CFO On Call: Budgeting – The Value Added

We worked with a startup dispensary to develop a first- and second-year forecast, which included sales, cost, and overhead expenses. This forecast was converted to monthly budgets for a rolling twelve months.

Businesses are not purely linear. Rather than have growth and then plateau, they grow again and then plateau. The most straightforward example is when the dispensary opened, starting with rent, utilities, and other overheads. The company had to grow sales to cover those overheads. The same is true for inventory, personnel, and other costs.

The budgets for the early months showed a monthly shortfall in sales to cover costs. The shortfall was covered by additional investments other than sales.

Eventually, sales built, and costs were covered.

After the dispensary was up and running, the budget showed different needs. Sales were tracked, and a pattern was established to understand the order rate for purchasing inventory. Inventory on-hand balances were tracked. The sales rate was tracked so the company knew that products would be sold in a week or two on their favorite products. Products that were aging by three weeks needed to be discounted and sold. With the development of those patterns, it allowed the company to carry more SKU’s, and grow the business while keeping a tighter budget for overall inventory.

We call out the tax budget separately even though it is a subset of the operating budget. The reason is that the tax rates for a canna business are very costly and due to the timing for payments, there is a need to budget AND SAVE for the periodic taxes that must be paid. We have a section of the monthly budget at the bottom of the layout identifying the taxes due each month. This is also managed on the financial statement in two spots: 1) P&L in a specific tax section, and 2) on the balance sheet in the liabilities section so the canna operator always has checks and balances to the monthly budget amounts for taxes.

Another budget that is only seen at the beginning of a business or in a significant expansion is a capital budget. Using our dispensary as an example, when they first acquired their license, the location was not in the condition they wanted it to be for its operation. As a result, a capital budget was created. This is often the case when a cannabis business first acquires its license.

The capital budget encompasses everything from the exterior of the dispensary building to the interior. Estimates have to be assigned to all line items. The inside is extensive: sales rooms and displays, inventory storage, lights, HVAC, plumbing, electrical, security, and vault, just to mention the high points. The result of this valuation is the cost for the build-out and the timing for the completion.

This is all pre-operation, so it all must be sourced from outside funds. Outside funds may be through current owners and/or outside investors. The funds are not needed at one time, so the costs and the timing arrived at in the budget become important here.

These examples have been for both operational budgets and capital budgets for a dispensary. Similar challenges face other parts of the industry. In all cases, monthly budgeting with accurate costs on a twelve-month rolling projection is generally a format to use.