Companies can’t move forward unless they have a full understanding of how the business is doing
Cannabis companies can easily spin their wheels or flame out if they don’t have a strong financial foundation in place. Only when companies know how the business is actually doing — with the right systems, processes, reporting, budgets and plans — can they make informed, smart decisions for moving forward.
A strong financial foundation empowers company leaders with up-to-date financial data to make the right calls on daily decisions and larger choices that affect market share, competitive advantage and valuation. Timely, accurate financial information puts companies on solid footing for making the right strategic moves in this exciting yet volatile marketplace.
How can this be done? These elements are essential for a strong financial foundation.
Set Up the Basic Accounting System
Companies that are off and running with their big idea are not necessarily thinking about the financial side of the business. Rarely does the idea have anything to do with accounting, but having a basic accounting system — and all your numbers in one place — is absolutely essential.
With growth comes complexity, which can muddle what’s going on if there is no system in place for capturing all the transactions and seeing how the company is actually performing. The accounting system goes beyond hunches and provides real numbers and data so that management can see what’s happening. It’s here that companies can answer the tough questions they need to know: Can the current system calculate the company’s labor cost? Can it reveal its product margins? Unfortunately, not all companies can easily answer those questions and will make some misguided steps because of this lack of knowledge.
Streamline Accounting Processes
Many startups are operating on a shoestring. Midsize companies need to continue to drive efficiencies throughout the company to realize profits. Inefficiencies in finance at a company of any size can bog down the business and hinder its ability to get to the next level. The right financial processes matter and need to be managed tightly. Keeping the transaction flow smooth and efficient will maximize revenues and keep expenses accurate.
For instance, is the monthly close process actually happening or is it leading to inaccurate financial information and poor decision-making based on misleading data? Is revenue forecasting occurring or is it a guessing game? How much capital does the company need and how will it be used? Every aspect of the company’s finance processes needs to be as efficient as possible, from capital planning and cash management to running payroll, paying bills and invoicing on time.
Understand the Nuances
Every industry has nuances in how it accounts for the business, and the cannabis industry is no exception. A fledgling accounting team may not fully understand the more complicated nature of what goes into a cannabis company’s accounting, from cost accounting and cost of goods sold to the impacts of IRS Code Section 280E, the statute that severely limits cannabis companies’ deductions and tax credits. For a complex accounting question that is beyond the reach of the team, it may require calling in a technical accounting expert for a quick project to get it right.
Get Reliable Financial Reporting
Accurate and reliable financial reporting is absolutely essential, but can be quite challenging if numbers are spread across different systems or not pulled together. Being able to tell your business’ story to investors and stakeholders — through accurate financial information — builds credibility with investors and raises the overall value of the company.
Create a Thoughtful Business Plan
Anticipate the future with smart financial and scenario planning to consider potential options for future moves. The capital raising, hiring and expansion plans along with revenue attainment need to all line up for the business to thrive. How do you measure the success of the business? How do you find new customers? What’s the three- to five-year plan in terms of financial goals and other key metrics like market share and business valuation? A thoughtful business plan for the year includes budgets that are realistic and well managed.
Manage Your Funding
The chief financial officer and finance leaders need to understand their cash flow burn rates, discuss options for how they can last longer with existing funds, know the different levers they can pull to quickly change spending up or down and raise future capital successfully when needed. If you don’t have a CFO, utilizing an outsourced professional to develop strategy and pursue investments can make all the difference between success or failure.
Setting up a solid financial foundation covers all of these areas, and the most advanced companies adopt best practices for each one. Companies that are unsure if they have all the essentials can benefit from a quick diagnostic to assess what is needed and what to do next. This “checkup” may sound like a slowdown when everything else is spinning so quickly, but that’s not the case. Putting the right financial foundation in place actually enables the company to move even faster toward its goals. In fact, companies with a solid finance foundation are healthier companies — they have a crystal-clear view of their financial situation and can make more intelligent choices for their future.
Dave Roberson is the CEO of Kukuza Associates, a Silicon Valley-based consulting firm that solely focuses on the needs of cannabis companies. A subsidiary of RoseRyan, Kukuza draws upon the full strengths and capabilities of its parent company, which entered the cannabis sector in 2014. Roberson fine-tuned his talent for guiding fast-moving companies as a senior vice president for Hewlett-Packard Co. and as president and CEO at Hitachi Data Systems.