Financial Models for Raising Capital in Cannabis

The cannabis industry is rife with startups.  And as a CPA, I am privileged to meet the founders of these companies.  I get to see fresh ideas and ambitions people with good strategies.

But I also see a lot the opposite…

I see founders that want to build big things without the numbers to prove it.  Or sometimes they have financial data, but there isn’t any substantiation.  Or maybe they have a P&L or two, but the support is weak once you dig into it.

At the heart of it, the goal is to make money.  And without showing how that will happen, and what it will look like, it is unreasonable to expect that you will.  And successful investors won’t waste time or resources on funding something that won’t make money.

This is why the CFO is usually the second highest paid person in the company.  Because, amongst other things, when you’re going in front of potential investors who will grill you about the numbers, and the CFO will do the talking when it happens.

And if you don’t have a solid plan for how to use the money you’re asking for, then why would they give it to you?  That’s why you need a financial model, because any money that goes into the company, whether yours or otherwise, must be used wisely so it can multiply.

So how do you make a financial model?

First off, make sure you have the following financial projections:

• Profit and Loss Statements

• Cash Flow Statements

• Balance Sheets

The P&Ls should include EBITDA and Net Income.  And there should be different scenarios drawn out.  For example, what does the P&L look like if prices drop?  What if they go up?  These are worth knowing, as well as what you will do in the event of either of them.

The Cash Flow Statements should show where money is going to, and where it is coming from.  Operations Cash Flows, Investment Cash Flows, and Financing Cash Flows should be made clear.

And the Balance Sheets should show the financial position at key points in the company’s life cycle.  This includes assets, liabilities, and equity.  Be aware that this does not include valuation. Everything on the balance sheet will show at cost, except for investments that the company makes in certain investment assets.

Creating a financial model should not be done haphazardly.  A financial professional should be responsible for compiling this information and updating it regularly, as anyone with a financial mind can see a homemade financial model from a mile away, and it instantly says that you either can’t or won’t hire for financial expertise, which is a dealbreaker to cautious investors.

But if you have this right, then you instantly stand out from all the founders looking for capital to fund ideas based upon uninformed optimism.

This doesn’t mean that you shouldn’t try to create one of these on your own.  I suggest playing with the numbers a bit and seeing what you come up with.  That way, when you talk with an expert, you will have a better conversation, ask better questions, and overall produce a better model, which will help you raise more money, and ultimately run a better business.

And if you go through that process and are ready to take it to the next level, then feel free to book a call with me and let’s make your pitch-deck pop.  We can discuss how to make a financial model that shows clearly what your idea is, and how we will make it happen.

So good luck and I hope you got some value out of this.