If you are looking to scale your cannabis business, you will need additional funding, most likely from professional investors. However, before you go soliciting additional funding, you should assiduously prepare to save yourself time, money, and exasperation. Read on for five signs that your cannabis finance team isn’t investor-ready.

1. A Lack of Financial Resilience, Compliance, and Risk Mitigation

The cannabis industry can be a strong source of anxiety. Its volatility and unpredictability can scare many would-be participants off. Therefore, anything or anyone that can alleviate this anxiety will possess distinct value. As Eli Grant articulates for AInvest, if your finance team doesn’t exemplify financial resilience, compliance, and proactive risk mitigation, you may not be assuaging that ever-present anxiety.

To make investors feel safe, you must demonstrate your aptitude for financial resilience by way of tax strategy, capital structure, and compliance, which Grant states are crucial components of resilience in a volatile market.

Grant further establishes that teams deficient in robust compliance processes, or those who cannot navigate the complexities of the Bank Secrecy Act and FinCEN guidelines, will likely deter investors.

If your finance team also can’t adequately communicate its risk mitigation strategies or demonstrate stability, investors will likely be wary of jumping on board.

2. Inefficient Financial Infrastructure and Transparency 

The cannabis industry is unique, owing to its tenuously legal status. Thus, it has unique needs.

As the site Distru points out, infrastructure is the “hidden champion” of successful cannabis companies. Therefore, if your company’s finance team relies solely on spreadsheets or lacks integrated financial software, investors may very well take their money elsewhere. ERP (Enterprise Resource Planning) ensures inventory is properly tracked, costs are calculated, and compliance is maintained.

Another necessary component of transparency is having a viable business plan that articulates the company’s forecasted or potential EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This is a vital alternative to Net Income as a measurement of performance, allowing more transparency for investors and regulators alike. 

In the cannabis industry, it can be one strike and you’re out. Distru emphasizes that a cannabis finance team that can’t provide verifiable financial data will probably send investors packing. Transparency lets investors know your business is profitable and stable. Further, abiding by strict transparency lets investors know exactly which products and stores are profitable. In short, stringent transparency builds trust, and inadequate transparency erodes it.

3. An Inability to Meet Financial and Operational Hurdles

One of the most blatant financial and operational hurdles that a cannabis finance team has to deal with is the cash-only restriction (due to federal banking laws). This necessitates (besides airtight transparency) a thorough understanding of regulatory compliance as well as having exemplary strategies for managing risks.

For example, Section 280E prevents standard business deductions, disallowing general and administrative expenses, only allowing cost of goods sold deductions. This requires your finance team to have specialized knowledge. If your finance team can’t demonstrate said knowledge, investors will make like our pants after Thanksgiving (they’ll split). 

Understanding banking and having a solid bank backstopping your financial activities instills confidence in investors and regulators alike. See the PBC Cannabis Banking Directory for resources from the banking sector.

Another operational hurdle that you must be familiar with in the cannabis industry is the IRS BSA 8300, a common form used in highly cash-intensive operations. Maintaining an active cash received log of 8300 forms as the vendor gets paid over a calendar year of more than $10,000 cash saves the finance team hours, if not days, in the event of a BSA audit.

4. The Business Operates Informally or Runs on Unsustainable Financial Strategies

As Joy, writing for Qredible, explains, many banks and credit unions still regard cannabis operations warily, expecting the businesses to be informal, counterculture operations. If your finance team can’t dispel these notions and make it immediately clear that you are taking the utmost care to run a professional business, it is unlikely you will get the investors you need.

Joy continues to say that, in the past, cannabis businesses largely relied on investments from personal connections who were willing to trade capital for ownership stakes. However, as these traditional methods of investing have become exhausted, new, sustainable capital sources must be obtained. Thus, a finance team that relies solely on ad hoc funding or can’t show a clear growth plan will not be enticing investors any time soon.

5. A Failure to Meet Investor Due Diligence Standards

It’s no surprise that investors would be hesitant to invest in a venture that could go belly up with the slightest change in local or national legislative efforts. Thus, as the AlphaRoot Team writing for Alpha Root illustrates, it is imperative that your financial team does an impeccable job with due diligence. They need to see the business from the investor’s side as well as speak to the right audience. That is, the finance team must be able to anticipate what the investors are looking for. And, simply, you will most likely need to look for more progressive investors who can disregard cannabis’s charged connotations.

Conclusion

Hopefully, after reading this article, you will know whether your company is ready to take the leap and pursue investors. To reiterate, your finance team may not be investor-ready if you are lacking in financial resilience, compliance, and risk mitigation, or if you have inefficient financial infrastructure and transparency, or if you can’t properly meet financial and operational hurdles. If your business operates too informally or relies on unsustainable financial strategies, or if your finance team does not do its proper due diligence on the investors they’re meeting, you may not be ready for investment.