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Theories Of Financial Management Are Applicable To Run An Organization:

Financial management theories and their application are really vital for an organization. It involves application of management principle to all financial operations. Theories of financial management are applicable to run an organization. These theories are designed and developed for promising positive cash flow and maximizing the profit of stakeholders.

Financial management theories comprise of large complex strategies for administration, maintenance of financial operations and minimizing risk involve in different aspects of such operations. By using financial management theories and principles, it becomes easy for executives to figure out the right way to handle various affairs of an organization.

Some of the theories of financial management that are applicable to run an organization are as follow:


This theory involves principle that in business key roles are played by managers who are appointed by stake holders. This theory states that financial transaction involves two parties and each one tries to secure his interest. This theory has problem of information asymmetry associated with it. Moral hazard is another problem with this theory in which due to asymmetry information authorized people try to accumulate wealth through unfair means. Adverse selection or bias selection of employees is another major problem associated with this theory.


This theory involves interpretation and transfer of information about business to capital market. This theory states that cash flow between an organization and capital market depends entirely on flow of information between the two entities. It is the theory that involves strategies to for organizations and enterprises to effectively demonstrate their capabilities to potential investor.

Signaling theory is really effective for business expansion and growth.


It is the theory that suggests that entrepreneur for business finance needs first utilize retained earnings, then debts and convertible loans. Equity with bankruptcy cost should be the considered as the last option to be selected for capital structure policy. It is estimated that 75% of organizations use pecking order framework to take financial decisions. It is also evaluated that most of the entrepreneurs used retained profit for financial needs of their business.

These theories of financial management are applicable and effective to run an organization.


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