GOAL OF WEALTH MAXIMIZATION AND PROFIT MAXIMIZATION
The goal of Wealth maximization A company has the ability to increase the market value of its general stock over time. The market value of the firm is based on many factors like their services, sales, goodwill, quality of products, etc.
This is a versatile goal of wealth maximization of the company and recommended criterion for evaluating the performance of a business organization. This will help the firm to increase its stake in the market, gain leadership, maintain consumer satisfaction and also have many other benefits.
It has been universally acknowledged that the basic aim of the business venture is to increase the property of its shareholders because they are the owners of the venture, and they buy shares of the company with this hope that it will give some returns.
It states that the firm’s financial decisions should be taken in such a way that the net present value of the company’s profit increases.
Profit maximization is the ability of the firm in maximum output with limited input, or it uses the minimum input for the said output. It is called the company’s most important purpose.
Traditionally it has been recommended that the obvious objective of any business organization is to profit, it is essential for the company’s success, survival, and development. The benefit is a long-term objective, but it has a short-term perspective, i.e. a financial year.
The profit can be calculated by cutting total cost from total revenue. Through profit maximization, a firm may be able to detect input-output levels, which gives the highest amount of profit.
Therefore, the finance officer of an organization should make a decision in order to maximize profit, although this is not the sole purpose of the company.
If you read “what is the goal of wealth maximization and profit maximization” then here is the next paragraphs about Profit maximization vs wealth maximization and Advantages of wealth maximization.
PROFIT MAXIMIZATION VS WEALTH MAXIMIZATION
Significant differences between the Goal of wealth maximization and profit maximization. Profit Maximization vs. Wealth Maximization is a very common but very important dilemma. Financial management has come a long way from focusing on a traditional perspective to a modern perspective.
Profit maximization vs wealth maximization is given in the points given below:
- Through which process the company is able to increase the earning potential, it is known as profit maximization. On the other hand, the company’s ability to increase the value of its stock in the market is known as the maximum amount of money.
- Profit maximization ignores risk and uncertainty. Unlike Wealth Maximization, which considers both.
- Profit maximization is a short term objective of the firm whereas the long-term objective is money maximization.
- Profit maximization avoids the time value of money, but Wealth Maximization recognizes it.
- Advantage maximization is essential for the survival and development of the enterprise. On the contrary, Goal Of Wealth Maximization accelerates the growth rate of the enterprise and its objective is to achieve the maximum market share of the economy.
- Risk management – Under profit maximization, management minimizes expenditure, so it is less likely to pay for hedges which can reduce the risk profile of the organization. A wealth-focused company works on risk mitigation, so the risk of its loss is reduced.
- Pricing strategy – When the management wants to maximize profits, then the maximum price is given to the products to increase the margin. To make a market share, in the long run, a wealth-oriented company can reverse, to reduce prices.
- capacity planning – A profit-oriented business will spend enough on its productive capacity to handle current sales levels and perhaps short-term sales forecasts. A wealth-oriented business will spend more heavily on the capacity to meet its long-term sales estimates.
So, here we are giving you an awesome paragraph about profit maximization vs wealth maximization. I hope you learn something about this. So, next, we are going to talk about the Advantages of wealth maximization.
Advantages of wealth maximization
Wealth Maximization means promoting fame, goodwill, prestige by emphasizing the consumer preference and wealth of society. Providing importance to the consumer’s priority organization, the questions related to the product are received, so the customer needs to change the product with this reaction which is innovative, after-sales services activities, etc. have been implemented. Below, I’m giving some advantages of wealth maximization.
Wealth Maximization model is a better model because it eliminates all the shortcomings of profit maximization as the goal of financial decision. Advantages of wealth maximization –
- The maximum utilization of funds is based on cash flows and not on profits. Unlike profits, cash flow is accurate and definite and therefore avoid any ambiguity associated with accounting profit. Benefits can be easily manipulated, if there is any change in accounting perception/policy, then profit is changed. The method of depreciation changes, the profit changes. This is not the case with cashflows.
- Profit maximization offers lower term view than wealth maximization. Short-term profit maximization can be achieved by managers at the expense of long-term sustainability of the business.
- The maximum use of money considers the time value of money. This is important because we all know that there is not a single dollar and a year later dollars equal value. In the goal of wealth maximization, future cash flows are exempted at a reasonable discounted rate to represent their current value. Let’s say that two projects are A and B, Project A is more profitable, but it is going to generate profit in the long term, while Project B is less profitable, but it is capable of generating returns in shorter periods. In case of uncertainty, Project B can be better. So, the timing of returns is ignored by profit maximization, it is considered in funding maximization.
- Considering the risk-and-uncertainty factors while considering the maximization criteria, the discount rate. The discount rate reflects both time and risk. The uncertainty is high, the discount rate is high and vice versa.
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