All sound business plans include financial projections and creating a meaningful and effective financial projection is both an art and science. A financial projection is a critical component in the cannabis licensing application process and will serve as an effective guide as cannabis operations expand. Logical financial forecasts help track your business’s monthly progress and accurately measure your business’s performance in comparison to your projections. A financial forecast includes projected sales, budgeted expenses, a balance sheet, cash flow, and sources and uses of funds. In addition, a financial projection helps determine the necessary amount of funding and the projected return on investment (ROI).
How are Financial Projections Developed?
Cannabis operators face significant challenges in creating financial projections due to a lack of historical data or industry benchmarks. For businesses in other industries, like manufacturing or construction, benchmark information can be obtained from third party financial data service providers. However, third-party providers that gather and sell financial information most likely have little historical data on the cannabis industry compared to traditional industries.
While cannabis companies are on the Canadian Stock Exchange, many are consolidated operations of vertical, distribution, and dispensaries, making them difficult to analyze. Therefore, financial plans for cannabis businesses are largely based on assumptions. An effective approach to developing a financial projection is to assess the current marketplace and measure data related to financial trends and growth opportunities. An additional strategy to gather sound financial data is to evaluate your current or predicted competition. Although the costs in your financial forecast will be unique to your business, assessing the current market and your competitors can help establish practical goals and objectives, and determine the growth opportunities in the market.
Effective Financial Projections are Ever Evolving
The explosive growth of the cannabis and hemp/CBD industries has increased the importance of sound financial projections. Whether your cannabis operation is a start-up or well established, effective financial projections should not be static. On a regular basis, it is beneficial to reevaluate your operation’s sales forecast, budgeted expenses, balance sheets, statement of operations, and cash flow statements. Aligning your financial projections and business goals is essential to developing a solid foundation for financial and operational success.
The Benefits of Working with a Cannabis Industry Expert
When developing a business plan with a financial projection for the purpose of securing funding or a cannabis license, it is highly recommended to have a trusted advisor who specializes in the cannabis industry prepare your financial plans. At Bridge West, a key advantage in helping our clients build solid financial projections is the data we collected over the last ten years of serving the cannabis and hemp/CBD industries. Our data is categorized by type of operator: vertical, cultivator, processor, distributor, delivery, dispensary, or retailer. In addition, our data is organized by markets, ranging from limited competition to over-supply, such as Oregon and Colorado. This is beneficial for operators developing or modifying a financial projection, since we can quantify the specific costs within a forecast. As an example, we quantify the plant yield and cost per yield for a cultivator that grows indoor vs. greenhouse vs. hoop house vs. outdoor. These analyses are very helpful in making educated decisions and strategic planning.
In a projection, a common error that we find is the amount of working capital needed, and the working capital is typically under-estimated. We apply our analyses of similar cannabis operations to facilitate education decision making and strategic planning. Therefore, a precise estimate can be made to identify the amount of working capital needed for inventory for each type of operator.
Financial projections should generally reflect five years of balance sheets, statement of operations, and cash flows. Generally, a detailed forecast of operating expenses should be developed by department and for at least two years. The most reliable financial forecasts are often built by trusted cannabis advisors working with management and operators. Ultimately, financial forecasts should become a measurement tool for a cannabis operation that is constantly analyzed and evolving.
If you have any questions or are interested in learning more about how we can help your cannabis operation build a financial projection to support your business plan, reach out. We’d love to talk.