mail-box-lead-generation

written by | August 9, 2022

Profit Maximization vs Wealth Maximization: What's the Difference?

×

Table of Content


All business strategies mainly focus on maximizing profits. You will find that not many people talk about maximizing their wealth. But, what's the difference between wealth and profit maximization? And which of the two should be your focus? 

Most business owners and other entrepreneurs will find themselves confused about these two particular terms as the main goals of their businesses. While many may assume that the intention and goals behind these two are the same, many differences affect businesses in several important ways. 

More often than not, when a business is started and run from the perspective of long-term success, there's always a need to be aware of how the company is doing. This article will explain what the different forms of profit maximization and wealth maximization mean and the key aspects that differentiate profit maximization and wealth maximization. 

Whether you own and run a business by yourself or have employees working under you, reading this blog will provide significant insights into how they relate to each other. Let's get started!

Did you know? Wealth maximizing for shareholders leads to the overall maximization of economic welfare.

What is the Difference Between Profit and Wealth?

Before knowing the difference between profit maximization and wealth maximization, we must understand what are the concepts of profit and wealth. These two terms might seem the same, but they are very different business concepts.

Profit refers to the amount of money you make on an investment or business venture, while wealth refers to and describes your overall financial situation and net worth. So, it may seem that making more profit is always good. But, there are some situations where increasing and solely relying on profits could prove to be detrimental to the health of the company and negatively affect the overall wealth in the long run.

Thus, if you are trying to make your first million or just make it to the end of the month, you would benefit from knowing what profit and wealth mean. Once you know what each term means and what significant aspects each holds, you can also start to compare their relative value in your life and business

Also Read: 3 Golden Rules of Accounting - Golden Rules of Accounts Explained with Examples

What is Profit Maximization in Financial Management?

The profit maximization principle is an important concept to understand, especially for any company that wants to maximise its profits. In financial management, profit maximization refers to finding the most profitable way to produce goods or provide any services. It simply means to maximise the profits of the company. 

Profit maximization, in economics, is one of the most common objectives of every company. Generally, profit in accounting and business terms means that part of the amount which arrived after revenue exceeds the cost of production involved

A simple illustration of profit maximization

Here, revenue is the money a business receives from selling its goods and services, and the cost is the money invested into production. In other words, this profit can be looked at as the net benefit earned for the shareholders by a company in the long run

What is Wealth Maximization in Financial Management?

Wealth maximization is a goal that all individuals and businesses should aim to achieve. Not only will it improve one's quality of life, but such wealth maximisation will help sustain the company's business in the long run. While wealth maximization is the company's objective, profit maximization is the objective of every company owner. 

In other words, wealth maximization is the maximization of the owner's wealth, and its value is calculated by the computation of stock value. Hence, maximizing wealth is comparatively different from maximizing profit.

Also Read: What is Double Entry System of Accounting ? Understanding Double Entry System

Profit Maximisation vs Wealth Maximization: The Differences

The prime consideration in managing every business is profitability. But only looking for profits would not make the business thrive in the long run. Therefore, this necessitates the combination of both profit maximization and wealth maximization in the company. 

Profit maximization is the management of financial resources through a range of activities to increase the profits of the company. Wealth Maximization manages financial resources in such a way that there is increase in the value of shares of a company’s shareholders.

Now let’s look into the differences between profit maximization and wealth maximization:

  1. Profit maximization is done by increasing the earning capacity of the company. Whereas, if the company's ability is focused on increasing the value of stocks for the shareholders and stakeholders, this is known as Wealth Maximization.
  2. While profit maximization is a short-term goal of any business, Wealth Maximisation is a long-term goal. 
  3. Risks and uncertainties do not form part of the entire process of profit maximization. While as Wealth Maximization considers and recognises the need to assess all possible risks and uncertainties.
  4. Profit maximization ensures the survival and growth of the business. In contrast, Wealth Maximization focuses on a company’s long-term growth rate by increasing its share in the market.
  5. The time value of money is not accounted for in the profit maximization, whereas wealth maximisation acknowledges it. According to the concept of time value of money, a certain amount of money is worth more now than it will be in the future. This is so because investment is the only way to make money grow. An opportunity is lost when an investment is postponed.
  6. Companies with profit maximization as their main goal focus on efficiency improvement with less cost and maximum profitable output. While in the case of the companies whose focus is wealth maximization, they heavily concentrate on increasing and improving the share market price of the company so that the value of the shareholders is increased.
  7. The benefits of profit maximization limit the company's growth to the current financial year, whereas the benefits of wealth maximization extend beyond the current year with a huge market share and higher share price, which ultimately benefits every stakeholder related to the company. 
  8. In the case of profit maximization, a company prefers to maximise its profits. It solely relies on the profits made from the difference between the total revenue and cost plus tax expenses of the current financial year. In contrast, a company with a wealth maximization goal aims to increase the value of the shareholders' wealth as they are the real owners of the company. It does so by investing its capital in the market with uncertain risks but with higher returns.

