Profit maximization and wealth maximization concepts explained

Profit maximization and wealth maximization are two different financial strategies that aim to increase a company’s value, but they do so in different ways.
In economics, profit maximization is a term which denotes the maximum profit to be earned by a company in given period of time. The concept of profit maximization focuses generally on short term projects. Its target is efficient allocation of resources, Optimum utilization that lead to maximum profit.  In the concept of profit maximization, the Investment, Financing and Dividend decisions of the company are oriented only to greatest profit.  The key drawbacks of Profit Maximization concept is that the profits focus is on short-term earnings, it ignores time value of money, and risk factors.

The fundamental objective of wealth maximization is to maximize the share value of the company in the equity market.  The wealth maximization concept not only takes care of the owners in return to their investments, builds up reserve for business expansion, it also takes care of other stake holders like interest of lenders (creditors) and employees.

The merits of Wealth Maximization, profit focus is on long term earnings. It takes into account the time value of money and the value of regular dividend payments. Further, Wealth maximization concept requires a company’s management team to continually search for the highest possible returns on funds invested in the business, while mitigating any associated risk of loss.

The key draw back of wealth maximization is many a times in pursuit of making greater profit,  the management may take decisions like  minimize its investment in safety equipment in order to save cash or invest minimal amounts in pollution control, thereby putting workers and the environment at risk.

Conclusion: Profit maximisation focuses on increasing a company’s profit in the short term. This involves optimizing revenue and minimizing costs to maximize the difference between the two. Profit maximization is considered the primary goal of a company because profit is a measure of efficiency.
Wealth maximisation focuses on increasing a company’s value in the long term. This involves considering the interests of all stakeholders, including cash flow, the time value of money, and risk and uncertainty factors. Wealth maximization helps businesses focus on long-term sustainability. An example of wealth maximization is when a company’s share price increases.