On the Distance Between Theory and Practice

In practice it is sometimes implied, with the remark “These are theoretical subjects, professor,” that what is being explained has no counterpart in real life. In business and finance, however, theory and practice are not two disconnected worlds. A substantial part of finance theory has arisen from the actual problems firms face, from market behaviour and from decision processes. Theory does not stand against practice; it is a guide that makes practice intelligible and helps sounder decisions to be taken.

For Türkiye this relationship is still more important. High and variable inflation, exchange-rate fluctuations, financing costs, conditions of access to credit and regulatory change make firms’ decisions more complex. In such periods theory is needed more, not less. As uncertainty rises, so does the cost of decisions based on intuition and habit.

Finance theory, for example, says that it is not enough for an investment merely to raise sales or accounting profit; cash flows, timing and risk must be assessed together. In periods of high financing costs in Türkiye, an investment that looks profitable in nominal terms may in fact create no value because of a large working-capital requirement or long collection periods. Concepts that appear “theoretical” — the time value of money, the cost of capital and net present value — then become matters of direct practice.

In a similar way, the fact that equity too has a cost of finance is still at times overlooked in practice. Capital that owners put into the firm is not free. Capital has alternative uses, and owners expect a return commensurate with the risk they bear. Especially in periods, as in Türkiye, when alternative investment returns can be high, ignoring that cost can lead to serious errors of decision.

Currency risk is a clear instance of the same point. Measuring the foreign-exchange position, assessing natural-hedge possibilities and, where needed, using derivatives are not a theoretical pastime; they are direct practices aimed at protecting the firm’s cash flows and financial resilience.

Türkiye’s conditions create not only threats but also important opportunities. Export potential, production infrastructure, entrepreneurial capacity, financial technologies and the development of capital markets offer firms significant possibilities. Making use of those opportunities likewise requires sound investment analysis, an appropriate financing structure and effective risk management.

When a mismatch is seen between theory and practice, it is not right to interpret this at once as theory being detached from real life. Sometimes the assumptions of theory must be adapted to present conditions; sometimes the difference shows that decisions in practice are incomplete or mistaken.

For me, therefore, theory is not a body of inapplicable abstractions; it is a guide that makes it possible to assess complex financial decisions in a more systematic and rational way. Sound financial management arises from being able to read theory and practice together.