Once relatively easy to break into, the cannabis industry now demands a leaner and more conservative approach to financial management, along with precise forecasting and a great deal of patience. There are inherent risks, regulatory uncertainties, and financial challenges faced by new market entrants and established operators alike. As the market continues to mature, so will your needs and approach.
Let’s take a look at some best practices for cannabis business start-ups within today’s landscape.
Structure, Build-Out, and Expectations
First, consult with your attorney and CPA regarding the type of business you’ll run in the context of the overall market. Will you be operating a cannabis dispensary or manufacturing entity? Are you a cultivator or a delivery service? Will you be vertically integrated?
While you might have a general idea of the structure for your business, financial and legal guidance on related taxation and liability can help refine your strategy to ensure the most profitable and sustainable operations.
As you map your entry into the cannabis space, you’ll first want to invest in some market analysis. Your market analysis should include research and data on market size, licensing policies of your particular municipality/state, competition, growth potential, and consumer preferences.
For retail, it should define the relevant population of your chosen market and provide insights into buying behavior for that demographic, the median household income, and the type of dispensary population growth that has occurred within a 5-, 10-, and 15-mile radius. For wholesale, consider strains, competition, and market saturation.
In addition to a market analysis, a start-up will need accurate cash flow projections, which should include revenue assumptions and financing, along with your timeline. If possible, benchmark assumptions against others in your particular market.
With the market analysis in hand, you can develop revenue projections. Consider your potential monthly purchaser base and its estimated spend. Of customer spend, what would be a realistic product breakdown? How do your intended SKUs compare with your competitors?
Finally, build detailed expense assumptions that include everything from furniture and fixtures to staffing, advertising, construction and renovation, professional services, taxes, facility maintenance, insurance, security, IT, and utilities. Keep in mind that the most successful start-ups are taking a cautious and conservative approach to their build-outs and are properly capturing costs to ensure they meet day-to-day business obligations.
Data and KPIs
Like all businesses, cannabis operations need to consistently capture data and maintain good books. Data capture can be conducted through technologies, including your inventory tracking, point of sale, accounting, and accounts payable systems. This process can then be systematized to provide the reports and analytics you need to monitor trends on the fly.
Next, identify Key Performance Indicators, or KPIs, and track their performance along with budget to actual on a post-build-out and ongoing basis. Ask yourself, do we have a realistic forecast that we could continually reassess? Solid preoperational numbers and forecasts are critical both at the point of operation and at set milestones, such as the first six, 18, and 24 months. This helps not only to refine business strategy but also to answer your investors when asked for a realistic breakeven point.
Data is crucial during the preoperational phase because it drives accurate management assumptions. It will also be critical in managing investor expectations. Consider one seemingly simple decision for a retail operator: Do we need a 1,000- or 10,000-square-foot store?
From this, you will need to determine how much of that space would be committed to sales, which may not be tax-deductible, and to inventory storage, which may be tax-deductible. Once you decide this, you will need to determine the number of employees required to run lean yet profitable operations.
Under these circumstances, what would be your estimated build-out costs? How much would you pay for rent? What’s the timing of various cash flows? Only with accurate data could you make the right determinations and measure the success of those decisions over time.
Using your initial data markers, you can then build out scenarios that allow you to visualize various options. For instance, see how results would look assuming a high-, mid-, and low-revenue operation. Likewise, you could model results under a high-salary/low-revenue versus a low-salary/high-revenue projection, as well as model against available benchmarks.
Note that if you have multiple lines of business, some of your data points will correlate. So, a combined dispensary and delivery business, for instance, could enjoy greater efficiencies. As you build out your plan, look closely for potential opportunities.
Another area where data is essential is inventory management and your business strategy around that. Use data to determine your best-selling strains, for instance, or those offering the greatest net margin potential. Keep in mind that, while one strain might be popular with consumers, the benefits to producing it could come at a price. So, evaluate whether it works to your advantage to continue with production or pivot to a less expensive strain.
