Financial forecasting methods in cannabis are essential for success. The industry environment is continuously changing, and the right predictions can make it easier to navigate.
Every business should utilize a financial forecast. This is especially true for those operating in cannabis.
The cannabis sector is experiencing tremendous growth at the moment, with Investopedia reporting canna-companies raised $116.8 billion in capital during 2019. Now is the time to understand what will happen throughout the industry, especially when considering the legal market should be worth approximately $73.6 billion by 2027.
To acquire your share of this expanding market, data is essential. With this insight, you’ll create a financial plan or forecast and know which factors will come into play. In this article, we’ll discuss financial forecasting and ways to improve your efforts with data.
Why Use Financial Forecasting?
The right financial forecasting methods give your canna-business an advantage by encouraging decisions based on uniform and cohesive reports. This information makes it easier to establish a foundation of realistic goals to build your business’s success.
Your canna-company can experience the following specifics with financial forecasting:
Maintain More Control Over Cash Flow
As you analyze your financial forecast, you’ll better understand your business’s future cash demands. With your projected expenses known, you’ll also know how much cash you’ll need to keep on-hand to cover your business’s costs.
A simple calculation of the minimum net operating cash you should have on-hand depends on a few factors, such as your risk tolerance. Regardless, it’s best to have between two and six months of your overhead expenses on-hand at any given time.
With your forecasted financials, you’ll know your monthly expenses. Then, you can multiply this number by the number of months per your risk tolerance.
For instance, if your company costs $6,000 to operate and you feel comfortable when you have six months of operating expenses covered, you’ll want to have at least $36,000 on-hand.
With cash-on-hand, you’ll have money in case something goes awry. Regardless of which industry you operate, there’s always some unexpected expense to cover.
Effective financial forecasting produces cash flow control that will cover any fluctuations in your expenses. Whether a mistake was made or the industry changes, you’re covered.
Use an Operations Budget as a Key Performance Indicator (KPI)
Your annual operating budget for the year ensures you’re always on track. With this budget, you’ll manage your progress month to month and calculate how your business performs in comparison to your plan.
You’ll know which costs are high or low, along with which sales are higher or lower on average. This information will guide you in taking corrective measures whenever necessary.
An operations budget also acts as a key performance indicator that you can use to perfect your financial forecast model. For instance, if your business performed better last year than this year, it might be best to make adjustments next year. This is the sort of insight your operations budget will provide.
Keep Yourself Ready for Significant Price & Revenue Changes
Operating with insight ensures you’re prepared for the worst. Some months will be better than others, and accurate data will help you appropriately manage the cash you have on-hand. But this will ultimately come down to the financial forecasting methods you have in place.
Financial Forecasting Methods to Incorporate in Your Efforts
Your financial forecasting methods are how you’ll gather the data your company needs to operate successfully. Instead of doing things based on ideas or what you think will work, you’ll have hard evidence to project your canna-business forward.
Analyze Comparable Businesses
Determining how accurate your financial forecast is can involve comparing your projections with other similar businesses.
Since the majority of canna-companies keep to themselves, you won’t always find their projects readily available. This is where you can get creative.
A cannabis CPA will have access to this information, so when it comes time to gather this insight, you can always ask for help. If this is something you need assistance with, we can help by comparing your forecast to our other clients operating in cannabis.
Map Multiple Scenarios
As you forecast your business’s performance, you might consider sandbagging. This is when you predict a low value you believe is easy to achieve because it feels safer to set lower expectations.
Another common strategy is to be optimistic, establishing high expectations for your canna-company. While these two methods differ, you can use both to analyze your business’s potential.
You should map out at least two scenarios. We suggest mapping at least one that’s optimistic and another that’s more conservative.
Mapping multiple scenarios is especially important in the cannabis industry. This sector is characterized by uncertainty due to the various government regulations. But other qualities can influence the unpredictability of this industry, including economic growth and new competition or licenses.
All in all, it’s best to track your business throughout the year. This will give you an average for your financial performance, making it easier to calculate more accurate predictions for the year.
Predict Expenses First
Your expenses will usually be easier to predict than your revenues because they involve fixed numbers. These include rent, licensing, insurance, and other expenses you expect to pay each period.
You’ll then have to anticipate your variable expenses. Include your utilities and other costs that fluctuate in this calculation.
