Profit maximisation and wealth maximisation are two different approaches to business. The main focus for any business is profit maximisation, but many people need to realise that wealth maximisation is just as important. So, what’s the difference between the two? And which one should you focus on? The article will help you understand the terms in detail.
Difference between profit maximisation and wealth maximisation
Understanding the difference between profit maximisation and wealth maximisation, requires understanding the concepts of profit and wealth.
Wealth relates to and reflects your whole financial condition and net worth, whereas profit refers to the amount of money you make on an investment or business enterprise.
Increasing profits is always a desirable thing. However, there are some circumstances where raising earnings and relying primarily on them could be harmful to the company’s health and, in the long term, negatively impact total wealth.
Profit maximisation and wealth maximisation are the two main goals of financial management. As the name suggests, profit maximisation refers to increasing a company’s profits, whereas wealth maximisation strives to raise an entity’s value.
Because profit serves as a gauge of efficiency, maximising profit is the company’s primary goal. On the other hand, the goal of wealth maximisation is to increase the stakeholders’ value.
What is Profit Maximisation in Financial Management?
For any business that seeks to maximise its earnings, the profit maximisation principle is a crucial idea to comprehend. Finding the most profitable manner to produce goods or deliver services is profit maximisation in financial management. It simply means to increase the company’s profitability.
One of the most specific goals of every business is profit maximisation or maximisation of surplus value. In general, profit in accounting and business jargon refers to the portion of the money that remains after revenue surpasses the costs involved in production.
Here, cost refers to the money spent on production, while revenue refers to the money a business makes from selling its products and services. In other words, this profit can be viewed as the long-term net benefit received by shareholders from a corporation.
What is Wealth Maximisation in Financial Management?
Maximising wealth is something that both people and companies should strive to do.
Profit maximisation is the goal of every business owner, even though wealth maximisation is the company’s goal.
In other words, wealth maximisation aims to increase the owner’s wealth, whose value is determined by the stock price. As a result, maximising wealth differs from maximising profit.
Profit Maximisation vs. Wealth Maximisation: Comparison Table
|Details||Wealth Maximisation||Profit Maximisation|
|Principle||The definition of this term is the management of financial resources to raise the value of the company’s stakeholders.||It is described as the management of financial resources to boost the company’s profit.|
|Puts more emphasis on||Emphasises long-term stakeholder value growth for the business.||Prioritises short-term profit growth for the company.|
|Risk||It takes into account the risks and ambiguity that the business model of the organisation implies.||The company’s business model’s inherent risks and unpredictability are not taken into account.|
|Application||It contributes to increasing a firm’s value, which could result in the company gaining more market share.||It assists in achieving efficiency in the day-to-day operations of the firm to maximise profitability.|
|Understanding Time Patterns of Returns||Yes||No|