The cannabis industry operates in murky, unpredictable waters, which creates distinct challenges for financial readiness. Investors will examine scalability, unit economics, and strong leadership — but they also consider many factors beyond the scope of this article. We look forward to discussing other aspects of cannabis operations that motivate investors in part two. For now, let’s focus on scalability, unit economics, and leadership, reserving deeper analysis of additional factors for later.

For brevity, from here on, we will refer to “cannabis company financials” as “cannabis financials.”

Scalability & Unit Economics

There are several ways you can demonstrate that your cannabis financials have a scalable business model. Just to name a few, you can provide documentation that as sales go up, profit margins remain consistent or, even better, actually improve. You can also use fintech solutions that automate and streamline operations, show that your operation can enter new markets without making major adjustments to your cannabis financials, and provide analytics that show forecasted demand and optimized resource allocation — in other words, illustrating that you make data-driven decisions.

Specialized accountants can help your business scale effectively by navigating the unique legal and tax challenges the cannabis industry faces. One of these challenges, of course, is IRC 280E — which, as we’ve written about several times (and will keep writing about, since it’s the perpetual thorn in the side of the industry), is a tax code that stops businesses from deducting otherwise standard business expenses from gross income associated with the “trafficking” of Schedule I or II substances. These accountants use their industry-specific knowledge to reduce your tax liabilities, which frees up capital you can reinvest in growth initiatives, like hiring more workers, expanding operations, and so on.

Unit economics are essential for investors because they give quantifiable measures on a granular, individualized scale. For example, one of the most basic aspects of unit economics is showing whether a business earns more from each sale than it costs to create and sell that unit —  i.e., profitable clarity.

A case study by Frederick Daso shows how growth with positive unit economics was crucial for Nabis, a cannabis distributor, to move from seed to Series A funding. Nabis built proprietary software to cut back on operational overhead, and this tech-driven solution directly improved both unit economics and customer growth.

There are plenty of other ways to show that your cannabis financials have a scalable business model and strong unit economics, but having an experienced CFO or finance team will definitely help illustrate your cannabis company’s financial readiness to investors.

Leadership 

Let’s shift focus to the abstract: leadership. Investors place significant weight on the experience and industry track record of management — especially in a sector mired in uncertainty and regulatory unpredictability. While some industry insiders may preach optimism, a closer look at their claims — for example, speculating on the current administration’s cannabis outlook — reveals that such predictions can sometimes be misguided, if not completely wrong.

Thus, a management team with verifiable experience in uncertain industries brings much-needed certainty to the equation.

As highlighted in the academic analysis “The Highs and Lows of Startups in the Cannabis Industry: A PESTLE Analysis of the Current Issues,” strong leadership characteristics — referred to as “human capital,” such as knowledge and education — are critical factors in a cannabis startup’s success. These qualities help a company navigate the unique challenges inherent to the industry.

Returning to an earlier point, strong leadership is also valuable to cannabis investors because it can drive scalability — streamlining supply chains and implementing systems that maximize efficiency, as Thomas Howard writes for The Cannabis Industry Lawyer.

Additionally, experienced leadership has a trickle-down effect: inspiring and competent leaders attract and retain competent employees, strengthening the company as a whole.

This point may seem self-evident. After all, if you’re investing in a company, you want to know the captain has steered in familiar waters before — and hasn’t run aground. That said, it’s not unheard of for companies to hire management whose experience isn’t directly applicable to their new role, sometimes with disastrous results — as seen with J.C. Penney’s hiring of Ron Johnson or Home Depot’s hiring of Robert Nardelli.

Conclusion

A solid working understanding of cannabis financial readiness requires a lengthy, multifaceted review. Scalability and unit economics address the quantitative side of the equation, while leadership falls under a more abstract umbrella. While both aspects are crucial to investors, they do not constitute a fully realized analysis. But sometimes, to gain an adequate appreciation of a linchpin of business like investing, one has to take baby steps and explain something piece by gradual piece.