How to Build Cash Flow Statement for Your Cannabis Business

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

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