(309) 306-1095 tom@collateralbase.com
How to Build Cash Flow Statement for Your Cannabis Business

How to Build Cash Flow Statement for Your Cannabis Business

cash flow statement

Need Help to understand your “Cash Flow Statement”? Then this is the right place for you!

The hasty growth and dynamic nature of the cannabis industry have culminated in barbarian and hyper-inflated business valuations, making it immensely tough for companies to derive in on a fair valuation as they follow to amass in the up-and-coming field. 

What can cannabis startup companies do to offset overinflated valuations? The best way is to have a better understanding of what their investors are aiming for when they originally evaluate a company for an upcoming potential merger and latest acquisition deal.

On any given day, cash flow is a top priority and challenge in the emerging cannabis industry, its advisable to scrutinize the entire process of production and sale of your product and select or categorize how one can increase the cash flow.

Before venturing upon “How to Read a Cash Flow Statement”, let’s discuss few important points to increase cash flow in the new Cannabis startup business.

Here are 3 immensely popular ways that you can heighten your cash flow starting today!

  1. Managing Inventory & Restocking Cycle Effectively

Effective management and planning of inventory is a crucial part of administering cash flow, it brings in transparency.

Holding in too much or unplanned inventory results in costly storage issues, and there is a high risk of spoilage. It drains out tons of money!

Fortunately, there are tips and tricks of STICKING AROUND ON TOP OF WEEKLY OR MONTHLY SHOPPER TRENDS, so that, if you’re a marijuana dispensary, you should be knowing how much cannabis tincture or recreational marijuana stock to have ready to sell.

Regular studies of daily newsletters and financial models related to the Cannabis Industry will help you in understanding the graph regarding how to maintain an optimum level of inventory.

It is vital to maintain good ties between cultivators, producers, retailers, and customers. There should be a clear account of the current stock, and general restocking cycles, these should be properly outlined in your organization’s BUSINESS PLAN.

  1. Reduce Order Rejection With Proper Standard Operating Procedures (SOPs)

Miscommunication issues between cultivators, producers, and retailers related to compliance documentation, labeling or packaging delays, or late payment by retailers can break the delivery and demand cycle.

A crystal clear and well-planned “Standard Operation Process” in place, from your company’s annual plan to daily operations, can help in tapping the cash flow. But to minimize bottlenecks in every transaction, you can build a communication process to rearrange orders and complaints.

  1. Important Factors in Payment Term

Cash flow is a major concern in the growing cannabis industry. Fortunately, there are facilities, like OUTSOURCED CFOS, and innovative platforms like Point of Sale technology are making the legal process for cash regulations smoother.

 280E LAW prohibits new cannabis startups from opening a bank account at any federally backed bank. This makes it difficult to apply for a bank account or simply open a bank account. Cannabis startup relies heavily on investors.

So, not only is initial funding a challenge, but payment terms can be difficult to keep up with, as well. Planning an easy payment term can help reducing cash burn.

In simpler terms, a cash flow statement audits how much amount of money flows into the Cannabis business, in the form of income, and out of the business, in the form of expenses.

Ways to Ascertain Value

Pinpointing the exact valuation of a business is not an exact science. Investors rely on a variety of modern methods and evaluation techniques to assist them in landing on a fair valuation of a Cannabis Business. Several approaches can be adopted in determining the exact “Cash Flow” of the Cannabis businesses.

  • Discounted Cash Flow: A Discounted Cash Flow (DCF) analysis aims to evaluate a company’s current value based on projections or assumptions of how much money it will generate in the future period.
  • Market Transaction Method: This method projects a total company valuation by correlating the business to identical companies in the marketplace. This modern approach works efficiently related to publicly traded companies.
  • Adjusted Net Asset Method: A cannabis company’s value is resolute by analyzing the actual net value of its total assets minus any existing liabilities.
  • Revenue Multiplier/EBITDA: A cannabis company’s total net value is determined by dividing its year-end revenue multiplier ratio by its total earnings before interest, taxes, depreciation, and amortization (EBITDA).