To ensure your prediction is as accurate as possible, it’s best to analyze all details of your product costs. For example, retailers should know their inventory costs, as well as what they pay in salaries and wages. As a retailer, you’ll need to know your cost per pound of flower, per gram of oil, and for any other products you carry.
These variable numbers will guide you as you find your topline revenue numbers for your forecast.
While your expenses and revenue will vary, you’ll add any additional factors as you calculate. You’ll begin with your known fixed costs, and then you’ll analyze other aspects of your operations to predict everything else.
For example, if you’re a grower, you know your rent because it’s fixed. You also know how large your grow space is, and you can calculate how many grams per square foot you’re likely to produce. In turn, you can estimate the revenue you’ll generate each growing season.
These numbers provide you with insight-driven data, leading to a more accurate forecast. And this is where you can change certain variables to ensure a positive ROI.
Reanalyze Your Model Regularly
Your business’s progress should never remain static, and neither should its financial models.
Analyzing and reanalyzing your model will reveal your growth rates. But you’ll also get a good idea of your true product cost inputs, how your marketing campaigns affect your business and offer insight into how your business performs.
You’ll also take the guesswork out of your business’s updates. Look over expense percentages, revenue, input assumptions, and other internal and external factors to determine more accurate numbers. These numbers tend to change throughout the year.
Your business’s past performance can be used as a signal for change. Alter your model under newer and more accurate data.
Factors to Consider During Financial Forecasting
While you can’t predict everything that will affect your business, you can perform an analysis for financial forecasting purposes. Understanding some of the factors that come into play will contribute to your success in creating your cannabis business’s operating budget.
Keep in mind, this is not a list of all factors that could impact your business’s financial forecasting. But these are essential to consider as you build out your financial projections.
If your operation is located in or en route to a seasonal tourist destination, you’ll likely notice a peak in revenue during the year. This, of course, all depends on when tourists are drawn to the area.
If your seasonal tourist destination is a lake or beach, the warmer months will likely produce an uptick. But if you’re more of a winter destination, like the X Games in Denver, you’ll notice it during the colder months.
Understanding when these upticks occur will encourage you to save during these busier months. This ensures you’ll have enough cash-on-hand to get through your slower months.
Seasons will impact your business’s finances too. If you’re in retail, your raw material costs could go up or down. Knowing your input costs will help you maintain your margins as these costs increase.
Cultivators, in particular, know all too well how seasonality affects business. October harvests from outdoor crops usually result in lower prices, especially for those operating in outdoor flower. Oil and other cannabis product prices might also decrease.
Changes in supply are seasonal and should be tracked. There’s also opportunity associated with some seasonal changes, like holiday offerings and sales that could increase revenue when appropriately navigated.
Even though daily fluctuations usually belong in a more granular forecast, it’s still ideal to consider how your sales fluctuate daily. This is especially the case when considering how your business’s location can affect the amount of traffic it receives each day.
For instance, if your business is in your city’s downtown area you’ll likely notice more traffic Friday and Saturday. But if you’re operating in or near a central business district, your traffic will be more significant on weekdays rather than weekends.
Each market campaign is on a mission: to drive more revenue. But there’s no telling how your campaign will go, especially if this is your first campaign.
While long-term campaigns can be easier to predict, you’ll need to track your sales to fully understand how the campaign will affect your sales.
For instance, let’s say you distribute coupons to some neighboring communities. These coupons are delivered on Wednesday, and then, you’ll analyze how your sales are impacted each day following their release until your coupon expires.
As time passes, you’ll notice a curve. This curve will help you determine how much inventory you’ll need in the future as you incorporate a similar campaign into your marketing efforts.
Suppose you plan to operate multiple similar campaigns this year. In that case, you would use the insight you gained from that initial campaign to forecast campaign expenses and the resulting increases in sales.
Weather & Climate Fluctuations
Consider the typical weather where you’re located. For instance, when it rains, you might notice a decrease in sales. Depending on where and what you operate, the weather could impact your sales, and it’s important to know what to expect.
As far as climate is concerned, winter and summer temperatures can cause fluctuations in sales too.
For example, as a retailer, you might sell more flower during the warmer months when people are more likely to go outside to smoke. On the other hand, you could see an uptick in vape cartridge sales during the winter when people are more likely to consume indoors.
