Profit Maximization vs Wealth Maximization
| Feature | Profit Maximization | Wealth Maximization |
|---|---|---|
| Focus | Short-term earnings | Long-term value |
| Planning Horizon | Immediate profits | Long-term growth |
| Risk Management | Minimizes expenses, avoids hedges | Works on risk mitigation |
| Pricing | High prices for maximum margins | Lower prices to build market share |
| Capacity | Enough for current sales | More for long-term projections |
While profit maximization is a short-sighted approach, wealth maximization focuses on long-term value creation for shareholders. Wealth maximization addresses the shortcomings of profit maximization by:
- Considering time value of money
- Accounting for risk and uncertainty
- Using a clear and unambiguous cash flow-based approach.
Therefore, wealth maximization is the most appropriate and effective objective of financial management, guiding decisions to increase the long-term value of the business.
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