In the fourth quarter of the year many people focus on Holiday celebrations and new year’s resolutions. For cannabis business owners, though, you also need to focus on your year-end business planning, which includes both winding down 2021 and preparing for the new year.
So, in this week's episode of The Business of Kush™ we talk about the 5 things to do before the calendar clicks over to the new year, and 6 things for the new year. Plus, learn from what's happening in the cannabis industry in our fun segment "News of the Day."
What to listen to next:
Episode 01 - The 10 Reasons Investors Say No to Your Cannabis Business
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Hi there and welcome to this week’s episode of The Business of Kush podcast!
Happy you’re here. So I’m Chip Schweiger a 27 year veteran of public accounting and corporate finance, and also the founder and managing member of The Green Leaf CPA.
We’re a CPA firm that helps cannabis, hemp and CBD businesses stay on the right side of tax, accounting, and compliance rules so you can focus on growth. And, because we’re a firm that solely caters to the complex compliance needs of the cannabis community we understand the unique challenges you’re facing.
Just finished Halloween, which is such a fun celebration,
and that also means it’s that time of year again! So, what am I talking about?
Well, while many people focus on holiday celebrations and new year’s resolutions this time of year, cannabis business owners also need to focus on your year-end business planning. Or, at least you should be.
This includes both preparing for the new year, AND taking stock of the past year.
But because the end of the year is so hectic, it’s not always easy to keep up with all the end-of-year preparations you should be doing to wind down 2021 and plan for 2022.
And, I get it, but things like taking stock, preparation, and planning are key to running a successful cannabis business – and really any business.
After all, you get what you measure. And, what you measure is what you can improve. This review helps you realign goals and resources so you can take advantage of new opportunities.
So, let’s talk about a rundown of every major and minor task you should take care of before 2022 becomes a reality.
1. Prepare Your Key Financial Documents or have them prepared for you
Financial documents play a crucial role in your company and especially in the highly-regulated industry we deal in.
Reviewing your financial documents gives you three benefits.
First, it shows you whether you’re running a healthy business or if you need some belt-tightening going forward. Your financials provide a guide to your company’s financial position and health, and should include details about your assets and liabilities, profit and expenses, and cash flow.
Second, if you do need some adjustment say, fewer expenses, your financials show you where adjustments are needed and tell you how much you need to adjust.
Third, if you’re in the market for funding, expansion, or possible an acquisition, financial documents are often required to let interested parties see the financial state of your business.
The financial documents you need before year-end are:
· A balance sheet, showing all the assets, liabilities, and equity;
· An income statement, showing revenues, expenses, and profits; and
· A cash flow statement, showing opening and closing cash within a specific period, with inflows and outflows.
And, while all three of these are important, it’s the cash flow statement that is not only the least understood, but also the most important statement. We know cash is king, but I’m telling ya you can run a business at a loss for along long time so long as you have sufficient cash flow.
More on that in a minute.
Ok, let dive into each of these for a moment. And, don’t forget that you can pull these reports from your accounting software, or ask your accounting team, or get with your CPA or bookkeeper to pull these together for you!
Your Year-End Balance Sheet
A balance sheet helps you determine if you’re in the black or the red. It does this by comparing everything the business owns against everything the business owes.
The business owns things like physical inventory (especially for the dispensaries out there), property or equipment, trademarks, and invoices the business needs to collect.
The business owes things like payroll or invoices they need to pay.
By doing this comparison, you can determine whether you should be cutting back on your spending, or pushing your business to grow. And yes, the balance sheet should ALWAYS balance.
Your Year-End Income Statement
The income statement is important because it clearly shows you if you’re earning more than you’re spending, or spending more than you’re bringing in. It compares the amounts you earn over a period of time versus the amounts you spend.
Because of this, it is also called a profit and loss statement. It’s different from the balance sheet because it looks at business expenses and earnings across a period of time, instead of a single, point-in-time instance like a balance sheet.
It also doesn’t consider any external equity you, as the business owner, might have, such as your ownership or that of investors.
While the income statement of a large, vertically-integrated company might be longer than that of a family farm, the overall format of an income statement is uniform across all business sizes.
And, there’s no magic to how these are created. First, choose a period of time, either 2021 as a whole or just the last three months.
