7 Financial Fundamentals for Cannabis Business

As the cannabis industry becomes more regulated, the need to perform and act like any other legitimate enterprise is paramount to success. This will test many business owners, especially those with little to no financial industry background. Here are several cannabis industry tips to avoid business mistakes young companies make, and how to handle a variety of challenges.

1. Business Strategy

Your business strategy is where you will tell your “business story”, which defines your path forward with near- and long-term objectives.

The cannabis market has a lot of moving parts, and within that market there are areas to fill that may align with a company’s strengths better than others. Generally, the narrower the focus, the better advantage a business will have for scalability.

While some business owners have a sky-is-the-limit approach, not every cannabis cultivator may be looking to scale. There is nothing wrong with starting a “mom-and-pop” operation that covers your expenses and lets you live your lifestyle. It is like vinyl record stores in the music industry. They do it because they love vinyl as their favorite thing in the world. iTunes is in the industry for making money, and these people are in the (vinyl) industry for providing an awesome vinyl record to go buy. You could say the same thing about any boutique marijuana store or cultivator.

Business owners should understand that if you’re running your business out of passion and not scale, you won’t have the same potential for making revenue as some of the bigger, commercialized businesses moving into the space. Regardless of how small or big you want your company to be, you’ll still need to have a basic understanding of what matters to keep the doors open.

Experts Weigh in on Key Metrics

  • Average yield: Measure of the yield of a crop per unit area and the seed generation of the plant itself.
  • Yield per square foot: Helps measure efficiency of canopy space used.
  • Yield per watt of light: Helps measure efficiency based on consumption of power.
  • Production per acre: Average of weight per harvested acre.
  • Fixed costs: Costs such as rent, building and equipment items, site security.
  • Variable costs: Costs such as electricity, seeds, soils, direct labor.
  • Strain cultivation: Knowing which strains to invest in with a focus on the metrics mentioned above.

2. Track and Analyze Key Metrics

Any business has key statistics that need to be tracked. Metrics allow you to demonstrate critical success factors and areas on which to improve and identify how far you are straying from projected operating costs. Stats such as average yield and how much product you can generate per acre can be crucial to a cultivator’s understanding of how to run his or her business.

Additionally, these same key metrics will be used as part of an evaluation process by interested third parties, such as investors. Investors do their homework on the competition, local grows and dispensaries in the region. They’ll know what metrics competitors are using and compare them with your product.

The key to keeping meticulous records is to rely on software. Accounting software, enterprise resource planning (ERP) systems, Business Intelligence and Office-type software programs are all key to keeping records in line.

After you compile your statistics, you’ll need to interpret them yourself or hire someone to do it for you. Analyzing your data correctly can point out critical inefficiencies (think about your yield per square foot) that could make all the difference in sustaining your business. It’s such a competitive industry in every single micro-economic market of each state, it’s impossible to survive without being as lean as possible.

Cannabis industry operators are increasingly requesting regional data — which products are selling best and how they can make changes to their own product line to feed demand.

A lot of people in the business get excited from the revenue (top line) they bring in and aren’t necessarily accounting for all of their expense obligations, such as taxes. Your bottom line is your net income after taxes. Don’t manage your business based on your top line.

Do’s and Don’ts for Building a Strong Business Foundation

Do

  • Define your business model and objectives.
  • Determine your niche in the market.
  • Set long-term goals now (for example: do you want to scale up?) and plans for achieving them.
  • Evaluate all product and market decisions relative to whether they fit in with your model and will help you achieve long-term goals.
  • Track and analyze key statistics that can help you pinpoint inefficiencies and drains on profitability, as well as increase your investor appeal.
  • Evaluate market trends in your region(s) and whether you are providing products that are not driving revenue and profits.
  • Hire the best certified practicing accountant (CPA) and lawyer (with experience in the cannabis industry in your state) you can afford, whether outsourced or on staff.
  • Look for financial advisors who plan for long-term success.
  • Have purchasing and other “paper trail” procedures in place, so all costs and receipts are accounted for.
  • Prepare best- and worst-case financial scenarios. If you have a worst-case scenario in place (for example, if prices drop to rock bottom), you can prepare your business ahead of time for dealing with them.
  • If seeking investment money, ask for more than you need so that you have a “cushion” and will not risk having to shut down if you run out of money too soon.

Don’t

  • Produce random or too many products for your company to sustain; instead, sell what there is market demand for.
  • Don’t ignore the importance of setting up the best type of business entity from the get-go.
  • Don’t base business decisions on only certain statistics (revenue, for example).
  • Don’t set aside the crucial business-management aspects of your business (financials/recordkeeping, budgeting, data tracking and analysis, HR) because it’s not your area of expertise. Seek outside assistance or fill the positions when you can.
  • Don’t hire financial advisors with short-term vision only.

3. Get Your Books in Order

Businesses in the cannabis industry can be under particular scrutiny from governing bodies — such as the IRS, which enforces tax section 280E. This line item makes it difficult for cannabis companies to deduct expenses from total income, a situation that won’t change until marijuana is reclassified from Schedule I.

Many cultivators have been working their grows for years before legalization and never had to deal with regulatory requirements. Many cannabis companies struggle to adapt to the new business climate with basic “blocking and tackling”: paying taxes, hiring employees, human resources issues and dealing with regulatory compliance.

It’s important to be on top of your accounting and finances as competition steps up, or else smart, well-financed entrepreneurs and people from other industries moving into cannabis will siphon business away from entities that aren’t as organized.

4. Build a Good Ecosystem

A good CPA and a lawyer well versed in the industry will save cultivation business owners time, energy and money that can be used elsewhere in an operation. For example, each state has different laws regulating and taxing cannabis, so having a lawyer and CPA who know the ins and outs of the state in which the business is located will help to avoid mistakes you might overlook while wearing several different hats as a start-up business owner.

While a good accountant and lawyer should be top-priority investments, Gibson and Vane advise that businesses should eventually fill out roles covering valuation, finance, marketing and other facets. You’ll need to lean on these employees and advisors at critical times, which makes it important to know you can trust them.

To find a good financial advisor, you should look for the advisor’s long-term vision, background and planned strategy. Have they thought through various options? On the other hand, watch out for advisors who focus on the short term.

5. Have Communication and Operational Procedures in Place

Other common mistakes for cannabis companies, and any young companies, are miscommunications and not having procedures in place.

Processes not understood company-wide, such as purchasing procedures, will have a detrimental effect on your business. For example, officials will want to see the paper trail from the purchase of a pack of markers. If you don’t have that in place, get it in place now.

Keeping more than one person responsible for any transitional task is important. Internal controls such as time logs, signatures and dual-approval for purchasing and cash-handling are paramount.

6. Brand Correctly

While all the above should be considered business essentials, branding still plays a significant role when done right. On an industry level, dispensaries and cannabis grows excel at branding their products. Packaging sells.

Know what your product is about, what you want your product to look like, how you want your customer to feel when they see your products or walk into whatever shop you have. Your brand ties back to your vision, which third-party companies and investors will look at to evaluate you as a competent business leader.

7. Create a Contingency Plan

You should create a contingency plan to prepare for volatility in the cannabis market. What happens if the price per pound of cannabis drops 25 per cent? Do you have access to capital in case such volatility cuts revenues? These are conditional “what if?’’ scenarios that need to be thought out and outlined as a contingency model to help get your company through hard times.

Plan to raise more money than you need. You want to be able to demonstrate that you’ve thought about that and you have got some staying power should things get tough for a while.

Written by Sam Fiske

https://www.cannabisbusinesstimes.com/article/7-financial-fundamentals-for-business-success/