In the world of business, the main goal of any business organization or firm is to earn money. All business firms utilize various tactics to achieve their monetary goals. The most obvious tactics are providing good quality products or services, good marketing strategies that target their intended audience and listening to customer feedback. How much money affirm makes depends upon how well they implement these strategies. And wherever money is involved, financial management follows. A good financial management plan makes sure that funds are utilized in the right manner so that the total amount of earnings for the corporation increases. The goals of the financial management plan are to increase wealth maximization and profit maximization. Profit maximization is usually concerned with increasing the amount of profit a firm is making while wealth maximization deals with increasing value of the stakeholders. This article will explain the concept of profit maximization and wealth maximization in detail and will also analyze the key differences between the two terms.
What is profit maximization?
Profit maximization refers to the strategies that a business firm employs to manage its prices and costs with the main goal being the achievement of the highest profit possible. It is an opens secret that the main goal of any business organization is to earn profit through their services or products. Profit is the amount of money earned after subtracting marketing and production costs from the generated revenue. The success of a company is usually measured by how much profit that company generates. Good earnings and profit ensure the survival of the company and lays the foundation for its growth in the future. Most companies measure their profits over a shorter period of time like one financial year or even quarter of a year. Profit maximization results by producing maximum output (products or services) through limited input (minimum costs in production). Better services mean better sales and increase in overall profit that aids the company in its growth in the highly competitive marketplace of today. Profit maximization is one of the foremost objectives of any business organization.
What is wealth maximization?
Wealth maximization deals with the company’s practice to increase the value of its common stock over time. Wealth maximization ensures the increase in worth of shares owned by stockholders. There are multiple factors that can affect the market value of a company. The most obvious of these factors is the quality of the product and services a company provides. Better services or services that are not available anywhere else is sure to attract customers leading to increasing worth. The number of sales made by a company also plays a key role in this area plus the amount of goodwill the company holds in the eyes of the general public. As compared to generating profit, wealth maximization is usually the long-term goal of a company. It is often used to judge the performance of a company in its marketplace compared to other competing firms. Increase in the market value of a company’s stocks leads to multiple benefits like increase in market share among others. Any business firm should strive to increase the worth of its stockholders as they invest in shares of the company with expectations of return. Therefore, increase in shares leads to more investment which is necessary for the growth of a company.
From the above information, the following key differences can be identified by comparing wealth maximization and profit maximization:
- Profit maximization deals with the process of ensuring an increase in the overall profit of the company while wealth maximization deals with ensuring that the value of stakeholders of the company increases over the period of time.
- Profit maximization is usually a short-term goal of any business firm while wealth maximization is the long-term goal as it deals with increasing the values of shares owned by shareholders in the longer term.
- Profit maximization does not deal with any risks or uncertainties regarding the business model of the firm while wealth maximization considers both risks and uncertainties in the business model of the firm.
- Profit maximization prioritizes the increase of profit for a short term so any optional charges like research and advertisement are neglected while wealth maximization always pays for these discretionary charges.
- In Profit maximization, the pricing model is usually inclined towards increased product prices. As the goal is to maximize profit over a short-term period, the company reduces costs and increases prices to boost profit margins. On the other hand, wealth maximization may lead to the company dropping their prices to gain an edge in the competitive market to build a long-term market share and customer following.
It can be inferred that Profit maximization is a short-term business approach that deals with maximizing profit immediately but can be harmful in the longer run. This leads to ignoring the risk factors or any uncertainties. Wealth maximization deals with building a larger presence over a longer period by decreasing profit for the time being but ending with increased worth of business and a larger market share. This leads to better risk management as shareholders who invest in the company expect high returns in return for their investments.
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