Profit Maximisation and Wealth Maximisation

Anshuman Biswal

Anshuman Biswal

Senior Member Of Technical Staff at VMware

Published Jun 26, 2016

The objective of a Financial Management is to design a method of operating the Internal Investment and financing of a business firm. The two widely used approaches are Profit Maximization and Wealth maximization.

Turn a profit maximization: Profit maximization is considered equally the goal of financial management. In this approach actions that increase the profits should be undertaken and the actions that subtract the profits are avoided. The term 'profit' is used in ii senses. In one sense it is used as an possessor oriented. In this concept information technology refers to the corporeality and share of national Income that is paid to the owners of business. The second fashion is an operational concept i.e. profitability. It is the traditional and narrow approach, which aims at, maximizes the profit of the business organization. The Ultimate aim of the business business is earning turn a profit, hence, it considers all the possible means to increase the profitability of the concern. Profit is the parameter of measuring the efficiency of the business concern. So it shows the unabridged position of the business organization concern. and hence Turn a profit maximization objectives help to reduce the risk of the business. Its main aim is to earn turn a profit. In this criteria Profit is the primary parameter of business operation. It reduces the risk of business concern concern. In this criteria profit is the main source of finance and profitability meets the social needs.

Some of the unfavorable arguments of profit maximizations are that it leads to exploiting workers and consumers.  It besides creates immoral practices such every bit corrupt exercise, unfair trade practice, etc.  Information technology also creates inequalities among the pale holders such as customers, suppliers, public shareholders, etc.

Some of the drawbacks of turn a profit maximizations are

  1. In Profit Maximization, profit is not divers precisely or correctly. Information technology creates some unnecessary opinion regarding earning habits of the business organization business concern. For example, profit may be long term or short term. It may be total turn a profit or rate of profit. It may be net turn a profit earlier tax or net profit after revenue enhancement. Information technology may be render on full upper-case letter employed or full avails or shareholders equity and and so on.
  2. It ignores the time value of money:Turn a profit maximization does not consider the time value of money or the net nowadays value of the greenbacks inflow. It leads certain differences betwixt the actual cash arrival and net present cash catamenia during a item menstruation. When the profitability is worked out the bigger the better principle is adopted as the decision is based on the total benefits received over the working life of the asset, Irrespective of when they were received.
  3. Information technology ignores the quality aspects of benefits which are associated with the financial course of action. The term 'quality' means the degree of certainty associated with which benefits tin be expected. Therefore, the more certain the expected return, the higher the quality of benefits. Equally against this, the more uncertain or fluctuating the expected benefits, the lower the quality of benefits.
  4. It ignores risk: Profit maximization does non consider take chances of the business organization concern. Risks may be internal or external which will affect the overall performance of the business organization.

Wealth Maximization: Wealth maximization is one of the modernistic approaches, which involves latest innovations and improvements in the field of the business organisation business organization. The term wealth means shareholder wealth or the wealth of the persons those who are involved in the business business concern. Wealth maximization is as well known as value maximization or net present worth maximization. This objective is a universally accepted concept in the field of business. It removes technical disadvantages of the turn a profit maximization. Wealth maximization is superior to the turn a profit maximization because the main aim of the business concern under this concept is to improve the value or wealth of the shareholders.  Wealth maximization considers the comparison of the value to price associated with   the business concern. Total value detected from the total cost incurred for the concern operation. It provides excerpt value of the business organization business organisation. This concept considers both time and take a chance of business concern concern. This criteria provides efficient allocation of resources and it also ensures the economic interest of the order. The wealth maximization benchmark is based on cash flows generated and not on accounting turn a profit. The computation of cash inflows and cash outflows is precise. Wealth maximization can be activated simply with the help of the profitable position of the business. So The goal of maximizing the value of the stock avoids the problems associated with the different goals we discussed higher up.in a uncomplicated language a good financial decisions increase the market value of the owners' equity and poor financial decisions decrease it. And then the financial director best serves the owners of the business by identifying appurtenances and services that add value to the firm considering they are desired and valued in the free marketplace. So information technology is a long term concept based on the cash flows rather than profits and hence there can exist a state of affairs where a business makes losses every twelvemonth but there are cash profits because of heavy depreciation which indirectly suggests heavy investment in fixed avails and that is the real wealth and it takes into account the time value of money so is universally accepted.

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