Sometimes, business owners don’t consider their break-even point. But knowing when you’ll become profitable means understanding how to calculate your break-even point. This is also how you’ll bypass the inflated numbers to reveal how long your profitability will take – with expenses in mind.
All too often, we see catchy headlines marketing to the masses. They proclaim how cannabis dispensaries are earning millions of dollars each year. These figures sound too good to be true, and that’s because they’re focused on the gross revenue.
But we need to bypass gross revenue and determine how much your dispensary earns after factoring in expenses. This is the right way to judge your business.
The first step is understanding break-even point meaning and how to calculate it.
Net income and net margins have their roles to play. With this information, you’ll know what you should set aside for taxes. And this ensures you effectively manage your costs.
The value in knowing your costs is knowing when your dispensary will be in a better position to become profitable. In this article, we’re covering what a break-even point in accounting is and the calculations you can do to uncover your dispensary’s break-even point.
What is a Break-Even Point (BEP)?
A break-even point in accounting for cannabis is the point when your costs and total revenue are the same. For instance, if you’ve invested $100,000 in your dispensary, you’ll break even when your total profit reaches $100,000.
But according to Investopedia, conducting a break-even analysis is as easy as dividing the fixed costs by the price per unit minus the variable cost of production. While this is a simplified definition, it highlights that your business’s goal should be to hit this point early on in its lifecycle.
After reaching your break-even point, the next step is to achieve profitability. This is when your revenue grows beyond your costs. Typically, the break-even point for a cannabis dispensary involves:
People – The wages and benefits for the people working in your dispensary.
Products – Think about where and how you source your products.
Space – Real estate regulations mean you have limited options for spaces.
For every break-even analysis example, your expenses won’t always be flexible. However, you can adjust some of them to determine what will work best to achieve profitability. For instance, you can cut the cost of your products by sourcing from somewhere else. You can also hire fewer staff or adjust the hours they work in your dispensary.
Calculating the Break-Even Point for a Cannabis Dispensary
As you calculate your cannabis dispensary break-even point, these are the variables to consider:
Average Sales Order – To calculate your average sales order, add all of your sales and divide the sum by the number of transactions.
Average Monthly Contribution Margin – To calculate your average monthly contribution margin, you’ll add your cost of goods sold (this should include shipping and any other direct costs) and divide it by your revenue. Keep in mind that this does not account for your taxes, which will take between 7% and 10% of your margins.
Average Monthly Fixed Costs – Combine all monthly fixed costs. This should include your bank/merchant fees, licensing fees, office supplies, software subscriptions, total payroll, rent or mortgage, utilities, and any other expenses you pay every month.
With this information on-hand, you can determine your break-even point, as well as how many sales per day or per month you’ll need to make to break-even. While a break-even point calculator will make this easier, some simple math can produce results too.
As a break-even point example, suppose your average sales order is $200 and your average monthly contribution margin is 50%. Your monthly fixed costs are $3,000 and you’ve invested $100,000 in your dispensary. With these numbers, you can calculate the number of sales per month or day to break-even. If you want to break-even in 6 months, you could uncover daily, weekly, and monthly sales targets.
In this break-even analysis formula, you’d multiply the number of months (6) by the monthly expenses ($3,000). Then, you’d add that to what you’ve invested ($100,000). This equals $118,000.
You’d then divide $118,000 by 50% of your average sales order ($200). This shows you’d need 197 orders per month to reach your break-even point in 6 months.
This math can also be applied to calculate how many orders you’d need per day, week, year, etc. However, keep in mind that you’ll need to include local state and federal taxes in your calculations.
What to Do After You Know Your BEP
Once you know your BEP, you know your sales targets to maintain your progress. While sales will fluctuate from day to day, this offers insight that can guide your marketing and management decisions.
Now that you have information contributing to your operation, you should maintain a sales journal. With a sales journal, you’ll track your sales, the number of transactions, and other relevant information. As you continue updating your sales diary with relevant information, you can look back to gain more insight regarding your business’s sustainability and how to maintain and grow it.
