The cannabis industry is a bit of a paradox: the central product encourages relaxation and conjures words like “chill” and “good vibes.” The industry itself, however, brings to mind words like “cutthroat” and “anxiety-ridden,” as it’s a hypercompetitive world where everyone is fighting over scarce resources and the whole industry operates in tenuously legal waters. In such a precarious environment, every edge counts — especially when it comes to obtaining resources.
In one of our previous articles, we covered some of the indications that your finance team isn’t investor-ready. Having covered potential deficiencies in your finances, let’s now discuss what your financials should actually look like to be investor-ready. Read on to discover how best to construct your financials for your best chance at being investor-ready (and, hopefully, alleviate some of the stress that accompanies the business).
Core Financial Statements and Projections
If you want your cannabis business to be investor-ready, you’ll need data to support your financial viability. This data forms a financial plan, including an income statement (i.e., a P&L statement [profit and loss]), balance sheet, cash flow statement, and break-even analysis.
Your P&L report should track your business’s revenue, COGS (Cost of Goods Sold), gross profit, operating expenses, EBITDA, and net income. Your balance sheet summarizes your assets and liabilities, which speaks to your financial standing, while your cash flow statement demonstrates your business’s liquidity and sustainability. Investors will require monthly and annual projections. The break-even analysis will help investors determine risk and establish a timeline to profitability.
Moreover, there should be projections of revenue and expenses, including breakdowns of fixed costs (e.g., rent and licensing), variable costs (e.g., raw materials and hourly labor), and the contribution margin. When these elements are included in your income statement and cash flow projections, they help investors determine your business’s scalability as well as its ability to generate profits in a competitive market.
Key Performance Indicators (KPIs) and Metrics
Another component of demonstrating that your cannabis business is investor-ready? More data. This data should be represented by specific, quantifiable measures that indicate your organization’s ability to meet its goals. These KPIs may include total revenue, gross profit/loss, and average selling price (per gram), among many others.
Profitability and customer metrics should also be analyzed — e.g., the Customer Satisfaction Index and Revenue Per Customer. Additionally, you should pay attention to operational metrics such as the number of stores, production volume, acreage, inventory turnover, and more. This will help with benchmarking and strategic planning.
By providing KPIs and metrics, you let investors know that you have clear evidence of your company’s growth potential and operational performance. When investors can see these facets, they can better assess the potential return on investment (ROI), depending, of course, on execution and market conditions.
Compliance, Transparency, and Reporting Standards
When it comes to cannabis businesses, everything has to be by the book. Compliance and transparency are must-haves, and failing to adhere to these components can be exceedingly detrimental to your business. Compliance demonstrates that your business is operating legally and illustrates your business’s long-term viability to investors. A lack of compliance can also result in a tax audit, which could cost your cannabis business thousands. To help demonstrate your compliance, a financial model will be necessary.
Transparency helps build trust in your company, which is crucial for swaying investors. Part of being transparent includes providing annual financial reports (ACFRs) and clear disclosure of all financial activities. Your financial reporting should also adhere to Generally Accepted Accounting Principles (GAAP), which ensure that financial statements are consistent and comparable.
Tools and Templates
Finally, if you want to show your cannabis business is investor-ready, your financials should include tools and templates — i.e., business plan templates, financial models, and pitch decks. These elements demonstrate that you have done your due diligence, allowing potential investors to conduct an in-depth analysis and gain a thorough understanding of your business model. Tools and templates also let investors see your market and competitor analyses, which proves you have done your homework on the competition and understand where your company stands in the business ecosystem.
Furthermore, tools and templates ensure you comply with industry standardization, making your data easier to comprehend and, in turn, bolstering investors’ confidence in your business.
There is a host of tools and templates available to assist your cannabis business, from Enterprise Resource Planning (ERP) systems to software that enables you to stay on top of regulations. Decide which tools and templates your business needs and start implementing them immediately. Imagine your competition is doing the same thing — if you’re not applying these tools and templates, you’re already at a disadvantage.
Conclusion
Investor-ready cannabis financials take many forms — albeit mostly in the form of data. The data will show how profitable your business has been and is projected to be. It will also demonstrate your company’s ability to meet its goals. As we’ve stressed, there is an absolute need for compliance and transparency. Making sure you attach the correct tools and templates lets investors know you have done your financial due diligence and are following industry standards — which helps investors easily sort through your data and build trust in your company.
Forget thriving; if you just want to survive in the dog-eat-dog world of cannabis, you need to leave the “laid-back vibes” for a different industry. There are plenty of people more than happy to take your place if you don’t feel like putting in the extra effort required. Investors aren’t looking for good intentions or positive attitudes — they want to know you’ve put in the work and that you’re a viable investment opportunity.