Your Year-End Cash Flow Statement
Your cash flow statement shows how much cash you have at the beginning and end of a specific period, and where it all went. On a cash flow statement, you’ll see three things:
· Cash flow from operations, such as revenue and expenses. In other words, the money you earned or lost from doing business as usual.
· Cash flow from investments, such as assets bought and assets sold. This can also include stock.
· Cash flow from financial decisions, such as loans and their repayment.
From these documents, you should calculate the following numbers on a regular basis:
· Current Ratio – the current assets divided by your current liabilities. Ideally, your current ratio should be between 1.5 and 2. A current ratio of 1 means you may not have enough money to last the year, whereas a current ratio of more than 2 could mean you’re not investing enough money into your business or outside investments.
· Debt Ratio – your total debt divided by your total assets. A “good” debt ratio depends largely on the industry, but anything below 0.3 is considered fair. Anything above 0.6 tends to make it difficult to bet additional loans.
· Gross Profit Margin – First, divide your profit (what you have leftover after paying your costs) by total revenue (the total money you brought in). This shows you what percentage of your income is actually profit!
Cannabis business owners should keep these statements on a monthly or at least a quarterly basis.
And, there a couple of reasons for this. You want to know the state of your business consistently, so you can plan accordingly. If you want to expand, you need to know you can, for instance. If your business is starting to show red ink, you want to know as soon as possible, so good financial reporting serves as an early warning system for your company.
2. Get Your Tax Documents Together
While the end of the year may not be tax season, it’s a good idea to get your tax documents together as well.
The financial reports you prepared in the previous step should help you ensure you get all of the offsets you’re entitled to under IRC 280e.
Why is that?
Well, to legally minimize your tax liability under 280e, you have to apply proper GAAP cost accounting. And, that means you have to have proper records. Don’t take my word for it, it’s right there in IRC 471.11, so get ‘em together now and save money later.
You should also compile your income, both business and personal, if relevant. Gather all your deductions. And, this is where we talk about keeping all those receipts.
3. Assess Your 2021 Goals
If you had a specific 2021 goals list, pull it out and go over it. If you didn’t, write down what your unwritten goals were (and consider a written list for 2022). Review your goals systematically and assess them using the following questions:
· Were your goals achieved? Why or why not?
· If they were exceeded, why? How?
· What are the next steps? (Do you want to use higher than anticipated revenue to expand, for example, or make debt payments?)
· If they fell short, why? How?
· What are the next steps? (Do you need to pull back on your product line, for example? Pare down your forecasts? Lower prices?)
4. Plan Employee Morale Events
Don’t forget your employees in your year-end planning. They’re an important ingredient in your business success. And, there’s a lot of discussion right now in our industry about employee retention.
Not only that, but the year-end holiday season provides multiple opportunities to reward them for what they’ve done.
As a cannabis business owner, you want to boost morale and company loyalty.
Consider what your employees might value: A big holiday party? More time with their family over the holidays? (If so, can you swing extra days off for everybody?) Flexible time to shop? (Could you give flex hours so they avoid the huge crushes in stores?) Company time to conduct a drive for charity? Could that be used for your business’s benefit?
5. Plan Your Own Vacation
All too often, business owners put off their own vacation until the year is totally over! Everybody needs some time to recharge and relax. Plan a vacation or think through your time off before the year is out.
OK, once you’ve pulled together the material for year-end 2021 planning, it’s easy to plan for the new year. With your business needs and goals clearly visible, your planning will be less time-consuming and more convenient.
With that in mind, here’s what to do as the calendar moves into the new year:
1. Plan 2022 Goals
Your review of 2021 goals should have given you a clear picture of at least some of your 2022 business goals. Now’s the time to write them down.
Do you need to increase sales?
Expand your locations?
Hire new employees?
Keep a more rigorous inventory count?
Keep a more rigorous cash count if you’re a dispensary?
Institute more thorough training?
Get written, documented SOPs?
Don’t, of course, rely only on past goals to chart your course. They’re crucial, but not sufficient.
Did circumstances or changes in 2021 — beyond COVID-19 — point out a need for new goals? Interest rates, for example, fell significantly in 2020 and have stayed low.
Could you get a loan for business needs or refinance your current funding? Did your tax position indicate you could benefit from a new corporate structure such as converting to an S-corporation?