A sales journal allows you to look back at the days you’re not breaking even. There could be a trend that reveals when and why certain days aren’t profitable. This will allow you to take action and determine where you can cut costs and increase your chances of making a profit on those days.
You might decide to cut costs. This will involve checking your variable costs. You may be able to cut costs by scheduling fewer hours for your team. Or perhaps you can decrease your marketing costs for the days you’re not profitable.
Another option is to sell more product on those days. This could involve some creativity. For example, you could try hosting events or running a promotion on those days to increase profits and cover your overhead costs.
Most of the time, the best option is to market profitable items. This isn’t always the priciest product you sell. You’d focus on selling the products that offer the best margins. For many dispensaries, this product is pre-rolls.
Running percentage discounts isn’t always the best choice. Some customers will alter when they purchase to ensure they’re buying during times you’re offering a discount. The goal here is to get your customers to spend more and get a better deal simultaneously.
After you know what’s causing your unprofitable days, it’s also important to determine what’s causing your most profitable days. Perhaps some employees are making those days better. Or maybe other external factors are coming into play. Your sales journal should highlight macro-trends you can use to improve your dispensary’s profitability.
While data can be tedious, this is the business end of things. With more in-depth data, you can ensure your dispensary’s long-term and sustainable success as you serve consumers.
Need a financial analysis of your dispensary? Looking for help with your dispensary accounting? Feel free to contact us today.
While filing for bankruptcy as a cannabusiness operator isn’t an option, receivership could work. This involves having an appointed trustee restructure your company and is especially helpful for business owners interested in exiting the cannabis sector and recouping some of the resources invested in the business.
But why is a receiver appointed? And what is the role of a receiver?
While we can use receivership for limited purposes, it also works as an alternative to foreclosure. Let’s talk about how receivers and receivership and how they can work for cannabis business investors.
Many cannabis business operators have found themselves in dire situations following the market downturn. We’re observing some bankruptcies move to Canada because it’s federally legal there. But some operators are finding it increasingly challenging to cope with the downturn as customers are stuck at home, and partners cannot operate the business properly.
Since Federal regulations prohibit cannabis, filing for bankruptcy protection isn’t an option for those operating in cannabis. This being the case, struggling cannabis business operators have an option called receivership.
Receivership is a financial process that allows a trustee to step in and restructure the company to bypass bankruptcy. Through this process, a court-appointed person can either try to improve the business or assist in liquidating assets and paying off obligations that could include debt owed to those who’ve invested.
If you’re a cannabis investor who has taken on a debt note rather than an equity stake in the company, receivership is usually an effective option. If you opted for an equity arrangement, the company has no obligation to pay you back. With this in mind, you might have to exit the receivership arrangement of the cannabusiness with nothing.
On the other hand, if you’re in a debt-relationship, you could use receivership to recover some of your financial resources from the cannabusiness. This could also work if you entered into a joint venture deal with a cannabusiness and the company owes you money from the arrangement. If this is the case, this is viewed as a debt that must be repaid.
If you have a debt note or a loan out to a cannabusiness, you can request that the court force the business into receivership. If this happens, the business will be taken over by a court-appointed receiver, and the current operator will no longer have a say.
You don’t need to be a third party investor to enter into receivership. While you can be a third party investor, you might be a founder who has funded the business on the books. This initial capital contribution could have been journaled as a loan to the canna-company. You might have equity in the business too. But if you made a loan to the company, that’s a debt that it owes you. This, of course, is contingent on the details of the agreement.
If you decide to trigger receivership for a cannabusiness you’ve invested in, here’s what you can expect:
Role of Receivership for Cannabis Business Investors
Who can appoint a receiver? The court.
Court-appointed receiver duties include managing the cannabusiness’s properties and assets. This is comparable to the role of a bankruptcy trustee.
The receiver acts as new management, managing, selling, or maintaining assets with the primary goal of attempting to pay creditors and stabilize the company to the point of recovery.
Even though the receiver gets to decide what they should handle first, their responsibilities and duties are put in place by the court. The judge sets the receiver’s powers, and if the receiver cannot recover the business, the court could order asset liquidation and assign a liquidator.
But what’s the difference between a receiver and a liquidator?
