In the realm of cannabis cultivation, manufacturing, and dispensary operations, the conventional approach to forecasting is undergoing a significant transformation.
Many businesses in the cannabis industry have traditionally relied on historical data to predict future performance, much like other sectors. However, the uniqueness of this field demands a more dynamic and adaptable forecasting methodology.
Picture a forecast that evolves on a far more frequent basis — imagine updates occurring on a DAILY or WEEKLY cadence, in contrast to the more typical monthly or quarterly updates. Furthermore, this advanced approach delves into granular specifics that extend beyond the confines of traditional forecasts.
Embrace the Dynamism of the Cannabis Industry
The cannabis sector is characterized by its ever-shifting landscape. From varying cultivation yields and manufacturing processes to dispensary footfalls and regulatory changes, the factors influencing revenue and expenditures are in a perpetual state of flux.
For cannabis businesses without an active CFO dedicated to consistently assessing forecasts, a sturdy financial foundation remains elusive. The intricate knowledge of cash flow status, potential investments, permissible distributions, and more becomes an untapped resource.
Consider the following scenario:
Many cannabis enterprises initially entrust part-time individuals, often friends or family of existing employees, with their financial management. While this approach can be functional to a certain extent, it quickly becomes insufficient as the company scales, typically beyond the 10-employee mark. At this juncture, the involvement of a qualified accountant becomes indispensable to construct meticulous monthly forecasts and comprehensive cash flow evaluations.
As your cannabis operations expand, reaching a threshold of around 20 employees, the next logical step involves integrating a part-time Controller or CFO on a weekly basis.
Neglecting the Vigilance of Financial Oversight
Operating in the cannabis industry without a dedicated financial overseer can potentially lead to unintended consequences.
Elevating your forecasting practices involves a renewed focus on your balance sheet. Beyond merely examining historical patterns, the true essence lies in understanding how those patterns shape your future balance sheet. Decoding the Balance Sheet Approach
When we assert that progressive forecasting aligns with your balance sheet, here’s the essence.
A holistic financial forecast transcends revenue and expenses. It necessitates factoring in variables like:
- Projections of available liquid assets in 1, 3, 6, and 12 months.
- Timelines for resolving short and long-term debts.
- Tracking of outstanding receivables along with their repayment terms.
- Monitoring of payable accounts, including vendor terms.
- Anticipated capital expenditures (CapEx) in the pipeline.
- Imminent expenses, such as industry events, consolidated logically instead of spreading them thinly over extended periods.
- Allocation for quarterly tax payments and the fiscal year-end disparities. The Relevance of this Approach
Glimpsing at your forecast’s surface might reveal a remarkable surge in net income over recent weeks. A reason to celebrate, right?
Yet, the truth is more nuanced.
Consider this scenario: You’ve expanded your cultivation or manufacturing operations to achieve this income boost. However, your customers adhere to extended payment terms. Such circumstances are common. Still, without a robust cash reserve, compensating your growing team becomes a challenge.
Delays in customer payments could exacerbate this situation.
Similar deliberations extend to accounts payables. Adjusting payment timelines to 30 or 45 days might be a prudent step during periods of anticipated cash flow constraints.
Forecasting intricately intertwined with your balance sheet equips you to navigate these continuous adjustments and fosters a profound comprehension of your cannabis business’s dynamics. Embracing the Bigger Picture
The heart of this transformative approach lies in uncovering how non-financial KPIs (Key Performance Indicators) interlace with your revenue streams. This understanding is the antidote to mere guesswork.
Consider this illustration:
For a cannabis business encompassing cultivation, manufacturing, or dispensary operations, understanding the projected revenue contribution from each segment is paramount.
Lacking this insight could lead to inefficient resource allocation. This challenge is one we frequently encounter among our clients!
In the grand scheme of things, while financial projections might be captivating on planning boards, their true potency materializes when grounded in the realm of reality.
Every financial facet of your cannabis venture merits consistent scrutiny and meticulous analysis, nurturing an enlightened grasp of your company’s fiscal health and trajectory.
If you’re navigating the intricate landscape of the cannabis industry and seek strategic insights into your current financial standing, our team at The Canna CPAs is here to offer collaborative guidance. Feel free to connect for a deeper exploration of your business’s financial landscape.
Contact the Canna CPA’s today. We are here to help.
Sandy Suchoff, CPA is the Founder and principal of Lefstein-Suchoff, CPA & Associates, LLC D/B/A The Canna CPAs. Suchoff has been featured and interviewed on MSNBC, FOX News, and Tune In Business Talk Radio as a tax advisor, as well as ONR Oklahoma PBS TV, Chasing News on FOX & WOR, KRQE 13, Cannabis Radio, Purple Haze Radio, and Cannabis Tech & Today as an advisor on cannabis tax and accounting.