Natural Disasters & Pandemics
There’s no predicting when a natural disaster or pandemic will occur. But it’s crucial to know how these uncontrollable events could impact your operations.
For instance, the COVID-19 pandemic has brought on an increase in cannabis sales as the average ticket price rose. Once it was deemed an essential industry, the cannabis sector in California has observed some of its best months since legalization.
But during Cali’s wild-fire season, its outdoor grows could be impacted. The fires can burn away supply, cut off the power supply for indoor grows, and result in other damage. For times like these, it’s important to have a fall-back fund to handle these emergencies.
As you can see, a state of emergency can increase or decrease revenue, and it’s critical to consider whether your business will be impacted during a time of crisis.
Tax increases are especially relevant in the cannabis sector.
Consumer taxes on cannabis have been known to rise, and if the state’s black market operates in full force, there’s a chance that some consumers will begin shopping at unlicensed retailers. This is especially common in California.
However, some states don’t have such an active black market. For example, Michigan doesn’t have many illegal pot shops in operation.
Another option for consumers is to purchase directly from the source. If the taxes increase, local growers will offer direct access to their product. But it really varies from consumer to consumer as most might not feel comfortable purchasing from a local grower.
For cannabis operations, increases in taxes could mean your minimum cash-on-hand requirements could rise. Your tax money should be kept separate from your working capital.
Tax money should be taken from revenue and kept in a separate safe or account. This ensures you’ll always have enough money to cover your taxes come tax season.
Cannabis Sector Growth Rate
Natural growth and shrinkage happen in every industry. But in cannabis, we see it grow in popularity month after month and year after year.
Your financial forecast will probably include natural growth. But the main thing to track is whether you’re maintaining, expanding, or losing your market share.
Since there isn’t much public data available, it could be challenging to get an accurate forecast of how your market share is evolving. Thus, you’ll likely have to make estimates to determine how your market share is changing.
As you maintain a good understanding of your financials, you’ll become more strategic with your decision-making. If you’d like assistance with financial forecasting in the cannabis sector, please feel free to contact us at any time.
A cannabis Chief Financial Officer (CFO) is one of the most crucial hires for any expanding cannabis company. As your business grows, so does its financial needs. But there’s more to it than that.
The cannabis sector is characterized by irregular overhead expenses and regulatory compliance necessities. This being the case, knowing how to find the right person to handle the finances of your cannabis company is essential for success.
But what should you expect from your cannabis CFO? First, you’ll need to know what a cannabis CFO will do for your company.
Responsibilities Your Cannabis CFO Will Handle
Your CFO manages the executive accounting functions of your canna-company. While overseeing these functions, this person will ensure your business operates as smoothly as possible, tracking your profit and losses, cash flow, and balance sheets. As they analyze the accuracy and detail of your numbers, they’ll highlight changes that could be made to improve your business’s operations, as well.
Once you find a cannabis CFO, this person will also perfect and monitor your financial processes. They will set up your business’s internal controls, as well. These actions ensure your cannabusiness is compliant with state regulations and investor expectations.
Your CFO should also know how to manage cash flow. This involves determining whether your business can cover its operating costs.
Furthermore, this person will check your systems to ensure they’re protected from fraud and inventory shrinkage. The internal controls this person should implement include processes and procedures to:
Record transactions and other financial information
Handle, record, and spend money
Track, cost, and record inventory
Financial reports, including reports to internal management and outside parties, are also your CFO’s responsibilities. This person can also help your company raise capital and negotiate debt with reasonable interest rates.
The right cannabis CFO will also develop key performance indicators to determine your progress. These KPIs can include the average number of sales per day, your average transaction size, and more.
Your cannabis CFO will also oversee tax preparation. Since it’s their responsibility to create all of the preparatory documentation for tax season, they must maintain these deadlines. They should also manage the complex tax filing process, checking for deductions in accordance with 280e and the cost of goods sold (COGS).
Tips to Successfully Vet a Cannabis CFO
Do financial credentials matter when hiring for a cannabis CFO position? Of course. But there’s more to hiring a CFO than that.
Use these tips to ensure you hire the right cannabis CFO for your canna-company:
1. Make a list of your requirements and expectations for your prospective cannabis CFO.
Your time is valuable, and with this fact in mind, it’s best to include what you expect of your prospects when you post about this position. You need a qualified candidate, and the best way to discourage the unqualified is to set your expectations before meeting with anyone.