EBITDA is currently the most widely applied valuation method in the cannabis industry today. Because EBITDA eliminates the impact of several tax restrictions under IRS tax code 280E. It permits cannabis business investors to examine the total company’s hypothetical profitability while the tax issues are eventually resolved. 

Most of the cannabis industry professionals agree that many of the tax and legal issues will be eliminated in the next five to eight years time span. The only risk associated with this method is that it can extend more than the projected timeline.

How to Determine Cash Flow Forecasts

It is an easy process and takes no time to understand the various cash flow statement elements:

Step 1. Assumptions or predetermined standards related to the forecast period

The time period can be for a week, month, year, or more. Because actual predicted costs and expenses are allocated within the forecasted time period.

Step 2. Propose your year-end estimated income

The projected income should include sales as well as other investments or loans.

If possible, one can study past sales as a starting point. However, for a brand new startup or new cannabis venture, then this will be based on the future sales prediction data. Factor in any changes in seasonal trends, or marketing activity that might have a deeper influence on sales.

In case, if the business has payment terms that are not urgent at the time of sales, such as 10, 30, or 60 days, then calculate when clients are due to pay you and when you are expecting their money to actually appear in your bank or building society account.

All these figures are important to calculate the total income for the future.

Step 3. Projection of the expected expenses of your cannabis venture

Make a complete list of all the sudden or expected outgoings. These could include expenses related to salaries, operational costs including dispensary rent, business utilities and local council tax, total marketing costs, loan repayments, and various V.A.T contributions.

There are fixed costs for example rent, but plenty of variable costs to be included. First mentioned all the fixed costs, and then assess what amount of the variable costs depending upon past experiences or assumptions in case of a new cannabis business.

Step 4. Project your predicted cash at the start of the period

If you have opening cash, this will be included in the cash flow statement.

This cash at the start of the period will be figure C.

Step 5. Use this formula to calculate your cash flow

Estimated Income – Expected Expenses + Opening Cash = cash flow total at the end of the period

If you’re aiming to project a 12-month forecast, it is very simple and quick to follow the above formula to create a 12-month (annual) forecast, by simply carrying over the cash flow total at the end of the particular period as the following month’s opening balance in total. 

A cash flow statement is a crucial financial assessment tool. Accurate calculations of estimated revenue, expense, and profit over a period of time more definite picture of the cannabis business operations.

Raising cash is more challenging now than ever before in the cannabis business.

Previously, if any of the cannabis start-up companies needed to raise cash from the market to grow their business, they would simply issue more shares of the company. But that’s no longer a feasible solution because many pot stocks have tremendously lost more than 70% of their value in the past 12 months. The Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF) is down more than 75% (April 2020), and it holds few of the top pot stocks in North America. Smaller and newer companies are in even critical shape as stakeholders look for safer ventures or investments to hold on to.

So it is more vital to prepare a solid “Cash Flow Statement” and Business Plan to lure future investors.

A cannabis company’s balance sheet and cash flow statement help cannabis investors in deciding the future prospects of the company. It portrays and reflects how much cash a company has on hand, as well as if the company is burning cash or not.

cash flow statement

Free Strategy Session?

For a quick assessment of your needs – let’s talk to discuss how Trusts can help your business.

What are valuation caps?

What are valuation caps?

A valuation cap is a term of a convertible note or a SAFE. It is also a great way to attract investors to any startup, providing them with an incentive to invest. Starting a successful financing round for your business will expose you to a slew of new terms. It is...

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

What are valuation caps?

What are valuation caps?

A valuation cap is a term of a convertible note or a SAFE. It is also a great way to attract investors to any startup, providing them with an incentive to invest. Starting a successful financing round for your business will expose you to a slew of new terms. It is...

How to add a new member to an LLC

How to add a new member to an LLC

Generally speaking, to add a new member to any LLC, you must first follow the operating agreement or the state law regarding LLCs. Though there are some additional things to take into consideration. Most operating agreements lay out how to add a new partner on their...

Subscription Agreements

Subscription Agreements

A subscription agreement is an investor's request to become a member of a limited partnership (LP). It also serves as a two-way warranty between a corporation and a new shareholder (subscriber). The company intends to sell a specific number of shares at a fixed price...

