company’s operating
efficiency and identify the key improvement areas where processes could be tweaked or
changed in their entirety to earn larger profits.\

Comparative Table

Basis Wealth Maximisation Profit Maximisation

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Wealth Maximization vs Profit Maximization
Definition  It is defined as managing financial resources to
increase the value of the company’s stakeholders.
Focus Focuses on increasing the value of the company’s
stakeholders in the long term.
Risk It considers the risks and uncertainty inherent in the
company’s business model.
Usage It helps achieve a larger value of a company’s
worth, which may reflect in the company’s
increased market share.
It is defined as the management of financial
resources to increase the company’s profit.
Focuses on increasing the profit of the company in
the short term.
It does not consider the risks and uncertainty
inherent in the company’s business model.
It helps achieve 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 survive against all the odds of the business and requires
some short-term perspective to achieve the same. Though the company can ignore the risk
factor in the short term, 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 considers 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 recognizing the value of
regular dividends. So, a company can make 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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