PROFIT MAXIMIZATION - It is one of the basic objectives of financial management. Profit maximization aims at improving profitability, maintaining the stability and reducing losses and inefficiencies.
Profit in this context can be seen in 2 senses.
1. Profit maximization for the owner.
2. Profit maximization is for others.
Normally profit is linked with efficiency and so it is the test of efficiency. However this concept has certain limitations like ambiguity i.e. the term is not clear as it is nowhere defined, it changes from person to person.
2. Quality of profit - normally profit is counted in terms of rupees. Normally amt earned is called as profit but it ignores certain basic ideas like wastage, efficiency, employee skill, employee’s turnover, product mix, manufacturing process, administrative setup.
3. Timing of benefit / time value of profit - in inflationary conditions the value of profit will decrease and hence the profits may not be comparable over a longer period span.
4. Some economists argue that profit maximization is sometimes leads to unhealthy trends and is harmful to the society and may result into exploitation, unhealthy competition and taking undue advantage of the position.
WEALTH MAXIMIZATION - One of the traditional
Approaches of financial management , by wealth maximization we mean the accumulation and creation of wealth , property and assets over a period of time thus if profit maximization is aimed after taking care , of its limitations it will lead to wealth maximization in real sense, it is a long term concept based on the cash flows rather than profits an hence there can be a situation where a business makes losses every year but there are cash profits because of heavy depreciation which indirectly suggests heavy investment in fixed assets and that is the real wealth and it takes into account the time value of money and so is universally accepted.
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