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

When Is An LLC Needed

When Is An LLC Needed

When Is An LLC Needed

Want to Get your LLC Drafted?

When is an llc neededWe want to help you out on your business journey and explain to you when a corporate liability shield, like an LLC or corporation is needed or not.

As small business owners it can be extremely valuable to find guidance in what you should be doing for your business and when.

We are going over when you need to get a liability shield for your business.

There is no requirement that you create an LLC before you go into business, it can be a smart move and highly recommended sometimes but is not necessary to have your business running.

You can just start sending out invoices and creating value from your labor or sales of goods. Start helping people and charge appropriately.

Needing or not to create an LLC will depend on the type of business you own and its structure.

If you are wondering if you should have an LLC for your business and if the benefits will outweigh the cost and hassle of setting one up, this will definitely interest you:

 

Want to Get Your LLC Drafted?

What is an LLC

 

LLC stands for limited liability company. It’s a business structure that provides a business with limited liability. Although the structure is similar to corporations, the LLC is easier to establish and simpler to maintain.

The key aspect of LLCs is that it  provides protection to the LLC owners by limiting the owner’s personal liability

Meaning that debts owed by the business, and other claims, like liens and lawsuits, are limited to the assets of the business itself, and in no case to the owner’s.

Therefore the personal assets of the business owners, under most circumstances, are protected and cannot be pursued.

Be careful, that does not mean owners are protected from negligence or  illegal acts committed in the name of the LLC.

 

What would an LLC do for your business?

 

An LLC gives your business a legal identity on it own. It becomes a separate “person” in the eyes of the law and it can own money, have a bank account, make agreements, buy property, sue and be sued.

Not having an LLC means that you and your business aren’t legally separate, and everything you own is at risk if your business is facing liens lawsuits or others

 

Does My Business Need an LLC?

The first thing you should do to see if it is time to start an LLC is: examine your business. Ask yourself these questions:

 

  • Do you have partners?
  •  Do you have high risk transactions?
  • Do you sell food?
  • How about anything where you have locations that could be sites of slips and falls?

 

If you need to form an LLC yet or not will mostly depend on your liability and taxes.

when is an llc needed

Many businesses are sole proprietors, so they cannot have all the disputes that partnerships can. Therefore, they are less likely to need an LLC until we look at what they are doing and how much they are making.

 

How about your blog that you have monetized with advertisements and merch, or online courses.  Does that business need an LLC?  Not until they are making tens of thousands of dollars a year.

 

In that case the transactions are all at a low price point.  A few dollars for online ads and some sales of merchandise money. There is not much risk there. Someone is not going to have a slip and fall on your website. No one is going to get food poisoning from your online course. There is no liability benefit from splitting the cash flows away from the owner.

 

In this situation, it does not make sense to form an LLC until you get enough money each year to get hit on taxes so much that it makes more sense to become an s-corp so that you can work for yourself and get a paycheck from your own company and earn lower tax on the dividends. But that’s a tax question that can change over time.

 

What if you are the sole proprietor of a bar & restaurant? You need an LLC immediately. You have huge risks. Slip and falls, food poisoning, over serving a customer that gets in a car accident on the way home from your place. An LLC allows the owner to be a legally separate person than the cash flows.

 

How about an independent contractor that does home improvements? Then you want the liability shield because your job to redo a kitchen and bath could be 40 grand or more. You want that to be the company’s problem, not the owners. Large transactional liability is another reason to form the LLC. So if you are in enterprise sales, get an LLC.

 

Finally, partners complicate things far more. When you break up the ownership all sorts of things arise. How do partners exit the business; how do new people get into the business; what duties do the owners have to the business; and much more. Multiple owners of any business, as far as I’m concerned, always should have an LLC.

 

Want to Get Your LLC Drafted?

Key Points to consider when doubting to create or not an LLC

 

  • You need an LLC when you have premises liability, brick and mortar stores.
  • You need an LLC when you have transactional liability. Protect the big fat contract checks.
  • You need an LLC when the tax man says you earn too much as a sole proprietor so get an accountant.
  • You need an LLC when you have partners. Be smart, have an exit plan before you start with any partners.

