Do You Need a Cannabis Pro Forma for Your Start-Up?
The cannabis industry is a tough business and you need to know how to navigate through it. By evaluating businesses we work with, we were able to determine whether they needed a pro forma or not.
In all cases, we discovered cannabis businesses from start-ups to medium size will always require a pro forma to calculate the financial projections and financial losses, if any. It’s also essential for new businesses because they can get the funding they need to survive the industry.
As cannabis consultants, it’s a challenge working with other individuals who don’t use a pro forma. We know it’s better to use a pro forma than not using one to become a successful cannabis business. Our knowledge leads us to share the core and purpose of a pro forma that you may want to know to grow your business.
What is Pro Forma?
A pro forma allows you to make financial projections from gains to losses for present and future business operations to appeal to buyers and investors. When an accountant or an individual makes a pro forma, they calculate the numbers.
It’s crucial to know the financial numbers by identifying the amount of funding you’ll receive by budgeting the losses that go out in building a business. It’s another way of getting organized for other buyers to gain interest in your business. When they know the numbers, they’re able to understand what they’ll gain from buying into your business.
In crafting a pro forma you’ll need the following:
Identifying the Funding Source: When it comes to funding, you need to understand the layout where the funding is coming from and where it’s leaving. Buyers or investors are attracted to this because it allows them to decide if your business is a good investment.
Income Statement: You know of an income statement as a profit and loss statement. It’s about calculating expenses, losses, funding gains, and revenue gains. Every business always has this and a cannabis business is no exception.
Cash Flows: A cash flow is the amount of money coming in and out of your bank account. You’ll need to know these numbers to understand if you're spending too much or being conservative with your money. Investors are attracted to businesses that have more money coming in than out.
Balance Sheet Document: This is another document that makes up a pro forma. It lays out the assets, liabilities, equity, and an analysis of return rates. Return rates are calculated to determine the capital composition of a company.
Taxes and Interests: Gathering the business’s end of year taxes can give you other insights into the business. Interests are another element to keep in the financial document, so you can make better financial decisions.
There are more elements to a pro forma you’ll need to consider. Briefly, these elements are analyzing gross margins, earnings before interest, return on investments (ROI), growth rates, and payback periods.
As a business owner, you already have so much on your plate. This adds another layer to your company that you need. We’re able to quickly craft pro formas at Califia Gold Cannabis Consulting that will leave a positive mark in any investor’s mind.
The Purpose of a Pro Forma
Ideally, start-up businesses and businesses without a pro forma will need to write-up one up to present and showcase to local state government officials or investors. It’s not mainly for outsiders, because you need to know your financial numbers to see if your business can sustain itself through the years that come.
When you know every financial gain and loss that comes through the business, then you can make better buying decisions. It won’t help your business if you don’t calculate the costs of goods sold (COGs). This is calculating the cost of materials and labor that goes into creating a product. As you can understand, it’s very important to know this financial element of a business.
The Right Time to Use a Pro Forma
In business, you’ll use a pro forma at the beginning of your start-up phase, even if you haven’t accumulated any revenue yet. It’s better to prepare to start receiving revenue in the beginning than to prepare right in the middle of receiving money. By this time, you may not have the time to write-up a pro forma and calculate the large numbers coming through.
However, if you have the funds to hire an accountant then getting a pro forma in place will come easily as your business grows. There are even pro forma templates you can use which makes it easier for you. It will solely depend on how you want to start your pro forma.
All businesses have a higher chance to succeed when they have a thorough understanding of their financial data. They will also attract buyers or investors because they prove their business can gain revenue effectively.
Do You Need to Present Your Pro Forma to Your State Application License?
Your application license may require a pro forma depending on the local state license prerequisites. When submitting an application license for cultivation, manufacturing, distribution, transportation, dispensary, and others, the local municipality in charge of cannabis compliance licensing can require all financial records for them to make a firm decision.
Every state will have different laws on what you need to apply for a license, how and where to apply for a license. A pro forma is just another component of the application process to prove professionalism and proof of financial gains. It’s necessary to contact your local state government in charge of the compliance cannabis licensing to know if you’ll need to have a pro forma in place.
Those Involved in Creating a Pro Forma
Who will need to be involved in creating a pro forma? The sole business owner, business partner, a professional cannabis consultant, and a certified public accountant (CPA). By getting important individuals involved in creating a pro forma, you're more likely to evaluate and identify any missed opportunities.
However, not every start-up business has the luxury of getting an accountant in the beginning stages. For this reason, discussing the pro forma process with your business partners and those you want involved will help the business move forward.
For those considering to find a cannabis expert on creating pro formas, you can easily work with a consultant from Califia Gold. We are experts on cannabis pro formas that will give any business the competitive edge they need to succeed. After years of working with clients, we know a thing or two about calculating the right financial elements to attract investors and retain them.
Pitfalls of a Pro Forma to Watch Out For
After you create a pro forma, there are certain pitfalls your business needs to be aware of to avoid.
Miscalculating financial gains and losses: When you don’t calculate the right number, you may lose more money than you’re calculating. This can lead to a downturn in your business that can lead to the closing of a business.
Not Giving Out Accurate Numbers to Investors: Some companies tend to leave out undesirable calculations and leave in calculations they know investors will love. It can involve leaving out your expenses and only leaving in your net profits which results in bad business. Make sure you and your partner calculate accurate data to investors. This will always give your company a better outcome even if your numbers aren’t desirable.
Missing Information: As a start-up company owner, it’s easy to accidentally leave out financial reports you're not aware of. Every detail matters in writing a pro forma, so finding an expert on all things pro forma will help you avoid this pitfall.
Conservative Estimates: It is important to use realistic data in the pro forma like the price per pound or number of harvests the data is based on. Unrealistic price points create unattainable pro forma goals so it is very important to use conservative estimates for both costs and revenues.
Whether you’re a start-up or a medium-sized business, a thorough understanding of writing and calculating a pro forma will leave your business in a good position. Avoiding the pitfalls above is a way to stay ahead of the industry.
By asking the right questions and contacting the right experts, your company will succeed.