Also Read: What are Accounting Principles and Accounting Concepts - Here's a Detailed Overview

Profit Maximization vs. Wealth Maximization: Comparison Table

Points of Difference

Profit Maximization

Wealth Maximization

Definition

It is the management of financial resources through a range of activities to increase the profits of the company.

It manages financial resources in such a way that these increase the value of the overall stakeholders of the company. 

Process of Maximization

It is attained through the process of increasing the earning capacity of the company.

Wealth is maximized by increasing the value of stocks for the shareholders and stakeholders.

Term of the Goal

It is a short-term goal. 

It is a long-term goal.

Risks Involvement

Risks and uncertainties do not form part of the entire process of profit maximization.

It recognises the need for assessing all possible risks and uncertainties.

Benefits of Maximization

It ensures the survival and growth of the business.

It aims to stimulate and attain a substantial growth rate by enhancing its share market holding in the economy.

Time Value of Money

Profit maximization does not take into account the time value of money.

Wealth maximization acknowledges it.

Center of Focus

It focuses on efficiency improvement with less cost and maximum profitable output.

It heavily concentrates on increasing and improving the share market price of the company.

Extend and Time of Benefits

The growth of the company through profit maximization is limited to the current financial year.

The benefits of Wealth Maximization extend beyond the current year with a huge market share and a higher market price of the share.

Main Motive

A company with a profit maximization goal prefers to maximise and rely solely on the profits.

A company with a Wealth Maximization goal is to increase the value of the shareholders' wealth.

Also Read: What are Accounting Standards - List of Accounting Standards in Detail

Conclusion:

Maximizing profit typically means making the most profit from a firm's resources. This way, all companies can achieve their financial standing by making the best use of all the resources available at their disposal. On the other hand, maximizing wealth is only achieved with an increment in the rate of return on all such investments of the company. This can be done through investments in assets like real estate and stocks. 

In other words, you can maximise your profits by satisfying your customers and minimising costs. You can maximise wealth by making wise decisions and saving as much as you can. Of course, that’s a very basic explanation of both profit maximization and wealth maximization, but it should give you some idea. Profit maximisation and wealth maximisation seem similar but are very different from a business perspective. Profit maximization is about the present, and wealth maximization is about the future.

Hence, if a company wants to increase the value of its shareholders, Wealth Maximization is the goal that the company should strive for. Whereas Profit Maximisation is most preferable where the company desires to earn only maximum profits.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: Why is there a conflict between profit maximization and wealth maximization?

Ans:

The conflict between profit maximization and wealth maximization arises due to several differences. These differences could be due to the time value of money, objectives, benefits, or even risks and uncertainties involved.

Q: What is profit maximization. Cite some examples.

Ans:

Profit maximisation is the strategy through which a company sets its costs and pricing to generate the maximum possible profits. Increasing profits is the organisation's main objective. For example, finding less expensive raw materials than those being used now, looking for a supplier that provides better prices for inventory purchases and goods vendors that charge less for shipping.

Q: Why wealth maximization is the primary goal of the firm?

Ans:

Wealth maximization is the primary goal of the firm because it wants to improve and grow the value of the shareholders who have invested in the company by providing capital to it.

Q: What is profit maximization and wealth maximization in financial management?

Ans:

Profit maximization is when the sole focus of the organization is on increasing sales and profits. Whereas, in wealth maximization, the organization focuses on improving the share price in the market and thereby, leading to the growth of the shareholder’s wealth.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
×
mail-box-lead-generation
Get Started
Access Tally data on Your Mobile
Error: Invalid Phone Number

Are you a licensed Tally user?

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.