Profit Maximisation vs Wealth Maximisation:

 

Profit Maximisation vs Wealth Maximisation: Difference Between Profit and Wealth Maximisation

When it comes to financial goals, businesses usually have two financial management strategies – profit maximisation and wealth maximisation. In order to successfully run a company, entrepreneurs must understand both and apply the appropriate one as per their business objective. 

So, if you are a business owner, keep reading this article. We will cover in-depth on profit maximisation vs wealth maximisation, enabling you to make an informed choice.  

What Is Profit Maximisation?

Profit maximisation refers to strategies which can help a business generate maximum returns with minimum input. It includes the most profitable ways in which a company can manufacture goods or offer its services in order to increase the revenue left after deducting the cost of production. 

The main objective of profit maximisation is to increase the company’s value so that shareholders and investors get a profitable return on investment. 

Pros And Cons Of Profit Maximisation

To understand which is better, profit maximisation vs wealth maximisation, you need to learn the pros and cons of both strategies. 

Here are the pros of profit maximisation:

• Helps develop a business’s financial sustainability. 
• Facilitates earnings growth, which can increase shareholder value. 
• Promotes effective resource allocation, which improves operational efficiency.
• Enables companies to develop a strong financial foundation, which is key to surviving in a competitive market. 

The cons of profit maximisation are as follows:

• Profit maximisation strategies can often violate social responsibility and ethical standards. Such activities can severely damage an organisation’s reputation and lead to social or legal consequences. 
• Such tactics only focus on the short term. They do not include aspects like customer satisfaction, R&D, staff training, etc., which are essential for long-term success. 
• Businesses may be tempted to go for high-risk projects in order to maximise profits, which can result in heavy losses.     

What Is Wealth Maximisation?

Wealth maximisation refers to the strategies adopted by companies to improve their common stock market value in the long run. It focuses on factors like product and service quality, sales, goodwill, customer satisfaction, etc. 

These tactics also take into account the business’s overall performance and aim to increase its market share, penetrate new markets, achieve a leading position and expand its customer base.   

Additionally, it includes maximising the wealth of shareholders who have invested in the company by increasing its earnings per share rate and capitalisation rate.  

Pros And Cons Of Wealth Maximisation

Mentioned below are the pros of wealth maximisation:

• Helps businesses focus on long-term sustainability.
• Focuses more on cash flow rather than profits. Now, cash flows are more definite, enabling companies to avoid the ambiguity that usually comes with accounting profits. 
• Takes into account the time value of money. Thus, future cash flows are discounted at an appropriate rate in order to appropriately represent their current value. 
• Considers risk and uncertainty factors while computing the discount rate, leading to more accurate results.   

The cons of following wealth maximisation strategies are as follows:

• Largely depends on a business’s profits. 
• Wealth-maximising tactics are mostly prospective; they lack proper description and clarity. 
• It can make other business goals suffer. 

Difference Between Profit Maximisation And Wealth Maximisation

Find the difference between profit maximisation vs wealth maximisation in the table below:

Factors	Profit Maximisation	Wealth Maximisation
Motive	Maximising a company’s profits.	Maximising the wealth of shareholders.
Strategy Time Period	Short term	Long term
Maximisation Procedure	Increasing the business’s earning capacity.	Enhancing stock value for stakeholders and shareholders.
Main Focus	Increasing a company’s capacity to generate maximum returns with the minimum input.	Improving the business’s share price.
Time Value of Money	Does not acknowledge the time value of money.	Takes into account the time value of money.

Profit Maximisation vs Wealth Maximisation Example

Now, to gain a better understanding of the two concepts, here is a profit maximisation vs wealth maximisation example:

Profit Maximisation Example

Aggrawal Paper Mills Pvt Ltd. aims to maximise its profits. Thus, the company needs to follow tactics that can reduce its input costs and maximise its efficiency. Thus, it can do the following:

• Reduce the cost of goods sold by opting for cheaper raw materials, reducing labour costs and shipping fees and finding suppliers with better rates.  
• Explore methods to increase the efficiency of its operations. 
• Expand sales windows via e-commerce platforms, increase product availability and adopt new marketing strategies. 
• Cut down overhead costs by moving business to an area with cheaper rents, lower maintenance costs and adopt measures which help save on electricity bills.  

Wealth Maximisation Example

Let’s say Anand Milk Products Ltd. wishes to maximise the wealth of its shareholders. In this regard, the company can go for the following strategies:

• Invest in training its employees so that they do a better job in manufacturing goods or providing services. 
• Expand its R&D capabilities in order to develop new offerings. 
• Take note of customer grievances and resolve them to promote market goodwill. 
• Explore new markets to increase the company’s overall share in the industry segment. 

Profit Maximisation vs Wealth Maximisation: Which Is Better?

If we consider profit maximisation vs wealth maximisation, both financial management strategies have their pros and cons. Thus, the answer to the question of which is better will solely depend upon the business's financial objectives. 

For example, if a company needs to establish its financial base in the market or ramp up its revenue to carry out future expansion plans, it needs to adopt profit maximisation. The reason is to achieve such objectives, it will need a large amount of funds, which can only come by maximising profits. 

However, if an organisation wishes to become the market leader in a particular segment and enhance the wealth of its shareholders, wealth maximisation is the way to go. Such strategies mainly focus on cash flows and take the time value of money into consideration, which can help the business achieve such objectives.   

Conclusion

Now that you have a clear idea of profit maximisation vs wealth maximisation, you can implement the appropriate financial management strategy for your business. However, do remember that none of these strategies are foolproof. 

Thus, always consider having a backup option in case the strategy you are pursuing does not work out.