Cash flow planning is one of the hardest and most neglected tasks for most businesses. And yet it is also one of the most essential requirements for your cannabusiness’s success. How many businesses do you know that failed because their bills got ahead of them and they ran out of cash? There are many and you don’t want to be one of them.
Here’s what often happens. A company (let’s say a dispensary) gets started, maybe with some seed money. If they are doing it right, they have already developed a budget of start-up costs and have been monitoring that budget as they spend, to be sure they don’t run out of resources before they open. The dispensary opens and very quickly there is a flood of cash sitting in a bank account or in a vault. Owners and managers may make decisions based on the cash they have available at a given moment in time, without thinking ahead to future cash needs. Perhaps they make distributions to owners, or they buy more equipment. Maybe they invest in an expanded variety of inventory. There’s nothing wrong with these decisions as long as you have planned for future expenses.
So how do you do it? How do you plan for cash needs several months down the road? It sort of goes back to that budget I mentioned in a previous blog but you are budgeting cash instead of net income. You’re also doing it in smaller timeline increments, that is weekly, instead of monthly. Common methodology in business is to do a 13-week cash flow projection. What’s magic about 13 weeks? It is a short enough period to project with a fair amount of accuracy, basically covering 3 months, but it also captures those months where you might have an extra expense. For example, if you do payroll every two weeks, occasionally there will be a month where payroll lands three times. A 13- week cash flow will capture that.
The cash flow projection can be a little daunting at first but my suggestion is to keep it very simple. There are lots of templates online that you can download for free. Basically you set up a worksheet with a column for your income and expenses on the left and 13 columns to the right representing each of the 13 weeks. At the top of each column is beginning cash, and at the end of each column is ending cash. In between are your income and expense estimates. The formula to get to ending cash is:
= Ending cash
This formula is set up on your spreadsheet so that the calculations work automatically.
Once the formulas are in, you can start dropping in your income and expenses by week. Again, don’t make it complicated. You can take your annual sales and divide by 52 weeks to get your weekly income (or monthly sales and divide by 4.3 weeks). Drop in rent in the week where the first of the month falls, drop in payroll in the weeks that you pay payroll, and divide your inventory costs the same way you do your sales, take the annual and divide by 52 or monthly and divide by 4.3. Once you have all your income and expenses entered in the weeks that they fall, you should be able to see if you have positive ending cash. If you do, then you know you are free to spend excess cash or reserve some for later use (which I highly recommend).
Cash flow planning is an essential key to managing your cannabusiness. The chances of your having to scramble to make payroll, or being unable to replenish inventory because you don’t have the cash are much reduced by maintaining a weekly cash flow plan that projects out at least three months. If setting up such a plan is beyond your scope of abilities, get some help in designing it and learning how to use it. Consider it a type of insurance policy against future stresses!