Building A Financial Plan For Your Cannabis Business? What You Need to Know
Before launching your business, make sure to know the do's and don'ts to set yourself up for success.
All good business plans require a financial projection. Creating a financial projection is both an art and science. A financial projection will include projected sales, budgeted expenses, a balance sheet, cash flow, and sources and uses of funds. Also, a financial projection will help determine how much funding will be needed and the projected return on the investment (ROI).
For most cannabis and hemp/CBD operators, the problem in creating a financial projection is they don’t have any historical data or industry benchmarks. If we were assisting a chemical manufacturer or construction company prepare a financial projection, we could obtain benchmark financial information from third party providers. Unfortunately, these third-party providers do not have any historical data on the cannabis or hemp/CBD industries. There are a few companies on the Canadian Stock Exchange; however, most of the companies are consolidated operations of vertical, distribution, and dispensaries making them difficult to analyze.
With the explosive growth of the cannabis and hemp/CBD industries has come the need for good financial projections. On nearly a weekly basis, we either review or help clients prepare a detailed sales forecast, budgeted expenses, build a balance sheet or a statement of operations and cash flow. One of the key advantages that we utilize in helping our clients build solid financial projections is the data that we have collected over the last ten years of serving the cannabis and hemp/CBD industries.
In addition, we have the information categorized by type of operator: vertical, cultivator, processor, distributor, delivery, dispensary, or retailer, which is very beneficial to our clients. We also have key data where markets range from limited competition to over-supply, such as Oregon and Colorado. As an example, we can help quantify the plant yield and cost per yield for a cultivator that grows indoor vs. greenhouse vs. hoop house vs. outdoor. These analyses are very useful and facilitate educated decision making and strategic planning.
Also, an important consideration is how much working capital is needed for inventory for each type of operator. In a projection, the most common error that we find is the amount of working capital needed; the working capital is typically under-estimated.
The financial projection should reflect five years of balance sheets, statement of operations, and cash flows. Generally, we recommend a detailed forecast of operating expenses by department for at least two years. This is built by working with management and the operators and then the budget becomes a measurement tool. We also analyze production or sales capacity of each unit to be grown, produced, or sold and review our findings with management.