Understanding the difference between profit maximization vs wealth maximization is often difficult for many finance and accounting students. So today we are going to explain this difference in detail:
What is profit maximization?
Profit maximization is the process by which a company maximizes its long-term profit. Profit maximization involves maximizing profits on all products and services produced by the firm. Profit maximization is a concept that has been used in accounting since the early 20th century. It was first popularized by Henry Ford, who argued that a company should seek to make more money from each dollar paid to it for goods or services produced.
In order for a company to maximize profits, it must consider both short-term and long-term goals when making business decisions. The short-term goal of profit maximization is to increase sales volume and market share in order to maximize profits per unit of sales. The long-term goal of profit maximization is to produce as many units of the product as possible at the lowest possible cost per unit of production. It is important for companies to make decisions based on what will have the greatest impact on their profits over time rather than focusing solely on immediate gains or losses.
Profit maximization can be achieved in various ways by firms. For example, a firm may increase its sales by developing new products or services, offering better prices to customers (possibly through price wars), and/or making itself more attractive to customers through advertising campaigns and promotional events. In the short term, this can be achieved by increasing sales or reducing costs. In the long term, it can be achieved by improving product quality or reducing production costs.
What is wealth maximization?
The primary goal of wealth maximization is to increase profits for shareholders. It is focused on maximizing returns to investors in the form of dividends and share buybacks as well as overall return on investment (ROI).
In financial terms, wealth maximization refers to how well a company is able to convert its resources into profits. This can happen through either increasing sales or decreasing costs. If a company can find ways to increase sales and decrease costs, then it will have an advantage over other companies in that sector that do not have these advantages.
Any wealth maximization activity is targeted at increasing the amount of money and assets owned by a company’s shareholders while keeping other factors constant. This goal is usually expressed in terms of growth or expansion, where a company increases its earnings per share (EPS) or total shareholder return (TSR).
A company’s earnings per share are calculated by dividing net income by the number of shares outstanding. Its TSR is an aggregate measure of how well each stock performed relative to its peers over time.
How is profit maximization different from wealth maximization?
Wealth maximization is primarily targeted at managing financial resources such that there is an increment in the value for the stakeholders. However, in profit maximization, the resources are managed to increase the total profit of the company. This also relates to the difference between cost accounting and financial accounting. This is because in profit maximization cost accounting plays a central role whereas, in wealth maximization, financial accounting is the key concern.