#4: How Long Can You Operate Without a Profit?
5 Things to Consider Before Applying for a Cannabis License
#4: How Long Can You Operate Without a Profit?
For the first few months of any operation, it’s likely you will operate without profit. In the cannabis industry, however, initial profitability cycles are often longer due to industry-specific scenarios like licensing holdups, regulatory delays, and compliance woes. For that reason, it’s crucial that you have enough capital to sustain your operations until you have ramped up sales. A recurring issue we see with cannabis entrepreneurs is underestimating the cost of starting up.
Financial Modeling
When opening a successful business in any market, you should understand what you’re getting yourself into, how much it will cost, how you’ll fund it, and what your projected profits will be. It’s not soothsaying, but financial modeling can give you a clearer vision of your future company.
The cannabis industry does have its own particular quirks to account for, so when you get into the nitty-gritty of financial modeling, include the basic parts — but don’t forget about cannabis-specific considerations:
- Market Assumptions: Which other state markets are most similar to yours that you could pull data from to predict demand?
- Capital Expenses: Have you budgeted for heightened security measures?
- Operating Expenses: This industry is always throwing curveballs so don’t forget to approximate conservatively and leave a cushion.
- Financial Statements: Have you defined your COGS deductions and accounted for IRC 280E?
Business Planning
Jumping into business and financial planning can be daunting. Keep in mind that in the preliminary stages almost everything is subject to change — depending on factors like further rules from the state or local jurisdictions, new talent joining the team, or finally securing a property — so don’t get stuck on the small stuff.
Here are a few things that can help give you direction as you get started:
Craft Mission & Vision Statements: Decide on your business ethos and how you’ll connect with your customers. Cannabis consumers often have strong emotional connections to their retailers and products. If you’re passionate about this plant and your plans, let it shine through.
Home in on your Competitive Advantages: Determine your unique strategy and what you’ll invest in for success. A cannabis business is not in itself a promise of riches and glory; you’ll need to differentiate your strategy to remain profitable.
Consider your Long-term and Exit Plans: Finding funding is particularly difficult in the cannabis industry without access to traditional banking, and investors will want to know your future plans. Are you flipping or expanding? Do you plan to open one shop, or five, or 100? These plans can color your future partnerships.
The length of time your business can operate without profit will depend on whether you have investors or loans to repay and whether you’ve set aside sufficient cash and inventory reserves. The regulated cannabis market is unpredictable, and if you’re breaking even, the smallest disruption can cause catastrophe. That’s why planning ahead and leaving yourself a conservatively high minimum cash position in your modeling — and funding — is crucial.
Contributing writer: Sumer Thomas
Read the rest of the “5 Things to Consider” series.