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.
Looking for expert assistance managing your legal cannabis business’s financials? Northstar is ready to increase your dispensary’s profitability!
Contact us now to learn more about how we’ll enhance your profits with the right financial services.
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.
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.
There’s rarely a sign with big red letters warning us of the need for due diligence during an M&A. But maybe there should be.
83% of mergers and acquisitions (M&A) fail. But with some preparation, it’s possible to join the minority of successful M&A transactions.
M&A is a term that describes the combination of two businesses. As the buyer, the idea is to implement strategic goals through an acquisition rather than grow organically. On the other hand, M&A is an opportunity for a seller to cash out or raise funds and share the risk and reward of a new business.
Successful M&A provides value to buyers and sellers. But buyers have the opportunity to:
Bring their products or services to market faster with new products and channels
Lessen competition by purchasing a competitor’s market share
Establish supply chain efficiencies when purchasing a supplier or customer
However, while both the buyer and seller can get what they want out of an M&A, the transaction isn’t always successful. The value of a business can become damaged during an M&A, and without due diligence, overestimating the potential cost savings can result in failure on the buyer’s part.
With failure a possibility, buyers usually prefer to perform in-depth due diligence. If they see something they don’t like, it’s possible they’ll move on from the deal without making a purchase. The key here is to make it as easy as possible for the buyer to determine your company is worth the investment.
This is where diligence is crucial for a successful transaction. By facilitating a comprehensive appraisal of assets and liabilities and an accurate analysis of your company’s commercial potential, you can increase your chance of a successful M&A.
The Importance of a Virtual Data Room (VDR) During an M&A
Today’s corporate environment has produced three significant trends to consider. First, technological advancements now redefine the way companies conduct business. Second, the global M&A transaction volume is increasing by an average of 37 percent each year, highlighting how corporate executives commonly use these transactions to achieve short- and long-term strategic objectives. And third, cross-border M&A activity is on the rise as a result of globalization.
With these trends in mind, nearly 20 percent of all executives involved in an M&A deal feel that due diligence is essential to the success of a deal. The crucial nature of a VDR is to enable the buyer to analyze the target’s risks, overall strategic fit, and potential combination benefits. Having this information readily available ensures a buyer finds the answers to these concerns during the due diligence process of the transaction.
The VDR digitizes the physical data your buyer needs to make an informed purchase decision. Documents stored in a VDR have a more efficient and effective presentation in digital format. It’s also possible to provide access to a VDR to multiple buyer teams as well as several potential buyers simultaneously.
For a buyer, a VDR offers cost savings, time savings, comfort, transparency, and a fair playing field. On the other hand, the seller benefits from a VDR’s simplicity, ease of setup, cost savings, competitive price, legal compliance, time savings, and security. In essence, the VDR facilitates the M&A transaction for both the buyer and seller.
M&A VDR Preparation Checklist
Any company interested in fundraising (debt or equity) for or selling their company should have a VDR containing all of their (corporate/financial/legal/operational) information for the due diligence process.
Here’s a checklist highlighting some of the documents and information most commonly requested during an M&A transaction:
1. Corporate Records – These documents generally include Articles of Incorporation (as well as all amendments), the Bylaws (as well as all amendments), Corporate Minute Book (along with all meeting minutes and resolutions of executive committees, shareholders and directors, and other governing groups), a list of shareholders (and the number of shares each shareholder holds), and an organizational chart.
2. Financial Statements – Your financial statements should include the three most recent sets of the following: balance sheet, income, and statement of cash flows; monthly or by shortest regular accounting period close; as well as key performance indicators and management discussion and analysis.
3. Audit of Financial Statements & Internal Controls – This documentation should include the most recent audit of your financial statements and internal controls, if available. Also, it’s ideal to include CPA-reviewed or -compiled financial statements, if possible.
4. Tax Returns – It’s best to have the last three years of tax returns, along with all schedules and corresponding financial statements on hand.
5. Fiscal Policies & Procedures – Your provided fiscal policies and procedures should include all related processes. This can include payroll processing, accounts payable, purchases, bank reconciliations, accounts receivable, and more.
6. Significant Contracts – Consider any and all significant contracts that relate to your company’s equity rights, leases, debt, employees, customers, suppliers, professional service providers, legal settlements, and anything else that could impact the company.
7. Annual Budget – Including your current and prior annual budget, along with sales, financial, and other forecasts, is also ideal for your potential buyer’s analysis.