Once you make this list, you have a few options to uncover prospective candidates. You can post about the position on popular job platforms, such as Glassdoor or Indeed. However, you can save time using a headhunter to find qualified candidates.
A headhunter will use your list of requirements to seek out candidates. This person will conduct the initial screenings and interviews on your behalf, and when they find someone they think is a good fit, you’ll conduct the final interview.
2. Check each applicant’s resume to determine who is most likely to fulfill the role.
As you sift through the resumes, compare the educational background and work history of each candidate. This information is vital for a successful hire as it shows the dedication and experience you can expect from each candidate, as well as how they compare to others applying for the position.
Ideally, it’s best to find a CFO who has a minimum of 3 years of experience doing similar work. This ensures your CFO is adequately prepared to handle the responsibilities that come with the job. While someone with minimal experience might be more cost-effective, you’ll pay for the difference as an inexperienced CFO will have to learn while they’re working.
3. While conducting your interviews, probe prospects for more information about their work experience and any relevant projects.
A CFO confident in their past experience is ideal because they can show you that they already know how to do their job. With this in mind, if a prospect crumbles when you ask for more information regarding their work experience, there’s a good chance they’re stretching the truth about it.
Ask for more information on relevant projects to get a better understanding of each prospect’s work experience. If they lack experience in or knowledge of the cannabis sector, this could be a red flag showing they’re not the right fit.
Operating as a cannabis CFO means being knowledgeable about the environment surrounding this industry. This includes staying up-to-date with regulatory changes to ensure compliance.
A simple error can cost a cannabis business operator their license, and consequently, thousands of dollars. With this being the case, it’s best to find someone who has experience handling a cannabis CFO’s responsibilities.
4. Question the candidate about an issue your cannabusiness is currently contemplating to see what insight they can offer.
What finance-related issue is your business currently struggling with? Ask your prospective CFO what they think about this problem.
The insight your candidate provides could reveal their ability to handle other problems, as well. Some things to consider include how effective the solution is, if you agree with the solution, and the candidate’s attitude while addressing the issue.
Any candidate worthy of your CFO position will have some insight to provide. But it’s up to you to decide whether or not the way they handle your current problem is adequate.
Think about what it would be like to work with this individual. If the candidate has the right answers and attitude, they could be the right fit.
The level of involvement your cannabis CFO will have depends on your company’s size and needs. For small businesses and startups, a CFO will handle the financial and accounting responsibilities. However, if you’re operating a large enterprise, your CFO could be managing teams that handle your accounting and bookkeeping.
Regardless of your company’s size, your CFO will be responsible for developing your business from a financial perspective. With this in mind, implement these tips to ensure you make the right choice as you’re hiring a cannabis CFO.
If you need assistance hiring a cannabis CFO, feel free to contact us at any time.
You already know the importance of cannabis accounting. But you’re wondering, “How can I find the right accountant for me?”
The cannabis industry is expanding. With this exponential growth, we see regulations changing, and many cannabusiness operators need some help with their accounting.
Between maintaining compliance and facilitating growth, cannabis accounting will contribute to your canna-company’s success. But without expert assistance, it’s easy to stumble upon compliance-related infractions that could severely impact your business.
The most crucial aspect of cannabis accounting is to hire someone you can trust. This individual, or team, should understand your needs, pay attention to details, and stay up to date on any changes occurring in the cannabis industry. But it takes more insight to find the right cannabis accountant.
Let’s talk about what to consider as you look for someone to handle your cannabis accounting needs.
Think About the Candidate’s Cannabis Accounting Experience
Like most professions, someone with cannabis accounting experience should have the insight they need to perform the job effectively. With this in mind, the first consideration should be how much experience the candidate has working with cannabusinesses.
Has this individual worked with cannabis companies like yours in the past? Perhaps they’ve assisted in building a canna-company before.
If the candidate has a successful track record helping businesses similar to yours succeed, that’s a good sign. But it’s crucial to analyze the candidate’s experience to determine whether they’re the right fit for your company.
Think about your needs and what you expect from a cannabis accountant. For instance, if you’re planning to raise capital for your venture, it’s ideal to find someone who has experience going through the process of raising money.
