What are the benefits of wealth maximization

Difference between profit maximization and wealth maximization

The financial management endeavors to use the funds in such a way that it increases the value plus the earnings of the company. Financial management is in place wherever money is involved. There are two primary goals of financial management: maximizing profit and maximizing wealth. Profit maximization As the name suggests, the company's profit should be increased Wealth maximization, aims to accelerate the value of the company.

Profit maximization is the primary goal of the group, as profit serves as a measure of efficiency. On the other hand, wealth maximization aims to increase the value of the stakeholders.

There is always a conflict over which of the two is more important. In this article you will find the main differences between profit maximization and wealth maximization in tabular form.

Content: Profit maximization versus asset maximization

  1. Comparison table
  2. definition
  3. Main differences
  4. Conclusion

Comparison table

Basis of comparisonProfit maximizationWealth maximization
conceptThe main goal of a corporation is to make a bigger profit.The ultimate goal of the group is to improve the market value of its shares.
Stressed onAchieve short term goals.Achieve long-term goals.
Consideration of risks and uncertaintiesNoYes
advantageServes as a benchmark for calculating the operational efficiency of the unit.Gain a large share of the market.
Recognition of the time pattern of returnNoYes

Definition of profit maximization

Profit maximization is the company's ability to produce maximum output from the limited input, or it uses a minimum amount to produce the specified output. It is referred to as the company's primary goal.

Traditionally it is recommended that the obvious motive of any business organization is to make a profit. This is vital to the success, survival and growth of the company. Profit is a long-term goal but has a short-term perspective; H. A fiscal year.

The profit can be calculated by subtracting the total costs from the total sales. By maximizing profits, a company can determine the input-output levels that will produce the highest profit. Therefore, an organization's finance officer should make a decision toward maximizing profits, although that is not the company's only goal.

Definition of wealth maximization

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

It is the company's multi-faceted goal and a highly recommended criterion for evaluating the performance of a business organization. This will help the company increase its market share, achieve leadership, maintain consumer satisfaction, and many other benefits are also provided.

It is generally accepted that the basic goal of the company is to increase the wealth of its shareholders, since they are the owners of the company, and they buy the company's shares with the expectation that after a certain return they will get some return be period. This states that the company's financial decisions should be made in such a way as to increase the net profit of the company's success. The value is based on two factors:

  1. Earnings per share
  2. Capitalization rate

Key differences between profit maximization and wealth maximization

The basic differences between profit maximization and wealth maximization are explained in the following points:

  1. The process by which the company is able to increase revenue capacity known as profit maximization. On the other hand, the company's ability to increase the value of its stocks in the market is known as wealth maximization.
  2. Profit maximization is a short term goal of the company, while the long term goal is wealth maximization.
  3. Profit maximization ignores risk and uncertainty. In contrast to Wealth Maximization, which takes both into account.
  4. Profit maximization avoids the time value of money, but wealth maximization recognizes it.
  5. Profit maximization is necessary for the survival and growth of the company. Conversely, Wealth Maximization accelerates the company's growth rate and aims to achieve the maximum market share of the economy.

Conclusion

There is always a contradiction between maximizing profit and maximizing wealth. We cannot say which is better, but we can discuss which is more important for a company. Profit is the basic requirement of a company. Otherwise he will lose his capital and will not be able to survive in the long run. As we all know, risk is always associated with profit, or in simple language, profit is directly proportional to risk, and the higher the profit, the higher the risk involved. In order to achieve greater profit, a finance manager must make such a decision that will increase the profitability of the company.

In the short term, the risk factor can be neglected, but in the long term the company cannot ignore the uncertainty. Shareholders invest their money in the company with the hopes of generating good returns and when they see that nothing is being done to increase their wealth. You will invest elsewhere. If the finance manager makes reckless decisions about risky investments, shareholders will lose confidence in the company and sell the shares, which will negatively affect the company's reputation and ultimately lower the market value of the shares.

It can therefore be said that profit maximization can be considered as the only parameter for daily decision-making. However, when it comes to decisions that directly affect the interests of shareholders, only wealth maximization should be considered.