The common dilemma of wealth vs. profit is one that many businesses face. The objective of maximization of profit is an important goal, but what about wealth? It’s easy to get caught up in either one, and this can lead to a negative outcome. Luckily, today’s modern financial management methods have changed this problem, focusing more on maximizing wealth. This gives business owners a longer time horizon for evaluating their performance, and enables them to focus on sustainable performance.
The aim of profit maximization is to increase firm profits while wealth maximization is the process of maximizing the wealth of the stakeholder community. The difference between profit maximization and wealth maximization is that profit maximization considers more factors, including risk. Profit maximization involves managing the firm’s financial resources, while wealth maximization takes into account the risk of its operations and the risks it faces. As such, profits and wealth are closely related, but different goals require different approaches.
The objective of profit maximization is to maximize profits for shareholders while wealth maximization focuses on raising value for stakeholders. Profit maximization is focused on maximizing profits, while wealth maximization focuses on the company’s financial health and is more cohesive than profit maximization. When management and ownership are separated, the wealth maximization objective may face difficulties. Wealth maximization is useful for equity shareholders, but it is of little use for debenture holders. Profit maximization focuses on increasing sales, maximizing accounting profits, and increasing cash flow into the organization. Profit maximization ignores time value of money and is often linked to exploitation of employees and consumers.
