From the course: Financial Accounting Part 2

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Value is based on expectations about the future

Value is based on expectations about the future

From the course: Financial Accounting Part 2

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Value is based on expectations about the future

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- The value of a business is based on how well you think that business will perform in the future. As I frequently say in my business school classes, when you buy a business, you are buying its future, not its past. And because you are buying the future, we shouldn't be surprised that business valuation is not an exact science. None of us can forecast the future perfectly, so none of us can value a business perfectly. If business valuation is about the future, then why do we often use valuation with accounting numbers, which are based on the past? Well, past accounting numbers are useful to the extent that they provide a starting point for forecasting the future. It will be relatively easy to forecast a future for a company that has a long and stable history. It will be relatively difficult to forecast a future for a company with a volatile history or no history at all. So we will naturally have more confidence in some…

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