Profit and Wealth Maximization

Financial Management is concerned with the proper utilization of funds in such a manner that it will
increase the value plus earnings of the firm. Wherever funds are involved, financial management is
there. There are two paramount objectives of the Financial Management: Profit Maximization and
Wealth Maximization. Profit Maximization as its name signifies refers that the profit of the firm
should be increased while Wealth Maximization, aims at accelerating the worth of the entity.
Profit maximization is the primary objective of the concern because of profit act as the measure of
efficiency. On the other hand, wealth maximization aim at increasing the value of the stakeholders.
There is always a conflict regarding which one is more important between the two. So, in this article,
you will find the significant differences between Profit Maximization and Wealth Maximization, in
tabular form.
Content: Profit Maximization Vs Wealth Maximization
1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion
Comparison Chart
BASIS FOR COMPARISON PROFIT MAXIMIZATION WEALTH MAXIMIZATION
Concept The main objective of a The ultimate goal of the

concern is to earn a larger concern is to improve the
amount of profit. market value of its shares.
Emphasizes on Achieving short term Achieving long term

objectives. objectives.
Consideration of Risks and No Yes

Uncertainty
Advantage Acts as a yardstick for Gaining a large market share.

computing the operational
efficiency of the entity.
Recognition of Time Pattern of No Yes

Returns
Definition of Profit Maximization
Profit Maximization is the capability of the firm in producing maximum output with the limited input,
or it uses minimum input for producing stated output. It is termed as the foremost objective of the
company.
It has been traditionally recommended that the apparent motive of any business organisation is to
earn a profit, it is essential for the success, survival, and growth of the company. Profit is a long term
objective, but it has a short-term perspective i.e. one financial year.
Profit can be calculated by deducting total cost from total revenue. Through profit maximization, a
firm can be able to ascertain the input-output levels, which gives the highest amount of profit.
Therefore, the finance officer of an organisation should take his decision in the direction
of maximizing profit although it is not the only objective of the company.
Definition of Wealth Maximization
Wealth maximizsation is the ability of a company to increase the market value of its common stock
over time. The market value of the firm is based on many factors like their goodwill, sales, services,
quality of products, etc.
It is the versatile goal of the company and highly recommended criterion for evaluating the
performance of a business organisation. This will help the firm to increase their share in the market,
attain leadership, maintain consumer satisfaction and many other benefits are also there.
It has been universally accepted that the fundamental goal of the business enterprise is to increase
the wealth of its shareholders, as they are the owners of the undertaking, and they buy the shares of
the company with the expectation that it will give some return after a period. This states that the
financial decisions of the firm should be taken in such a manner that will increase the Net Present
Worth of the companys profit. The value is based on two factors:
1. Rate of Earning per share
2. Capitalization Rate
Key Differences Between Profit Maximization and Wealth Maximization
The fundamental differences between profit maximization and wealth maximization is explained in
points below:
1. The process through which the company is capable of increasing earning capacity known as
Profit Maximization. On the other hand, the ability of the company in increasing the value of
its stock in the market is known as wealth maximization.
2. Profit maximization is a short term objective of the firm while the long-term objective is
Wealth Maximization.
3. Profit Maximization ignores risk and uncertainty. Unlike Wealth Maximization, which
considers both.
4. Profit Maximization avoids time value of money, but Wealth Maximization recognises it.
5. Profit Maximization is necessary for the survival and growth of the enterprise. Conversely,
Wealth Maximization accelerates the growth rate of the enterprise and aims at attaining the
maximum market share of the economy.
Conclusion
There is always a contradiction between Profit Maximization and Wealth Maximization. We cannot
say that which one is better, but we can discuss which is more important for a company. Profit is the
basic requirement of any entity. Otherwise, it will lose its capital and cannot be able to survive in the
long run. But, as we all know, the risk is always associated with profit or in the simple language profit
is directly proportional to risk and the higher the profit, the higher will be the risk involved with it.
So, for gaining the larger amount of profit a finance manager has to take such decision which will
give a boost to the profitability of the enterprise.
In the short run, the risk factor can be neglected, but in the long-term, the entity cannot ignore the
uncertainty. Shareholders are investing their money in the company with the hope of getting good
returns and if they see that nothing is done to increase their wealth. They will invest somewhere
else. If the finance manager takes reckless decisions regarding risky investments, shareholders will
lose their trust in that company and sell out the shares which will adversely effect on the reputation
of the company and ultimately the market value of the shares will fall.
Therefore, it can be said that for day to day decision making, Profit Maximization can be taken into
consideration as a sole parameter but when it comes to decisions which will directly affect the
interest of the shareholders, then Wealth Maximization should be exclusively considered.

Profit and Wealth Maximization

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Financial Management is concerned with the proper utilization of funds in such a manner that it will

Content: Profit Maximization Vs Wealth Maximization

BASIS FOR COMPARISON PROFIT MAXIMIZATION WEALTH MAXIMIZATION

Concept The main objective of a The ultimate goal of the

Emphasizes on Achieving short term Achieving long term

Consideration of Risks and No Yes

Advantage Acts as a yardstick for Gaining a large market share.

Recognition of Time Pattern of No Yes

Definition of Wealth Maximization

1. Rate of Earning per share

Key Differences Between Profit Maximization and Wealth Maximization

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