Wealth Maximization vs Profit

Maximization – Key Differences

Both these terms are significant in the context of financial
management, but their difference is a must to know to ensure
businesses know which one to focus on to meet their objectives.

Let us, therefore, look at the critical differences between the two
below: –

#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 the company who have invested their
capital, given the risk inherent in the business of the company with
expectations of high returns.
• Wealth maximization is a long-term objective that gradually happens
and hence, the management is always ready to pay for the
discretionary expenses, including research and maintenance.
• For effective wealth maximization, the companies normally choose to
reduce the prices and have a strong backup in the form of market
share.
• A wealth-oriented firm is focused on making expenses keeping in
mind the long-term sales objectives. It believes that such expenditure
will help increase the value of the business.
• Companies aiming to maximize wealth focus on risk mitigation
measures to avoid risk of losses in future.

#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.
• When it is about maximizing profits for a business, companies aim to
make instant profits. Hence, they choose not to pay for discretionary
expenses, which include advertising costs, research and maintenance
expenditure, etc.
• Unlike wealth maximization, profit maximization favors the choice of
increasing product prices to keep the margins as high as possible.
Hence, the companies do so to ensure more and more instant profit
making.
• Businesses aiming to maximize profits have a focus on managing their
existing level of sales efficiently and productively. In short, they
emphasize short-term sales goals for profits, which sometimes
hampers their long-term goals.
• To show they are earning profits, companies choose to minimize
expenditure, which makes them unprepared for the hedges required
at a later stage.

Pros And Cons Of Profit Maximisation

To understand which is better, profit maximisation vs wealth maximisation, you
need to learn the pros and cons of both strategies.

Here are the pros of profit maximisation:

Helps develop a business’s financial sustainability.

Facilitates earnings growth, which can increase shareholder value.
Promotes effective resource allocation, which improves operational efficiency.
Enables companies to develop a strong financial foundation, which is key to
surviving in a competitive market.
The cons of profit maximisation are as follows:

Profit maximisation strategies can often violate social responsibility and ethical
standards. Such activities can severely damage an organisation’s reputation and
lead to social or legal consequences.
Such tactics only focus on the short term. They do not include aspects like
customer satisfaction, R&D, staff training, etc., which are essential for long-term
success.
Businesses may be tempted to go for high-risk projects in order to maximise
profits, which can result in heavy losses.

Pros And Cons Of Wealth Maximisation

Mentioned below are the pros of wealth maximisation:

Helps businesses focus on long-term sustainability.

Focuses more on cash flow rather than profits. Now, cash flows are more definite,
enabling companies to avoid the ambiguity that usually comes with accounting
profits.
Takes into account the time value of money. Thus, future cash flows are
discounted at an appropriate rate in order to appropriately represent their
current value.
Considers risk and uncertainty factors while computing the discount rate, leading
to more accurate results.
The cons of following wealth maximisation strategies are as follows:

Largely depends on a business’s profits.

Wealth-maximising tactics are mostly prospective; they lack proper description
and clarity.
It can make other business goals suffer.
 Profit Maximization Wealth Maximization
Short term objective Long term objective
It increases the quality No compromise with the quality
To increase investors attraction