8. Plans & Guidance – All plans and guidance associated with your company should be available. This includes the company’s business plan, executive summary, strategic plan, and any other general guidance that could prove beneficial for analysis.
9. Accounting Books – Staying up to date on your accounting and having a copy of or access to the accounting information system database on hand is a sure-fire way to provide insight into your company’s finances. This could include QuickBooks, Sage, Oracle, or some other accounting software.
The Goal: Facilitating the Valuation of Your Company
By performing M&A due diligence, buyers and investors can conduct an analysis to accurately value a company or its assets. The valuation approaches utilized during an M&A transaction can include analyzing the future cash flows (income approach), the value of the company’s assets (asset approach), and/or the value of similar companies (market approach).
Each potential buyer’s due diligence requirements differ in accordance with which valuation approach(es) they plan to use. Since it’s possible to simplify due diligence and increase tax and strategic advantages, many of these M&A deals convert into asset sales instead.
Whether the M&A will change or not, each party must prepare to ask and answer all questions pertaining to the valuation of the company. This, of course, includes providing information to support any of the valuation approaches that might be used.
Regardless of how your M&A might change, as the seller, it’s crucial to focus on providing the right information to allow the buyer or investor to appropriately value your company. While keeping the best possible outcome in mind can help you achieve the best deal possible, it’s equally important to consider the other party’s needs to successfully complete the M&A transaction.
Business operators often can’t help but wonder, “Should we hire a CFO or Controller, or should we try to do it ourselves?” However, there’s another option that’s often overlooked; outsourced cannabis CFO services.
Managing finances is essential for any business. This is especially true for businesses that are growing.
But up until around ten years ago, small business owners had to hire an in-house CFO. Until recently, they didn’t have the option to hire an outsourced team.
Today, business operators across all industries can benefit from outsourced CFO services. And with the cannabis industry experiencing incredible scaling capacity, these services are becoming vital for avoiding finance-related bottlenecks that hinder business growth.
Regardless of the industry, the majority of business owners believe that hiring in-house is the best option to have someone handle paying bills, running payroll, and managing company finances. However, for many cannabusiness operators, an outsourced CFO and accounting department is a better solution.
In this article, we’ll discuss the benefits of outsourced CFO services over hiring in-house and how outsourcing a cannabis CFO is a solution that will help you scale your company.
Outsourced Cannabis CFO vs. Hiring In-House
Hiring a cannabis CFO in-house means you’re assigning the majority of, if not all, of the financial responsibilities of your cannabusiness to a single individual. Now, while this person might be an expert, there’s a good chance that they’ll have more work than they’re capable of handling. This is especially true if your business is in the process of scaling.
Another problem with hiring a cannabis accountant in-house is that while they might be skilled in some aspects of your business, they could lack expertise in other areas. In turn, you could be putting the financial health of your business at risk by hiring one person to do several finance-related jobs.
Outsourcing cannabis accounting and finance functions brings an entire team’s expertise into your business. With this in mind, an outsourced cannabis financial services team will have experts in multiple aspects of your business’s finances on hand to handle each aspect of your cannabusiness’s finances.
With more expertise ready to assist, cannabis business operators improve their financial reporting accuracy. Furthermore, these business owners obtain several layers of oversight, ensuring mistakes and potential fraud are found before they become a severe issue.
Outsourced Cannabis CFO Services More In-Depth
Using an outsourced cannabis financial team also changes your cannabusiness at higher levels. Since many small and medium-sized canna-companies don’t have the financial backing to bring on a full-time CFO, outsourcing is an economical option. The lower levels of most cannabis organizations can benefit from outsourcing financial services too.
Per 280e, plant-touching companies cannot deduct finance and accounting expenses. Therefore, hiring in-house not only can be very costly, but can also harm cash flow by being non-deductible.
Outsourcing also eliminates the overhead, HR, and administrative burdens that come with hiring in-house. When you outsource a cannabis CFO, you’re using efficient and lean structuring that can provide cannabis-specific expertise at a fraction of the cost of an in-house team.
Bringing an outsourced cannabis CFO gives you access to their expertise when you need it too. As a result, you’ll save more when you need fewer services. For instance, your cannabis operation could be going through a period of tremendous growth. In this case, you’d need more financial services to meet your business’s needs.
