A company's value is tightly linked to its future performance. Why?
The value of any business (or anything else for that matter) is the price at which a willing buyer would pay for the business. The price at which the buyer would pay is determined by the expected future profits of the company, adjusted for risk. The future profits of the company cannot be determined without a financial projection.
A simple example may help. If a wooden box (painted black) produces $10 one month from now, a buyer would pay $10 for it. She wouldn't pay more than $10 since she'd lose money on the purchase since the box will only produce $10 and she would not recover her investment.
The investor would love to pay less than $10 for the box, say $8. At $8 she knows she'd make a profit of $2 since she'll get $10 at the end of the month. Unfortunately, she won't have the option to buy the black box at $8 since a different buyer, offering more than $8, would always be chosen by the seller of the box. The investor offering $8 would never be the winning bidder unless she were to raise her price. However, if she raised her price to $9, a competing buyer could offer $9.50. If she raises it to $9.75, a competing buyer could offer $9.85. Only if she raises her offer to $10, would she be assured of buying the black box.
Therefore, if the black box produces $10 to the owner -- guaranteed -- then the value of the box would be $10.
However, what if the buyer believes that the box would NOT pay $10 at the end of the month? What if the box were to pay only $9.50? Would the investor offer $10? No. She would offer $9.50 for the black box.
This is an important concept: if there is risk -- either real or perceived -- that the black box will not produce $10, then the price -- aka value -- will be less! Regardless of the perceived amount to be paid by the black box, the future payments from the box will always guide the value/price of the box.
The ideas from the simple black box example also apply to a company. However, since a company is expected to exist for more than a month, the task becomes a bit more complicated. However, the future earnings of the company are the basis of value for the investor.
This is why a financial projection is so important. A financial projection identifies the future earnings expected to be produced by the company. Those projected earnings are the basis on which an investor will value the company.
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