Financial Management is concerned with the proper utilisation 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.

There is always a dispute 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.

BASIS FOR COMPARISON PROFIT MAXIMIZATION

Concept The main objective of a concern is to earn a larger amount

of profit.

Emphasizes on Achieving short term objectives.

Consideration of Risks and Uncertainty No

Advantage Acts as a yardstick for computing the operational efficiency

of the entity.

Recognition of Time Pattern of Returns No

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.

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