How to Measure Your Cannabis Business’s Financial Health

How to Measure Your Cannabis Business’s Financial Health

Maintaining a financially healthy cannabis business is crucial to success. Without keeping a finger on the pulse of key financial health indicators, your operation becomes susceptible to a plethora of issues.

The cannabis sector’s rules and regulations are continually receiving updates. But between handling all of the other components of your business and staying compliant, you likely have thousands of other things to track. The most important of these is your company’s financials.

For those handling the financial health of a cannabis business on their own, here is how you’ll uncover insights regarding your business’s growth potential, stability, and other essential aspects of operating in this budding industry.

Track Your Financials in a Business Journal

A business journal is easy to use and can be especially useful for cannabis dispensary operators. This will allow you to keep track of the internal and external factors that impact your business.

The simplest way to create a business journal is to use either a Google Sheets spreadsheet or an Excel spreadsheet. Create three columns for the date, day of the week, and a section for notes covering the day’s occurrences.

Include relevant information, like the events in the area, specific promotions you’re running, hiring or firing news, weather insight, big news headlines, and anything else you can think of.

As you continue updating your business journal, you should be able to uncover trends that would’ve otherwise gone unnoticed. Remembering back 30 or 90 days is challenging. But with a journal, it’s as easy as looking back at your notes.

Avoid Overvaluing Certain Statistics

Measuring your business’s financial health in accordance with industry trends can seem like the right move. But trends can be misleading as they typically use data that’s irrelevant to your day-to-day operations.

You can sometimes compare your KPIs to granular data, such as zip code to zip code data. But with so many neighborhoods and kinds of locations, there’s more to consider.

For instance, if your shop is in a tourist area, your shop likely has a lot of volume. But the average spend per transaction is probably low. The products in a neighborhood shop will differ, focusing on selling more flower in lower volumes with higher transaction spends.

This is where historically tracking your cannabis operation’s financial metrics comes into play.

With records of your past performance, you’ll have context to the metrics you’re tracking. This is how you’ll see which parts of your business are thriving and determine if your financial performance is improving or not.

Put Systems in Place to Track Metrics

Collecting data and choosing the metrics that have the most significant impact on your business is essential. But you’ll need the right system in place to college that data.

Without data, there’s nothing to analyze. And when you have a way to measure results, you can effectively manage your business’s financial performance.

But what key performance indicators (KPIs) should you monitor?

Many KPIs exist, and it’s easy to feel overwhelmed by the amount of data you can use to uncover information about your business’s performance. The most important aspect of putting these systems in place is to ensure you’re collecting enough data for an analyst to review.

Incorporate a robust Point of Sale (POS) system and a CRM system to communicate with your POS tool. Software and systems can help you maintain your books. But we recommend using these in conjunction with spreadsheets to keep books in order and make reviewing records as easy as possible.

Some software tools contain pre-packaged metrics. However, even though these are tempting to use, the metrics these tools offer don’t let you run historical or trend analytics. Also, these softwares usually only provide a snapshot of data. We recommend using your own systems to extract your company’s data to put it into a spreadsheet for analyses.

Here are some KPIs you might consider, depending on your operation’s vertical:

  • Cannabis Dispensaries
    • Average spend per transaction
    • Contribution margin of each product
    • Customer frequency
    • EBITDA
    • Gross margin per product
    • Labor %
  • Cannabis Cultivators
    • Waste management costs
    • Grow cycle time
    • Yield
    • Gross margin
    • Product turns
  • Cannabis Manufacturers
    • Cash-to-cash cycle time
    • EBITDA
    • Gross margin
    • Manufacturing cycle time
    • Throughput & capacity utilization
    • WIP inventory/turns
    • Yield
  • Cannabis Delivery Services
    • Distance per delivery
    • Fulfillment turnaround time
    • Time per delivery

Check Lines to Uncover Trends

While you might be tempted to look at certain points in time, a singular moment only offers insight into one data point. To analyze the entire history of your business’s financial performance, connect the dots to form lines.

These lines offer a more complete story of your business’s financial health. You’ll see whether things are improving, getting worse, or remaining the same. Analyze your data once per month during your first year in operation. Then, it’s best to perform analyses quarterly to gain the most insight possible.

Consider Your Metrics to Resolve Problems

While it’s essential to understand your metrics, it’s even more crucial to use the insight you gain as you track your KPIs. This is where you’ll develop your action plan.

For instance, if your average spend decreases, consider what could be causing this metric to drop. You’d look into your metrics and analyze your demographics. By delving into these key audience insights, you could uncover the root of the problem.

Check how demographics impact audience spending habits. Then, you’ll plan a course of action to make adjustments to push your average spend back to where it was. This could be as simple as adjusting who you’re targeting on different social media platforms to reach the group responsible for driving down your average spend.

Looking for assistance monitoring your cannabis business’s financial health? Our outsourced CFO service can help.

We’ll set up systems to track relevant data and provide actionable steps to put your business on the fast-track to success. Contact us today to learn more about how our services will benefit your business.