However, if your business is operating smoothly, you have a financial plan in place, and you’re abiding by annual budgeting that’s already been established, you might not need to have your outsourced accountant working as much. The less your CFO works, the less you have to pay. And this allows you to dedicate that money elsewhere.
Best Practices From Multiple Industries Working for You
Hiring in-house usually means you’re hiring someone who is knowledgeable in specific areas. But working with an outsourced cannabis CFO, you have access to experts who have worked across many industries.
The exposure to other industries allows your financial experts to spot potential weaknesses or opportunities for your cannabusiness. Thus, you have knowledge and data backing each of your business’s moves.
With knowledge of the best practices across other industries paired with GAAP (Generally Accepted Accounting Principles), your cannabis business receives the right financial services to keep it operating smoothly. Since the cannabis industry is highly regulated, this is essential to ensure your business’s success.
The right outsourced cannabis accountant will introduce efficiencies and organization to your cannabis business’s operations, contributing to your wins and steering you clear from potential losses. As tax season approaches, there’s no need to fret as you’ll know everything is being handled as it should. The experience of an entire team working on your business’s finances ensures you’ll never need to worry about pricey infractions.
Standardized Reporting to Make Documentation Simple
The majority of CFOs have personal preferences for how they’re formatting documents, reports, and files. This is especially true when they’re the person handling all of the documentation for your business. While this can work, it’s possible that they will not adhere to the standard practices within the cannabis industry.
In an industry characterized by strict restrictions and pricey infractions, standardized reporting is crucial for success. With a part-time cannabis CFO, you’re more likely to have someone who will adhere to these accepted reporting standards. Since they already work with several cannabis companies, they already understand the importance of sticking to what works for this industry.
Standardized reports make tax season easier. From handling your taxes to reporting and handling legal issues, a fractional cannabis accountant will keep everything organized with standardized reports and make sure that in the case of an audit, you’re prepared.
Some Problems Outsourced Cannabis CFO Services Help Business Operators Overcome
Outsourced cannabis financial services aren’t for every business. But it can be a valuable change in many canna-company operations.
Bringing outside help could be beneficial in many instances. These are just some of the times an outsourced cannabis accountant is ideal:
Your company is experiencing exponential growth and demands an increase in oversight and financial management.
Your office manager is stuck handling your company’s bookkeeping while scaling your business.
Your in-house bookkeeper quit without giving much notice, requiring a fast solution to your financial management woes.
You’re preparing your business for a sale.
You’re looking for ways to increase your profitability.
You feel your bookkeeping practices are overly complex, and you feel that the accuracy of your financial statements could be in jeopardy.
All of these situations can be alleviated by bringing in an external cannabis accountant. These issues are especially common in cannabis, so don’t worry! You’re not alone in needing some additional assistance handling your cannabusiness’s finances.
Looking to outsource your CFO responsibilities? Feel free to contact us at any time to learn how our cannabis financial services can improve all aspects of your business’s finances.
Outsourcing a fractional Chief Financial Officer (CFO) is becoming more common in cannabis. As the economic downturn impacts operations around the country, finances become the top concern of cannabusiness operators.
With the state of the economy, hiring a fractional CFO is now more than an option for some small business owners; it’s a necessity. However, in this article, we’re going to make the decision to hire a fractional cannabis CFO just a little bit easier.
Here are 5 benefits worth considering before hiring an in-house CFO for your cannabis business.
#1: Hiring a Fractional CFO is the Economical Choice
Qualified cannabis CFOs don’t come cheap, and finding the right one for your business will require some dedication. Posting a listing, screening potential candidates, and bringing them in from throughout your area for interviews – even the time is a costly investment. If your canna-company has never employed a CFO, the operational inefficiencies also add to the cost.
Even after finding a part-time cannabis CFO, there’s no telling whether the professional is a good fit for the role until after they’ve started working. Then, if they’re not the right fit, the process begins again.
But sometimes, the process of hiring is simple. Even then, a CFO’s salary and benefits don’t come cheap. Depending on the area you reside, the cost of having an in-house cannabis CFO is estimated at up to $578,054 annually between the salary and benefits.
Bringing on a part-time cannabis CFO is the economical option because recruitment and hiring costs aren’t as high. You can test a candidate as your outsourced CFO to see if they’re the right fit. If they’re not, you can move on to the next candidate.
