Cannabis was relatively easy to get into in the past, but now it requires an approach that is more conservative and leaner, with precise forecasting as well as a lot of patience. Both new market players and operators are faced with inherent risks, regulatory uncertainty, and financial obstacles. Your needs and strategy will change as the market matures.
Take a look below at the best practices to follow when starting a cannabis-related business in today’s market.
The Expectations of Structure, Construction, and Buildout
Consult your CPA and attorney about the kind of business that you plan to run, in relation to the market. Are you going to be running a dispensary, or a manufacturing company? Are you a cultivator or a delivery service? Are you vertically integrated or not?
You may have an idea about the general structure of your business. However, you can refine it with financial and legal advice on taxation and liabilities.
Before you plan your cannabis entry, it’s important to conduct a market study. Market analysis includes data, research, and information on licensing policies, consumer preference, market size, the competition in your state or municipality, and growth potential.
It should be able to define your target market, provide information on the population, median income of households, growth in dispensaries within 5-10 and 15 mile radius, etc. Consider strains, market saturation and competition when it comes to wholesale.
Along with a thorough market analysis, you will need to produce accurate cash-flow projections. This should include your financial assumptions, revenue expectations, and timeline. Compare your assumptions to those of others in the market.
You can then develop your revenue projections using the information you have gathered from your analysis. Estimate the monthly spend of your prospective purchasers. How would you realistically break down customer expenditure? What is the comparison between your SKUs and those of your competitors?Â
Create detailed expenses assumptions, which include all costs, from staffing to furniture, fixtures and advertising. Also, consider taxes, maintenance of the facility, insurance, security and IT. Remember that successful startups are conservative and cautious in their approach and capture costs properly to meet daily business obligations.
Data and KPIs
As with any business, marijuana operations must capture data regularly and keep good records. The technology that you use to track your inventory, sales, accounts payable, and accounting can help capture the data. The process of data capture can be automated to produce the analytics and reports you require to track trends in real-time.
Then, determine Key Performance Indicators (KPIs) and monitor their performance, along with the budget and actual, on an ongoing and post-buildout basis. Are we able to continually assess our forecast? It is important to have solid numbers and projections before you begin operations, as well at milestones like the first six months. It helps you refine your business strategy and also answer questions from investors about a breakeven point.
Data will be crucial to the management of expectations during pre-operational phases. This will be crucial in managing expectations of investors. One seemingly simple question for retail operators: do we need 1,000 square feet or 10,000?
This will help you determine the amount of space that would be dedicated to both sales (which may or may not be tax deductible) and inventory storage (which may or may not be tax deductible). You will then need to decide how many people you’ll require to operate a profitable, lean operation.
What would you estimate your build-out cost be? Rent: How much rent would you be willing to pay? How do you time the various cash flows in your life? You can only make accurate decisions and track the results of these over time if you have the correct data.
Then, using your initial data points, you can build scenarios to allow you visualise different options. You can, for example, compare the results of a low, medium, or high 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.
You may find that some data points are correlated if your business has multiple divisions. For example, an integrated dispensary-delivery business could benefit from greater efficiency. When you are putting together your business plan, be sure to look for any potential opportunities.
Data is also essential for inventory management. Your business strategy should be based on this. You can use data to identify your top-selling strains or the ones with the highest net margin potential. While a particular strain could be popular among consumers, its production may come with a cost. Decide if it is in your best interest to keep producing the strain or switch to one that costs less.