Choosing the Right Accountant for Your Cannabis Delivery Service

Choosing the Right Accountant for Your Cannabis Delivery Service

Whether you’ve recently started your cannabis delivery service or have been in business a while now, you should have a team of professionals and advisors to steer you in the right direction. 

Most of the time, cannabis business lawyers are the go-to. They’re almost always the professional questioned first regarding where to find the right accountant for cannabis delivery services.

Like picking an excellent attorney, finding a knowledgeable cannabis accountant will contribute to your service’s success. So it makes sense that you’re looking for valuable insight into choosing the right accountant for your cannabis delivery service.

If you operate businesses outside of cannabis, you might already know an accountant you trust. However, the laws surrounding the accounting profession don’t provide enough protection for CPAs (Certified Public Accountants) operating in cannabis. This usually means that while skilled, some CPAs aren’t willing to work with cannabis businesses.

The truth of the matter is that many CPAs are qualified to handle accounting services for businesses. But to work in cannabis, a CPA must dedicate some time to develop their expertise in this budding industry.

With so many rules and regulations, cannabis business accounting demands more research from CPAs. Between IRC 280E and the various other laws surrounding cannabis accounting, there’s a lot of information for CPAs to digest before they’re ready to handle cannabis delivery service accounting.

Here’s what you should look for to choose the best accountant for your cannabis delivery service:

A Firm Grasp of Accounting Core Skills

It’s crucial to start at the basics, regardless of the niche you plan to participate in. With this in mind, it’s helpful for your cannabis delivery service accountant to understand the core skills of the CPA, Enrolled Agent, and bookkeeper.

But what does all of this entail?

Qualifying as a CPA means this individual has taken a specific number of accounting-related courses, passed an in-depth exam, and has obtained a license in at least one state. CPAs can offer audits and reviews of your business’s financial statements, as well as provide an educated opinion. Your CPA should be able to give assurances for your financial statements, ensuring third parties like banks or potential investors can rely on their statements when the time comes.

As a bookkeeper for your cannabis delivery service, your accountant will have to review all of your business transactions and piece together the information into a useful financial statement. This can also include preparing your state tax returns and other government filings.

The role of an EA, or Enrolled Agent, is to prepare tax returns and represent your business before the Internal Revenue Service. For someone to qualify as an EA, they would have had to pass a comprehensive IRS exam or have worked for the IRS at some point.

Red Flags

Regardless of the kind of professional you’re looking to work with, they should always have certain qualities. Keep these red flags in mind as you’re looking for an accountant for your cannabis delivery service:

  • The accountant is unresponsive. While skilled accountants tend to be busy, they understand how to balance their work to ensure every client is treated fairly. Even though it could take a skilled accountant more time to complete something than you’d like, they should always return phone calls and keep you informed.
  • The accountant chooses to take shortcuts. Your accountant may try justifying shortcuts by deeming them creative. However, while the cannabis sector is demanding and fast-paced due to the regulations, shortcuts aren’t always the answer. You’re trying to progress your cannabis delivery service forware. But even though you might think getting things done faster by creating misleading statements on bank applications or tax returns is the right way to do things, the right accountant understands that these shortcuts are damaging to cannabusinesses and their owners. The right accountant will know to protect you from temptations to take shortcuts.
  • The accountant doesn’t know how legal entities work. An accountant working with a cannabis delivery service should understand the fundamentals of accounting. This, of course, includes reporting financial operations by legal entity as opposed to reporting by business groups. For instance, if you have a group of investors who own several cannabis delivery service operations, each business should be operating as a separate legal entity. This means keeping separate books and records for each legal entity. Your canna-accountant should know that this is something they’ll need to do for tax reporting purposes, as well as for recording information that’s needed to remain compliant with your state’s licensing requirements.

Your legal agreements and business practices should be documented accurately in all transactions. You should have legitimate contracts to ensure your cannabis delivery service isn’t left open to any unnecessary risks. For instance, a valid loan agreement is essential for loans between two legal entities. You’ll also need a management services agreement if you’re exchanging payments between two legal entities for management services.

Simply put, your accountant should understand how to do everything by the books to ensure your business adheres to regulations.

A Strong Professional Network

The right cannabis accountant for your cannabis delivery service will have a professional network composed of all sorts of professionals. Professionals know other professionals, and with this being the case, your cannabis accountant should become a resource you can use when you need another professional.

Your accountant should assist you with minimizing costs, budgeting, complying with tax and financial reporting, and evaluating financial opportunities. But you’ll likely have other tasks that your accountant won’t be able to fulfill.

For example, your accountant will not create legal entities or prepare legal documents. With this in mind, if this professional has a list of other professionals they trust, they should be able to recommend you to someone who can help.

Looking for a reliable accountant for your cannabis delivery service? Feel free to contact us today to learn how we can help your service navigate the complexities of the cannabis sector.

How to Raise Capital for Cannabis, Hemp, or CBD Companies

How to Raise Capital for Cannabis, Hemp, or CBD Companies

Cannabis businesses have raised hundreds of millions of dollars in 2020, and these investments are expected to continue as the industry grows.

Much of this sector demonstrates its resilience to recessions and pandemics, even being categorized as essential, as many states have been observing heightened demands. But even with these companies being recession-resistant, some find it challenging to acquire capital for funding or obtain investor interest.

