5 Reasons Your Cannabis Business Needs a Solid Financial Foundation
Does your cannabis company have the information it needs to scale and grow? If it’s lacking a solid financial foundation, the answer is probably a big no.
Businesses need more than returning customers, market awareness of their product and a good reputation. If they don’t know how they’re doing, what they’re spending, how much cash they have or whether they’ll be able to cover payments next month, they’re on shaky ground. A solid financial foundation helps to keep a company upright by enabling it to produce timely and accurate reporting. It’s that information that can be used to inform decision-making, providing the kind of fodder the company needs for making the right next move.
Companies in this industry may start out with casually recorded transactions that soon multiply into an unwieldy mess. There’s orders filled and not yet filled, payments made and suppliers waiting to get paid, etc. It’s not unheard of to have an entrepreneur trying to keep track of everything through a shoebox filled with receipts—but it’s not advisable. Looking to bring order to the chaos? We’ll give you five reasons to strengthen your financial foundation:
Accurate information: With the right systems and process in place, you can develop key metrics for measuring the health of your business. This can help you spot anomalies in spending, understand when you are hitting an inflection point and need to make investments to scale your business, and provide an early warning signal if something is going off the rails. You will have the information you need to support a swift change in direction.
Expanded visibility: Our industry in particular can use help with this. When you can’t turn to a bank to hold onto your cash, then it’s likely spread out in more than one location. That may prevent you from knowing for sure how much cash you have at any one point. Was a big vendor payment just made or does it seem like you have more cash on hand than you actually do? How much do you have sitting in any particular safe at any particular time? Stop the guessing. And be sure you have the controls and monitoring in place to safeguard your cash—fraud is a heightened concern in this cash-intensive business.
Attractiveness to investors: If you’re looking for financing or will be soon, you’ll need to share your financial statements. Even if you’re comfortable with your current way of doing things and feel confident that you can make sense of the jumble of transactions going in and out of your business every day, investors won’t be. They’ll want to know where that money is going and how you’re going to use it. And then they’ll expect to see ongoing reports on what you’ve done with their money.
An auditable entity: Your investors may specifically ask for audited financial statements—and so could any acquirers if you’re hoping for an M&A exit. Do you have a way of putting together financial statements today that wouldn’t make an auditor wince? Audit fees quickly escalate if the underlying financial data doesn’t hold together, and timelines drag out. Don’t miss your window of opportunity or have your valuation take a hit because your financial foundation is weak. The same goes for any tax audits—something canna companies need to be especially concerned with because of IRS Code Section 280E, which significantly limits your deductions. You want to be sure you can substantiate your tax returns with appropriate supportable financial records to avoid having legitimate costs disallowed, and facing penalties and interest to boot!
Insightfulness: The right financial foundation gives you insights about your people, processes and systems. Is it time to upgrade your systems? Should you bring in new people who have experience with hypergrowth companies like yours? Should you change your processes as you scale your business?
As I shared in “The Importance of a Strong Financial Foundation,” a 10 minute video you can watch on demand, building or enhancing your financial foundation starts with an assessment of your people, processes, and systems. Think about how you’re set up, where the gaps lie, and the company’s plan for growth. As you move forward, you don’t want something that can be fixed to hold you back. Tinkering with your financial foundation can require some cannabis accounting expertise and finance experience to have it done right—and personalized for your company. What are you waiting for?
Sign up today to watch “The Importance of a Strong Financial Foundation” with Pat Voll and host Lauren Kershner. Part of The Joint, Kukuza Associates’ executive event series, this episode covers the reasons why your cannabis company needs to be on solid footing.
Pat is a vice president at Kukuza Associates’ parent company, RoseRyan, where she focuses on solution development for specialized finance and accounting solutions that take fast-moving companies to the next stage of growth. Her insights helped to form Kukuza’s cannabis accounting and finance solutions, which support cannabis companies as they start up, accelerate, continuously optimize their financial operations, and prep for big changes like an IPO, M&A or fundraising milestone. Pat previously held senior finance level positions at public companies and worked as an auditor with a Big 4 firm.