Also, since a fractional CFO is a third-party employee, they don’t receive benefits or costly perks. You don’t have to incentivize retention for a part-time CFO because they still can work with other clients while working with you. This translates to your part-time team member earning more as they can dedicate time to helping other clients.
#2: Using a Part-Time CFO Makes Scaling Easier
Your part-time CFO is the entry point your cannabis operation needs to begin scaling. Rather than spending the money on someone in-house, you’ll use their labor as much or as little as you need, while taking your current financial and business goals into consideration.
Some seasons might be busier than others, demanding more time from your outsourced CFO. Other times, you might need to scale back their services to fulfill some other financial demands. Regardless, when you have a part-time CFO, you can allocate funds to increase their focus on your cannabusiness or to boost another aspect of your business that promotes its scalability.
Managing transitions becomes easier, allowing you to focus on scaling whenever the time comes. Financial challenges in this industry can make or break a business, meaning it’s crucial to consider how hiring part-time will benefit your business.
Hiring a part-time CFO is even an option for as you’re going through these transitions. For instance, if you’re trying to secure outside financing or expanding into new markets, it might not be an option to bring someone in full-time. However, a part-time CFO is a viable option to fuel your cannabusiness’s growth.
#3: The Right Fractional CFO Provides Immediacy to Cut Costs
Time is money, and if you hire a fractional CFO that saves you time, that team member is saving you money. The immediacy of hiring a part-time CFO saves costs by limiting the time spent searching for your new hiree.
This is someone who immediately comes in to fulfill your business’s financial needs. Without the exhaustive search for a full-time CFO, it’s an option to allocate it towards other important business matters.
Another instance of fulfilling immediacy necessities is if an existing CFO suddenly leaves your business. Bringing on a part-time cannabis CFO ensures you can continue your operations without any hiccups or delays.
#4: A Part-Time CFO Provides a New Perspective
As a cannabis business operator, it’s easy to get “tunnel vision.” Sometimes, we can become so focused on managing the business that we forget to think outside the box. However, bringing on a fractional CFO offers a new opinion that can add to your business’s success.
Desires and plans can impact the way your team thinks. An outsourced CFO cuts through the day-to-day operations, providing the viewpoint of an outsider.
Often, these part-time team members can offer impartial advice that brings your business’s operations to the next level, as well. For difficult decisions, it could be a good option to seek advice from an outsourced cannabis CFO, especially when considering the additional experience these professionals have across the industry.
#5: A Fractional CFO Offers More Expertise & Knowledge
Part-time CFOs can fulfill your cannabusiness’s financial obligations with expertise and knowledge leading the way. This comes without the high costs of a full-time employee.
With cannacompanies being able to afford this high-value resource at a fraction of the price, this allows them to allocate more to other aspects of their business. This means more money towards business strategy and planning than they’d otherwise have available.
You can also use a fractional CFO to help you set your accounting system. For instance, when we onboard our clients, we create off-line Excel (or Air Table) based sheets to track inventory movements and values and input the final inventory value in QuickBooks Online (QBO).
For cannabusinesses starting their operations, having the knowledge a CFO possesses on-hand – without the high cost of hiring full-time – is invaluable. These part-time team members offer incredible value without the hefty price tag, leaving more money to act upon any suggested recommendations.
Regardless of where your cannabusiness is financially, you have needs that we can fulfill with our fractional cannabis CFO services. Feel free to contact us with any questions regarding these part-time services.
Whether you’re stocking hundreds or thousands of cannabis products, cannabis inventory management is essential for success in the cannabis sector. Operating in this industry means you need to know where your inventory is, how much you have available, and when you’ll need to restock.
According to Wasp Barcode Technologies, 43 percent of small businesses in the United States either are not tracking their inventory, or track it with a manual system. While a manual system could work for some businesses, the cannabis sector’s strict regulations demand operators to eradicate any potential for human error.
Cannabusinesses must track their products on an individual basis to remain compliant. Supply chain issues also raise the need for cannabis inventory management.
In this article, we discuss several actionable tips and strategies to simplify processes, automate inventory management, and take precautionary measures that promote successful inventory management in the cannabis sector.
1. Use FIFO (First In, First Out) for Inventory Accounting
The FIFO inventory management principle is the industry standard in food production safety. However, this principle will also ensure you sell cannabis products in the order they’re received.
Cannabis products must be sold long before they expire. Keeping expired stock on the shelves could compromise the safety of your products, and this can result in dissatisfied customers and a compliance infraction.