The Court Grants Power to the Receiver
Unlike liquidators, the power a receiver gains over a canna-company depends on the circumstances and the court’s orders. These duties go more in-depth to resolve problems within a company.
You can use a receivership for a limited purpose. For example, you could implement a receivership to preserve a property pending a foreclosure sale or lawsuit judgment. It can also be used as an alternative to foreclosure, putting someone in charge of managing assets rather than claiming them as collateral.
In some cases, a receivership can be a possible alternative to bankruptcy. This is when a stakeholder wants to liquidate a property and requests the court assign a receiver to handle the liquidation responsibly.
What are the Benefits of Receivership?
A receivership could be the right move for your cannabusiness. But ultimately, it depends on your situation. Here’s how you can benefit from a receivership.
Receivership can preserve assets and even stop fraud. This is beneficial in instances when you’re worried about embezzlement damaging your business.
In some cases, a loan could be backed by assets, such as a building or pricey equipment. These assets can become damaged, stolen, or misused. With this in mind, a court could appoint a receiver accountability over that asset. This can prevent mismanagement or intentional misconduct.
Sometimes, employees or stakeholders within your business might be purposefully committing fraud, damaging your business, or diverting cash. In these instances, a receiver can be a useful ally. If you’re nervous that a company or individual might damage or waste company property or assets, it’s ideal to appoint a receiver to ensure this doesn’t happen.
Receiver relationships can also insulate a secured creditor from lender liability. Lender liability ensures that lenders don’t mistreat their borrowers. If they don’t, the lender could be held liable for any resulting damage to the borrower. A receiver helps you bypass this issue by controlling how the borrower (the cannabis business) is treated and directed.
Receiverships also benefit creditors. A receiver has the ability to freeze and stop all other creditor actions and ensures your claim is honored before others. This is especially helpful when other creditors have a personal relationship with the cannabis business operator or attempt to take advantage of the business in another manner.
With a receiver, you also may have the option to purchase the business using your initial investment. While the receiver comes in to set the company up to recover, the recovery plan might not work out. Then, the receiver needs to liquidate.
As the receiver begins selling off the assets, the creditor’s initial investment (your initial investment) can act as an opening bid to purchase the whole business. If you think you can effectively run the company profitably, this could be a good option for you.
The Receivership Process
The receivership process looks different for each company. However, the process has four main phases:
Receiver tries to stabilize the business. At this stage, the receiver is trying to get the company to a state of profitability. This can involve negotiating with creditors and lowering expenses.
Receiver determines why receivership was essential. The receiver attempts to gain an understanding of the problems that caused the need for intervention. They then must either initiate litigation or convince insurers to abide by the original policy terms and conditions.
If they find litigation is essential, the receiver files a lawsuit if they believe investors will benefit from it. The lawsuit is only filed if the claim will benefit all investors in the entity in receivership. If the claim only helps some investors, it won’t be filed. Thus, if your case isn’t aligned with the mission of the receivership, it could be best to pursue an individual claim.
The receivership concludes with distribution. Assets are distributed to investors at the end of the receivership. This phase can take months or even years, depending on who can claim certain parts of the business. In some cases, investors receive less than 5% of their losses. However, others can recover nearly 100% of their investment losses.
Considering entering into receivership? Feel free to contact us at any time for assistance.
Cash management is crucial for any small business. But when it comes to operating in the cannabis sector, inappropriately managing cash can become a severe issue.
This industry is characterized by inaccessible banking services that force many cannabusiness operators to handle transactions in cash. With this in mind, strong cash handling policies can ensure your dispensary’s survival.
For instance, without the right cash handling methods, sales tax can become a serious problem if you don’t correctly pay it. But if you’re dealing with cash transactions, sales tax is money that belongs to the state.
One significant issue is that companies tend to misuse cash that should be put to the side for sales taxes. Instead, they use this money on operating expenses. Then, when incoming cash flow pauses and sales tax bills are due, cannabis business operators have problems with the IRS and other state authorities.
It’s crucial to know which cash belongs to you and how much to set aside to pay your taxes. Understanding your operating capital cash ensures you know what you’re working with and what belongs to the state.
