Many cannabis companies today are zooming forward in legalized states, trying their best to navigate an uncertain marketplace and moving quickly to make themselves known in an increasingly crowded field. But there’s risk of falling off course if you don’t have a rudder to keep you in control.
One of those rudders is your financials. When set up properly, financials show how much the company is spending and earning, and they can help you make sound decisions on where to take the company next. The processes and systems underlying the financials determine their accuracy and whether the company has a realistic view of how it can keep the business going — and whether it’s doing what’s needed to successfully scale and grow the business.
When you view the financials as the rudder for your fast-moving company — as a way to check on how the company is doing and deciding how to proceed — they can help you better manage your cannabis business.
How to Budget Right
It’s all too easy to create a budget that may appear feasible, based on what you think you’re spending and taking in today. But without the right finance processes and systems in place, redundancies and inaccuracies could be muddling your understanding of what the company is spending, what it’s collecting and what it’s likely to earn in the near future. A truly useful budget is built on actual results, with one or more years of data, to set a realistic baseline that can be used for making comparisons and noting trends.
Whether you’re in the beginning stages or already operating at full speed, the budgeting process can always use refining. It can bring the various pieces of the business together to explore what’s happening, what’s planned and what’s possible. Look at the budget as a check-in tool; is the company on track, falling behind or doing better than expected?
Include as many details as possible. Think one to three years ahead. Map out monthly goals as well as quarterly and yearly totals. These points of reference will give the business opportunities to gauge its performance and make adjustments as necessary.
The budget should include your income statement, with expected revenue, cost of goods, gross margin, operating expenses, interest and taxes. For cash flow, include capital expenses and customer payments.
As your budget comes together, consider “what if” scenarios. It’s better to do this using real data than to try and guess what your next move should be. What would be the impact of a price increase? Or if you give in to competitive pressure and lower prices?
A dispensary seeing fairly small revenue numbers right now may want to keep a fairly small physical footprint for the time being. Or it may be time to look into another location, make new hires to handle the growing number of customers and expand your inventory, or make adjustments to your supply chain. Is it time to expand into an adjacent business or is the risk too high? A well-designed budget lets you consider different scenarios before making a commitment to a particular direction.
Keeping the Business Accountable
The budget helps control spending as much as it lays out the financial plan for the company’s immediate future. It can be done on a yearly basis but deserves regular reviews to see how the company is performing against its plan and whether adjustments should be made. Compare the actual results to the budget to see which areas of the business are underperforming or overperforming — and incorporate those findings into the budget process. By their nature as a forecasting tool, almost all budgets will be different than the actuals. The more these reviews are done and the differences noted, the better the process can become and the more accurate these forecasts will be.
Also, keep plugging away on scenario planning. The metrics devised need to be reasonable — outside experts who have a sense of what other cannabis companies are doing can help you refine appropriate scenarios for your business.
Being Transparent with Investors
Through it all, transparency with what the business is experiencing can differentiate it in a crowded field. Cannabis is fairly new territory for many investors, and they want to zero in on companies that have integrity, that can stand by their numbers and thoughtfully explain what they mean. Without trust in what they are seeing, they will move on to the next company.
The Bottom Line
Companies that run on factual data are able to build reliable forecasts and are not stuck chasing after unrealistic goals or misguided strategies. Financials should provide a snapshot of a period of time when you predicted that if nothing significant changed, this is how much the company would spend and how much it would take in and how it would perform.
The more the company can build up its history, the more accurate its forecasts can be. Ideally, the right set of financials prepares you for a viable future.
Dave Roberson is the CEO of Kukuza Associates, a Silicon Valley-based consulting firm that solely focuses on the finance and accounting needs of cannabis companies and draws upon the full capabilities of its parent company, RoseRyan, which entered the field in 2014. The company’s Kukuza Rapid Diagnostic is an online tool to help people evaluate their business’ finance readiness and agility.
Roberson was formerly the president and CEO of Hitachi Data Systems and currently serves on the NCIA’s Banking & Financial Services Committee. He can be reached at firstname.lastname@example.org.