With this method in place, cannabis business operators avoid stocking or selling stale or expired products. Here are the five steps for using FIFO:
Find products that have the earliest use-by, expiration, or best before dates.
Discard products damaged or past their expiration dates.
Stock your oldest (but still good) items at the front of your shelves.
Put your newer stock behind the older stock, with the most recent dates at the back of your shelves.
Sell the oldest items from the front of your shelves first.
These steps will ensure you sell your products before they expire by encouraging you to prioritize selling the products expiring soonest.
2. Use an Inventory Management Software
Inventory compliance in cannabis is crucial, and when you have Point of Sale (POS) and inventory management software in place, you’re handling inventory management like a professional.
Between the projections, reconciliations, and regular inventory audits a cannabis POS system facilitates, these systems are essential for every cannabis business operator that handles inventory. However, the right inventory management software will integrate with the government’s reporting system and make automated compliance reporting simple.
An inventory management system also reduces human error. The data-related features such as automated product equivalency, purchase limit calculations, product recall management, and batch tracking encourage data-backed decisions that increase your efficiency and help you avoid compliance infractions.
3. Analyze Data You Gather from Your Customers
Improve upon your inventory management by analyzing the data your customers generate. As you manage your inventory and gather data, you can make your business more effective and respond to your customers’ demands.
With the right data, you’ll understand what your customers want, how much you should order, and what margins will encourage your business’s growth. By effectively using this data to streamline your inventory management processes, you’re also positioning your business to make the most of any opportunities you uncover during your operations.
Overstocking is a problem. However, you also need to store enough inventory to provide your customers with products, regardless of whether you’re experiencing a peak in sales.
Your software should generate inventory and sales reports to ensure you know how much product you should have on-hand at any given time. This results in your business running as efficiently as possible.
4. Standardize Your Process for In-house Inventory Audits
While your software will provide accurate reporting for compliance, you’ll still need to standardize your in-house inventory audit process. This information will help your business recover lost sales, make better ordering decisions, and catch internal thefts and frauds with ease.
Inventory-related compliance infractions can result in a full state audit. By establishing your SOPs for in-house inventory audits and performing a full audit of all inventory weekly, you’ll increase your chance of dodging a state audit.
Some cannabusiness operators use cycle counting to audit their entire inventory each month. This is easier than counting all inventory at once, and it’s just as effective. To complete accurate inventory counts by cycle counting, you’ll count portions of your inventory at scheduled intervals throughout the month until you’ve analyzed your entire stock.
Daily inventory reports are also ideal. While it’s challenging to maintain inventory audits, conducting a minimum of an audit per week is an excellent way to reduce fraud and theft. Just make sure the person counting your inventory is not also handling your cash.
5. Prevent Employee Theft
While you’ll need to show your business is secure for your application, it’s also important to consider how much product you’re handling each month. Simply put, it’s easy for products to go ‘missing’ when there’s so much temptation for dishonesty.
According to the Marijuana Retail Report, “up to 90% of losses reported by dispensaries are due to employee theft.” This is why incorporating strict protocols to secure your inventory is so crucial.
These are some of the best options available to keep cannabis inventory secure:
Conduct thorough background checks during the hiring process.
Create limited access areas for inventory stock.
Require employee identification to get into and out of these limited access areas.
Keep a record of all staff coming in and out of inventory areas to prevent fraud.
Use alarms, video surveillance, and lighting to discourage theft.
Hire security to watch for inconsistencies in staff and customer behavior.
6. Properly and Securely Store Cannabis
Successfully managing cannabis inventory involves organization. This is why some cannabis business operators hire an inventory manager responsible for inventory maintenance.
Your inventory storage space should not be full of clutter. Instead, it should be well-organized and ready to pass an inspection at any time.
Store your products appropriately to ensure they last. This can mean air-tight containers for extracts and flower, refrigeration for perishable edibles, and temperature-controlled climates to keep all products as fresh as possible.
The inventory storage space should also be secure. Use your state’s regulations to guide you as you secure your inventory. While this will keep your business compliant, you’ll also effectively protect your inventory from unexpected discrepancies.
LEARN MORE ABOUT CANNABIS INVENTORY MANAGEMENT AND COMPLIANCE
Are you concerned that your inventory SOPs aren’t contributing to your business’s effectiveness? For recommendations regarding inventory management, software, and compliance, contact us today!