With this in mind, try these tips to manage your cash:
Get Informed on State, Local, and Federal Taxes
If you’re managing cash on your own, stay up to date on the state, local, and federal taxation. But if you’re working with a CPA, make sure they’re experienced in handling cash for cannabis businesses. Your CPA should be able to teach you about the percentages and calculations you’ll need to set aside cash to pay your taxes.
Your CPA will explain whether your taxes are based on gross receipts, the base that your tax rate is calculated on, and other information about your taxes. This information will vary depending on what you do, so speaking with an expert about your situation can shed some light on it.
For example, dispensaries should have some sort of target revenue monthly, quarterly, and annually. This allows you to calculate what you expect your tax bill to be for each period. With this insight, you’ll have a good idea of what you should set aside to cover your taxes.
Set an SOP for Cash Reconciliation
Once each day ends, reconcile your cash on hand using your POS system. This is how you’ll ensure there hasn’t been a theft or diversion.
Your team should have a standard operating procedure for handling cash. Here’s what your procedure should cover:
Where cash is kept
How cash is counted and who is responsible for counting it
If your business has a bank account, the bank’s location
How the cash is to be transported from the business to the bank
Where the safe is located
What type of safe you’re using
Set Aside Cash for Regulating Agencies
Compliance is essential in the cannabis sector, and your business must remain compliant with regulations set by the state, local, and federal agencies. Cash should be put aside for taxes, but also for license renewal fees and potential penalties you might incur.
Handling your cash flow involves putting cash aside to manage every aspect of your business. This should also include an emergency fund that’s capable of covering your company’s operating expenses for at least 60 days. Emergency funds can be a serious blessing in instances when you find yourself dealing with an unexpected expense like a high tax bill or something else.
Use Banking Services for Cannabis
Sometimes, it’s challenging to get a business account for a cannabis endeavor. However, it’s not impossible. If you have a business bank account, make your cash deposits at least two or three times weekly.
If you can, deposit cash into separate accounts to hold your tax money. But if you can’t separate your cash, make sure you have at least 115% of what you estimate your tax bill will be in your account.
Incorporating a Drop Safe
While a drop safe isn’t always a priority, it’s one of the most effective ways to keep your cash safe and ensure you’re allotting money towards everything you need to handle. A drop safe physically separates the cash you have into categories. For instance, you can have a drop safe for taxes, another for operating expenses, one for payroll, etc.
You should only grant access to your drop safes if it’s essential. The fewer people with access, the better. The only people who should have access are the owner, their lawyer, and perhaps a designated cash handler. Recording each drop in a cash log is also recommended because this will help with reconciling your dispensary’s cash at the end of each month.
For Digital Payments, Separate Your Income from Taxes Automatically
Some merchant processors will let you automatically set aside income money from tax money. For example, if you’ve recorded $1,000 through your POS, you can set the system to deposit part of that money into separate accounts automatically. You can set it to send 10% into your sales tax account, 20% into an account designated for state and federal taxes, 10% into a city tax account, and everything else into your main account.
Incorporate Counterfeit Cash Detection Procedures
Your employees likely haven’t been properly trained to spot fake bills. But that won’t stop the government from taxing you based on fake cash your employees have accepted.
With this in mind, avoid paying taxes on fake cash by incorporating counterfeit cash detection procedures. You also have the option to use a device that checks for authenticity.
Hold People Accountable for Their Tills
Cannabis cash handling demands accountability. Someone, whether it’s your general manager or shift manager, should be responsible for counting the cash at the state and end of each workday.
The cashier or budtender responsible for the till should watch as the GM or SM counts the money. They should then sign off on the count in or out. Once this is completed, whoever is in charge should reconcile the cash with the day’s sales. This should all be done in a recorded room that offers clear views from all angles.
Need help determining the best course of action for cash management at your dispensary? Contact us today to learn more about how we can help.
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:
Average spend per transaction
Contribution margin of each product
Gross margin per product
Waste management costs
Grow cycle time
Cash-to-cash cycle time
Manufacturing cycle time
Throughput & capacity utilization
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.
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.
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.
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.