Question

Discuss at least two (2) specific financial theories that can be utilized to improve a firm or institution’s efficiency or operations. This may include a Small to Medium Enterprise (SME) or a Multi-National Enterprise (MNE). Cite resources.

Answer 1

Financial Theories

Financial theories offers specific financial guidance to individuals. There are several categories of financial theories that can be used by SME and also MNE. Financial theories provide a wide range of direction to companies and individuals who want to excel in business.

Financial management theories
These following approaches address precise problems in the field of management and leadership and boost operations efficiently and reach organisational goals.
Business and finance have a close connection to each other. Companies are expected to make financial and investment decisions. Some of the key decisions in business environment focus on:
• Borrowing
• Labor
• Dividend

Therefore the individuals charged with managing institutions need to have a strong affiliation to financial theories by which they can be able to make decisions that will increase:
• Revenues
• Grow investment
• Promote healthy relationships with stakeholders

When theories are used in businesses the functions become easier since the finance managers comprehend how they can approach matters such as-
• Acquisitions
• Expenditure
• Sales efficiency

Examples of financial theories

Investment Theory
Investment theory indicates that capital investment should grow over time. It tries to explain how individuals can grow capital or calculate investment flow.
An investment flow calculation involves getting the difference between the capital at the end and start of the period. As a theory of financial management practice, this theory plays a vital role in differentiating investment and capital.

Expectation Theory
The expectation theory is the simplest interest rate approach, and it is used to manage investments. It suggests that the interest structure depends on investments pricing and maturity. This theory indicates that the two investment options are the same because the risks involved may be the same.
Expectation theory also deduces that projections of future interests rates may correspond with incoming rates attained in time. This approach helps individuals in making investment assumptions.