Cost accounting is also a topic specifically of interest to cannabis business operators. For cannabis accounting purposes, effective cost accounting is how a cannabis accountant stands between your cannabusiness and costly taxation.
Through cost accounting, your cannabis accountant should find it simple to calculate your business’s cost of production at the time that each cost occurs. The expert should also include fixed costs, such as the depreciation of equipment, while calculating cost.
This sort of insight comes with experience accounting for other cannabis business operators. So if the candidate doesn’t have the experience, there’s going to be a potentially costly learning curve you can expect with this hire.
Check on Candidate’s Reputation in the Cannabis Industry
Even though your candidate has experience accounting in cannabis, their reputation could make or break the idea of bringing them in to work with you. Ask around to learn more about this individual before making a decision.
Check with the candidate’s past and current employers or clients. Learn about the experiences these people have had working with the candidate to determine what it will be like working with them. This is how you’ll learn the way this candidate will handle your business.
If you’re unsure of the candidate’s reputation but still want to hire them, consider offering them part-time employment. This is a safer way to hire, at least at first, since there’s not as much commitment. Then, if it doesn’t work out, it’s easy to cut ties and move on to the next candidate.
Analyze Candidate’s Record-Keeping Abilities
Meticulous record-keeping is a skill essential for proper cannabis accounting. Maintaining your cannabusiness’s records is how you’ll ensure your business operates as smoothly as possible.
Through excellent record-keeping practices, your accountant will track your business’s progress and keep all documentation organized. But the most crucial aspect of keeping adequate records is how this documentation will aid in keeping your business compliant.
Since your company must keep some records by law, this documentation is important to have. In instances when government officials decide to perform an audit, you’ll know your business is compliant because you’ll have all of the necessary documentation on hand.
The following are documents the right candidate will know your business should keep for a minimum of five years:
Your inventory records should include amounts, dates, and testing results for any cannabis or cannabis products that are cultivated, sold, produced, or destroyed by your company. Furthermore, the amount of all cannabis stored at your company should always be tracked and recorded. Since cannabis must be tracked from seed to sale using a plethora of points of information to adhere to regulations, this is record-keeping your accountant should be knowledgeable about facilitating.
These records should include applications, any disciplinary actions taken against an employee, documentation of training, and performance reviews.
This documentation will involve tracking all taxes that have been paid to state and federal entities. All license fees you’ve paid to state and local jurisdictions should be included in this documentation, as well.
Your transfer logs will include the amount of cannabis product your company has transferred, the full name of the person or people transferring and receiving the cannabis product, and the dates for each transfer.
Tracking all financial transactions your business has made is crucial. This documentation includes, but is not limited to, expenses, reasonable compensation, reimbursements, or contributions. The documentation should consist of the receipts, as well as the corresponding electronic tracking inventory reference.
Anyone in cannabis accounting knows more record-keeping is always ideal. Some of these records might include your company’s transportation logs, advertising approvals, maintenance logs, cleaning logs, sanitation logs, packaging approvals, and any inspections you’ve had conducted at your business. A visitor log should also be included. This log should take note of the full name of each visitor, as well as the date and time they visited, along with the reason they visited.
Consider the Candidate’s Professional Network
Similar to the referral system, skilled professionals are associated with other skilled professionals. With this in mind, if you bring in a talented accountant, they should know who to refer you to whenever you need a professional to help you with something else.
While your accountant will provide budgeting, cost-minimizing, financial opportunity evaluation, and compliance maintenance services, you’ll need other experts for some tasks. When the time comes, this means you’ll want a recommendation to another trusted professional.
For instance, your accountant shouldn’t have trouble referring you to another professional for legal document preparation or legal entity creation. As you consider your accountant’s professional network, consider what this professional has to offer – besides quality accounting services.
Keep Your Eyes Open for These Red Flags Before Hiring
The candidate has significant, unexplainable gaps in their job history.
While some time between jobs could be fine, there’s some risk associated with hiring a cannabis accountant who can’t even account for work gaps.
In some instances, this is the sign of a job hopper. This is someone changing jobs every few months throughout the year.
The problem here is that this could mean the candidate is incapable of maintaining long-term work opportunities. This shows a lack of loyalty, meaning you can’t trust this candidate’s reliability.