 

How to Start an LLC 

Now that you know when you need an LLC – let’s talk about how to form one.  Make sure you you follow us for future content! 

Filing with the State

If you are a small business, it would probably make more sense to start your LLC in your home state.

But you should know that there are other states to fill your LLC that may be more favorable  due to beneficial tax laws and business infrastructures. 

If you serve a local demographic you should file in that state, but for cyber or internet type of business the location has no real importance and you could research the state regulations that fit your business model best.

Each State has its own process when it comes to filing the articles of organization for an LLC.

Most of them offer to file online making the process easier, otherwise, you’ll have to fill out the articles of organization by hand and send it to your Secretary of State’s Office.

 

Determining If You Want To Be Manager or Member Managed

There are two forms of management for an LLC, it can be managed by the members or managed by a manager:

manager-managed LLC: Creates a manager role separated from the ownership. The manager has the authority to decide on the day to day operations. But the owners have authority for higher level decisions.

Member-managed LLC: the owner or one of the owners is the manager and handles operations accordingly.

 

Getting a Registered Agent

A Registered Agent is a person that could be a member of the LLC, or a third-party who acts on behalf of the LLC to collect legal notices from the State or other. 

The registered agent needs a physical address in the State in which the company is registered. 

If you do decide to incorporate an LLC in a different state from where you live, you will need to find a Registered Agent that resides in the same state where you incorporated your business. 

 

Drafting an Operating Agreement 

Next step is to draft your LLC Operating Agreement which is intended to be kept for internal record-keeping. This is where the ownership percentage of the company is outlined. Here are a few important things you should include in your LLC Operating Agreement:

  • Names of all Members and all their signatures
  • Members’ Percentage Interests and Capital Contributions
  • Date of Annual Meetings

Once your LLC Operating Agreement is complete, each Member should have a copy.

 

Getting an FEIN Number

A FEIN is a Federal Tax Identification Number, also heard of as an Employer Identification Number (EIN), is issued to companies that do business in the United States. It iis a unique nine-digit ID number, like a security number but for companies. 

  • A FEIN is a way for government entities to identify and track businesses tax and financial activities.
  • A FEIN is required to file tax returns, and to set up accounts to offer benefits to employees

Not every small business needs a FEIN, but the following do:

  • Any business with employees.
  • Any business that operates as a corporation or a partnership.
  • Any business that pays employment, alcohol, tobacco or firearms tax returns.

You can apply for a FEIN

  • By phone.
  • By fax or mail:
  • On the IRS website

Even if your business is not required to have a FEIN, you may decide to get one. There is no charge, and you never know when your business circumstances change.

 

What are valuation caps?

What are valuation caps?

A valuation cap is a term of a convertible note or a SAFE. It is also a great way to attract investors to any startup, providing them with an incentive to invest. Starting a successful financing round for your business will expose you to a slew of new terms. It is...

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

What are valuation caps?

What are valuation caps?

A valuation cap is a term of a convertible note or a SAFE. It is also a great way to attract investors to any startup, providing them with an incentive to invest. Starting a successful financing round for your business will expose you to a slew of new terms. It is...

How to add a new member to an LLC

How to add a new member to an LLC

Generally speaking, to add a new member to any LLC, you must first follow the operating agreement or the state law regarding LLCs. Though there are some additional things to take into consideration. Most operating agreements lay out how to add a new partner on their...

Subscription Agreements

Subscription Agreements

A subscription agreement is an investor's request to become a member of a limited partnership (LP). It also serves as a two-way warranty between a corporation and a new shareholder (subscriber). The company intends to sell a specific number of shares at a fixed price...

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer Are you from the buckeye state and want to establish a cannabis business? Having a good cannabis lawyer in Ohio makes the difference between getting a license or not. Even though Ohio’s medical marijuana market had a bumpy start, the market has a...

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer Are you from the great lake state and want to start a cannabis company or need assistance with an existing one? You probably need a Michigan cannabis lawyer. As the cannabis industry gets more recognition and the market expands, recreational...

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens