How to Build a Financial Plan for Your Cannabis Business
When starting and evolving a cannabis business creating and continuously revising a business plan is a proven key to success. At the basic level, your business plan should include your business goals, methods of attaining those goals, and a timeframe to achieve them. In reality, business plans are typically much more detailed and include financial plans as well. A cannabis business financial plan is an essential part of the overall business plan as it confirms that your objectives are financially achievable. As an additional benefit, keeping track of changes and metrics provides a valuable measuring tool for the business.
How to Build a Cannabis Business Financial Plan
Building a financial plan for a cannabis business can be tricky as historical data and industry benchmarks are minimal. Financial planning involves determining how a business will afford to achieve its strategic goals and objectives. The financial plan describes each of the activities, resources, equipment and materials needed to achieve these objectives, as well as the timeframes involved. Consider the following when creating a financial plan for your cannabis business.
Assess the Environment
This will establish the financial benefits to progressing with the business plan. Include data related to market size, trends, growth potential, target customer segments, competitors, and the regulatory landscape. Prove there is an opportunity in the marketplace for your business to grow and thrive via a niche or with superior product. Confirm vision and objectives. When you explain the long-term vision and the day-to-day objectives it will make it clear for others who may choose to invest or partner with you.
Quantify Your Resources
Quantify the amount of resources including labor, equipment, and materials, then create a budget which summarizes business expenses (registration fees, licensing and permits, starting inventory, rent deposits, property & equipment down payments, utility setup fees) and operating expenses (salaries, rent, utilities, materials, storage, distribution, promotion, loan payments, office supplies, maintenance). Overestimate here and provide hard numbers.
Be wary! The most common error made in projections is that working capital is under-estimated. Consider information from the surrounding areas. Doing solid research at this stage of your business will allow you to use the key metrics for future tracking and analyzing. Be sure to include risks and issues within the set budget, even if exposure is minimal. Foresight is beneficial and reassuring to investors.
Determine Financial Projections
Determine five years’ worth of financial projections (as anticipated to be generated or expended over a chosen period in the future), including projected sales, budgeted expenses, a balance sheet, cash flow, as well as sources and uses of funds. Consider cash revenues versus cash disbursements and then reconcile cash revenues to cash disbursements to show an opening balance. You’ll use this information to project and outline needed funding and projected return on the investment.
Organize Your Books
Make it a priority to get the books in order. Take the financial framework and processes seriously. Businesses in the cannabis industry can be under particular scrutiny from governing bodies like the IRS, which enforces tax section 280E. This line item makes it difficult for cannabis companies to deduct expenses from total income, a situation which will not change until marijuana is reclassified from Schedule I. Lack of organization will only hinder profits.
Minimize Turnovers
Show an example of cost savings by planning to minimize turnovers. High turnover rates cut into business bottom line. For example, a 100-person organization which provides an average salary of $50,000 could have turnover and replacement costs of approximately $660,000 to $2.6 million per year. Keep the right people by paying fair wages, providing implemented communication and operational procedures, and establishing a retirement plan.
Create Your Contingency Plan
Finally, create a contingency plan to prepare for volatility in the cannabis market. Issues can and have arisen around regulations, technology expenses, weather, and shortages. Market volatility can lead to wasted product, unmet demand, stock market devaluation, and subpar output. A contingency plan for such scenarios will not only chart a course financially but will also provide potential direction to expand or specialize, ensuring staff and investors will not panic and abandon the company in times of stress.
Learn More About Cannabis Business Financial Plans
An excellent resource for cannabis business finance insight is CannaCon. The 2020 dates are released and now is the time to mark your calendar! Meet with other professionals, attend information sessions, and experience various goods and services of vendors. Visit Tacoma on January 10-11, Detroit on April 3-4, Chicago on July 17-18, or Oklahoma City on May 29-30! When you attend a CannaCon near you, you’ll be able to glean whatever you and your business need.