You’re looking for someone reliable to handle your cannabis accounting long-term. This in mind, it’s best to interview candidates who have a history of longevity working within a company.
The candidate does not know what benefit they’ll provide to your company.
Accounting experience is always appreciated. But if the candidate doesn’t know how to acknowledge your business’s specific needs, they’re probably not the right fit.
You’re busy running your business; you don’t have time to determine everything you’ll need an accountant to handle. Your time is best spent focusing on the successful implementation of your operations.
The right candidate will specify the value they can add to your company. They’ll showcase precisely how they can help your business navigate the regulatory environment of the cannabis industry.
So if the candidate doesn’t put your business’s needs first in their plan for your business, it’s best to look elsewhere to fulfill your cannabis accounting needs.
The candidate lacks experience working in the cannabis sector.
This is a severe issue as it shows this person might be a generic accountant. If this individual has never worked in the cannabis industry before, this could be their attempt to break into it.
If the candidate hasn’t worked with a cannabusiness in the past, it’s risky to work with them. This individual is trying to make your company his or her test subject to determine whether they can learn how to effectively provide accounting services to the cannabis industry.
The most critical problem here is if an accountant lacks experience specifically for the cannabis sector, they might not understand the need to adhere to regulations. They also might overlook the fact that they need to remain up to date on regulatory changes.
Experienced accountants know the workload that goes into cannabis accounting. But without that experience, it’s easy for someone new to the industry to underestimate the job and how you’ll expect them to perform.
Watch for These Red Flags Upon Hiring
Your cannabis accountant is not responsive.
Your hire could be a skilled accountant who is busy and attempting to balance their workload. However, if they are working with other clients, it’s crucial they treat each one fairly. This means providing adequate accounting services, of course.
If the accountant is skilled with his or her services in demand, it could take longer for them to complete a project. But if your accountant forgets to call you back or doesn’t keep you informed, consider this a sign of how this person plans to care for your business.
Your cannabis accountant chooses shortcuts.
While your accountant might say this is their “creativity” at play, this isn’t necessarily the case. If this individual wants to take sheisty shortcuts, they could be risking your compliance.
The cannabis industry is constantly in motion; it’s a demanding and highly regulated industry. With this in mind, the goal is to propel your company forward without risking the progress you’ve already made.
Even though it could be tempting to falsely represent your company to move forward faster, the risk is simply not worth the potential reward.
Some accountants will suggest creating misleading statements on bank applications or tax returns, or perhaps even on your own records and books. This is essential information that, by omitting it, could damage your business and its operator.
If your cannabis accounting expert is suggesting any of these behaviors, they don’t have your best interests in mind. The right accountant will protect you and your business from these tempting but risky behaviors.
Your cannabis accountant can’t demonstrate an understanding of legal entities.
Knowing about legal entities is essential for any accountant. However, if the accountant operates in the cannabis industry, they need to know how to report the financial operations in accordance with the legal entity.
For instance, if a group of investors owns multiple dispensaries, the way the accountant structures these entities and manages their books is crucial. To have each of the dispensaries operating as a separate legal entity provides protection to each dispensary.
Furthermore, the accountant will need to maintain separate books and records for each entity. This is essential for the entities’ tax reporting purposes as well as to maintain compliance-related information in accordance with the state’s licensing demands.
Train the Right Accountant
Once you find the right accountant, it’s time to train them to your specifications. While it’s the accountant’s job to tell you what you need, it’s your responsibility to explain your expectations in full. This is how you’ll forge a long-term relationship with the right cannabis accounting professional – and keep them loyal to your business.
Some people opt to explain expectations during the interview process. This gives the candidate the opportunity to ask questions before accepting the job offer.
Regardless of when you discuss your expectations, outline which duties they’ll handle, as well as any specific details regarding how you’ve done your accounting in the past. For example, if you’ve been using specific programs, it’s best to discuss them with your accountant before they begin working with you.
Hire the Right Cannabis Accounting Expert
For any type of business you’re operating in the cannabis industry, you’ll need a professional accountant working with you every step of the way. The many regulations continue to change, and having a diligent cannabis accounting expert to stay up to date on all legislation that could impact your business is crucial for success.
If you’re looking for a professional and reliable accountant with a proven track record helping cannabis businesses like yours succeed in this industry, feel free to contact us today.