If your financial statements indicated a need for improvement, how can you improve them? What are the most advantageous ways? This is a place for some expert opinions and advice about growing in the new year.
2. Develop Action Plans Based on Your Goals
Once you’ve determined your key goals in the new year, devise an action plan for each.
We all know the best goals are SMART (specific, measurable, attainable, realistic, and time-based). My advice here is to break each goal down into daily, bite-sized chunks.
Whatever your goals are, the most important thing you can do now is write down your plan to achieve them.
This point was driven home recently by a study published in the British Journal of Health Psychology. The project was designed to see what impact stimuli would have on participants’ level of exercise. Researchers divided a random sample of participants into three groups.
For the first group, the researchers asked the participants to track how frequently they exercised. They were told to read a passage of an unrelated book before beginning.
For the second group, researchers wanted to measure the impact that motivation would have on their exercise levels. The second group was also asked to track their activity levels and were then told to read a book’s motivational passage that outlined the benefits of exercise for maintaining a healthy weight.
The third group was asked to read the same motivational excerpt as the second group but had the additional task of writing down their exercise goals for the coming week.
When the researchers sat down to analyze the results, they were surprised to find that among the motivated group (group 2), just 35% exercised once per week. That was slightly less exercise than group 1 (36%) even though they were motivated to work out.
When the researchers analyzed the third group’s exercise log, they were stunned to find that 91% of them had worked out. The only difference between groups 2 and 3 was that the third group was asked to write down their goals. That simple task seems to have almost tripled their likelihood to succeed.
The researchers concluded that motivation alone has virtually no impact on our actions. Instead, it is motivation coupled with a written action plan of how you’re going to achieve your goals that has the most significant impact on your results.
Food for thought as you start thinking about making 2022 your best year yet!
3. Create Your Marketing Plans
Early 2022 is also a great time to plan your marketing campaigns for the year. What areas of marketing will you focus on? Social media? Video or content production? Do you need to hire staff to plan marketing? Do you need to change your marketing, or keep it constant? Do you have any data on what your customers responded to last year, or even customers like yours?
Is there any specific area or product you need to focus on? Should you target or emphasize a new demographic? A new sector? A new trend?
4. Plan Time to Keep Financial and Tax Records Up to Date
If you haven’t been keeping important financial statements up to date each quarter, book in time in the new year to do that.
Do the same for tax records and any meetings with accountants or other financial advisors. Remember, staying on top of your business taxes and business performance will decrease the work you need to do at the end of 2022.
5. Assess Employee Engagement
Do you need to review your compensation and benefit structures to make sure they’re in line with your industry, region, and business values? Morale could suffer if this doesn’t occur at least once a year. If the compensation and benefits you offer aren’t competitive, your top people could walk out the door, leaving you with gaps to fill.
Do you have promotional paths in place? Companies that do reap significant gains in loyalty and longevity.
Keep employee morale events going, too. Again, you want to foster job satisfaction and loyalty to keep top-notch people. What does that the most? What returns the most to the company for the expenditure?
Planning for the year allows you to choose times that are advantageous to you and everyone. Some companies host summer barbeques or spring hikes as get-togethers, for instance. What works for your company?
6. Plan Vacations
Don’t forget to plan vacations, both for yourself and your employees.
For yourself, map out what you’d like to do and what is advantageous for the business. Many small business owners like to take their vacations when their business is known to have downtime — or at least less busy periods.
It’s a good idea to have employees give you (or their supervisors) their vacation plans far enough in advance to know when you have coverage and when not. If there are any peak periods when a cluster of vacations might be problematic, let employees and supervisors know so they can plan accordingly.
OK, so there’s quite a bit of things to think about, but don’t panic. Get some help, get support and take everything as it comes.
Well, before we finish for this week, one last thing, and if you listened last week, you know what it is, and that’s a segment we call “news of the day”
And, there ya have it for this week’s episode.
So, our first episode last week really touched on a nerve and a positive one at that. We’ve received a ton of questions about getting investors into a cannabis business, so while we’ve got episodes on banking reform, and the capital markets, and on insurance planned, let’s insert an episode into the queue next week where we dig in a bit more about the secrets of raising capital for your cannabis, hemp or CBD business.
Hope you’ll join us again. And, until then, have a great week.