In Financial Management there are two main objectives; Profit Maximization and Wealth Maximization. The terms Profit Maximization and Wealth Maximization defines that Increasing the Profit and Wealth of the Organization and manages to maximize it. It’s the primary goal of any organization.
PROFIT MAXIMIZATION
Profit Maximization is the traditional approach, in this process Companies undergo to Determine the best Output and price levels in order to maximize its return. The company will usually adjust influential factors such as production costs, sale price, and output levels as a way of reaching its profit goal. The overall objective of business enterprises to earn at least satisfactory returns on the funds invested to sustain in the market for long periods.
WEALTH MAXIMIZATION
Wealth maximization is almost universally accepted and appropriate goal of a firm. According to wealth maximization, the managers should take decisions that maximize the net present value of the shareholders or shareholders’ wealth. The wealth maximization principle implies that the fundamental objective of a firm is to maximize the market value of its shares.
Difference between Profit Maximization and Wealth Maximization:
Let us see some of the differences between Profit Maximisation and Wealth maximization
| PROFIT MAXIMIZATION | WEALTH MAXIMIZATION |
|---|---|
| Profit Maximization is based on the increase of sales and profits of the organization. | Wealth Maximization is based on the cash flows into the organization. |
| Focused On | |
| Profit Maximization emphasizes on short term goals. | Wealth Maximization emphasizes on long term goals. |
| Time Value of Money | |
| Profit Maximization ignores the time value of money. Time value of money refers the money receivable today is more valuable than the money which is going to be recieved in future. | Wealth Maximization considers the time value of money. In wealth maximization, the future cash flows are discounted at an suitable discounted rate to represent their present value. |
| Risk | |
| Profit Maximization ignore the risk and uncertainity. | Wealth Maximization considers the risk and uncertainty. |
| Reliability | |
| In the new business environment Profit maximisation is regarded as unrealistic, difficult, inappropriate and immoral. | Wealth maximisation objectives ensures fair return to the shareholders, reserve funds for growth and expansion, promoting financial discipline in the management. |
| Objective | |
| Profit Maximization objective leads to exploiting employees and consumers. it also leads to inequalities and lowers human values. | Wealth Maximization provides efficient allocation of resource, It ensures the economic interest of the society. |
Conclusion:
The calculation of Profit and Wealth is calculated by the following
After calculating and getting the current profit and wealth status of the Organization the management make strategies according to the current market situation to maximize its profits and wealth. This process is called as the Profit Maximization and Wealth Maximization and every organization tries to implement the strategies they prepared to maximize their profits and wealth.
For further reading about Difference between Cost Accounting and Financial Accounting click here.