Besides going further into debt to raise their capital, cannabis companies must find a way to build capital without draining their resources. Regardless of whether you’re operating a startup or an established canna-company, this guide offers insight on how businesses operating in cannabis can significantly increase their capital.

The Benefits of Bringing in a Niche-Specific Accountant

An accountant specializing in cannabis isn’t always on the top of early investors’ and founders’ to-do lists. These investments don’t often pay off because these people lacked the insight to determine the health of the company.

You don’t have to go down the same erroneous path. The right cannabis accountant will ensure you bypass common errors and increase your business’s value by maintaining its health.

The majority of investors don’t participate in the day-to-day operations of their business. So a cannabis accountant is essential to maintain and monitor the investment. These professionals can prevent downside loss from theft, severe bookkeeping error penalties, and fraud too.

Investors look for the solid, visible data that shows them your business is the right investment. In essence, this information should exemplify the profitability and smooth operations of an investment-worthy business. But this information isn’t accessible without a professional to compile it properly.

Correct cost accounting, accounting policies and procedures, chart of accounts, documented internal controls, and other tools must be tailored to your cannabis business.

Cannabis-related businesses have complex accounting requirements. These also differ across unrelated verticals, including chemical manufacturing, product manufacturing, retail, labs, and farming.

Your accounting team should have a firm understanding of multiple niche-specific layers and regulations that impact the cannabis sector. This knowledge, along with a successful track record of supporting other cannabusinesses, shows this professional will handle all of the high-level tasks and sets your business up for smooth and successful operations.

Create an Incredible Pitch Deck

With the right data on-hand, it’s easy to put together an amazing pitch deck. This is what your all-star cannabis investors want to see. No one has the time to invest in reading through an in-depth business plan; the simpler it is to scan your pitch deck for what makes your canna-company a solid investment, the more likely you are to raise capital.

Here’s what you should include:

  • Moving/Compelling story: The right story does a lot to convince investors your company is worth their time – and money. This is where you showcase your company’s background, explain why it was started, and demonstrate what contributed to your current success. You should also explain the main customer problem your company addresses, as well as how your company solves that problem.
  • Proven management team: Explain your team’s background and past successes. A CEO and a qualified accountant who have experience successfully navigating the cannabis sector add credibility to your company.
  • List of advisors and/or board members: A solid team should demonstrate what your investors can expect after investing in your company. Make sure to offer seats to your potential investors.
  • Competitive analysis: Research the competition and explain what makes your company better.
  • Market analysis: Conduct some research on TAM (total addressable market) and contemplate how you expect the company to grow throughout years to five.
  • Market plan model: Explain your market plan, along with your plans for distribution and sales. If you’re a farmer, avoid the assumption that your product will be sold at top-tier prices, especially if you’re just starting your grow journey.
  • Financial model summary: Outline your key assumptions, growth projects, 5-year revenue outlook, and EBITDA.
  • Unit economics: Give pricing and margins from your business model, highlighting revenue drivers and the company strategy, as well.
  • Investor economics: Provide a company valuation, sources/uses of capital you’ve already raised, ROI, ownership size in relation to the investment, and expected payback time.
  • Amount of capital the owner has invested: Assess and record the capital you’ve put into your company.
  • Outline what traction you’ve had so far: This should include anything that shows your cannabis business’s progress and usually includes things like cannabis retail license acquisition and increases in sales.
  • Legal phrasing: Make sure to have a qualified attorney check your phrasing as this can be an issue.

Develop an Impressive 5-Year Financial Model

Your financial model should be aligned with the information you’ve included in your pitch deck. Sometimes, a model will receive an update. But without changing the numbers in your pitch deck, investors might question its accuracy. Here’s what you should include in your model:

    • Financial statements: Offer all financial statements, such as a P&L, balance sheet, and statement of cash flows.
  • Key assumption tab: This is where you’ll include all key assumptions, such as your pricing, production, etc.
  • Summary tab: Include key metrics and assumptions, along with financial ratios such as investor capital, overall ROI to investor, and internal rate of return at Year 5 exist under different valuations)
  • Best- and worst-case scenarios: Show the extremes to show investors what they can expect if your predictions are off by 50% or more. This ensures they will be prepared and understand what they should expect in regards to sales fluctuations

Other Considerations to Raise Capital for Cannabis

As you raise capital for your cannabis business, some other factors will come into play. Consider doing the following before you begin reaching out to investors:

  • Defining a realistic company valuation. This should be included in your business model and deck. The key here is to ensure your valuation is realistic. Consider whether the company is pre-revenue and whether it has any real assets besides an idea and a cannabis license.
  • Find your UVP and USP. Your Unique Value Proposition shows what makes your product or company unique, sustainable, valuable, and desirable in accordance with the market. Your Unique Selling Proposition highlights the reason your customers will purchase from you as opposed to the competition.
  • Obtain traction. Consider the milestones you’ve already hit to determine your next steps. If you’ve had a lot of traction, you’re likely prepared to raise capital and your valuation can be higher. This translates to you sacrificing less of your company to receive the capital you’d like to raise.