For many, understanding financial statements is like putting together a puzzle with no picture. It’s daunting, or nonsensical, or only vaguely has meaning. How do you make your financial statements into a tool for managing your cannabusiness? It takes an investment in expertise to create the tool, and an investment of your time to learn how to use it.
Having worked in healthcare for many years, I had numerous opportunities to present financial information to physicians. Most physicians had never seen a financial statement before they went into practice, and usually their eyes glazed over when we started our review. They wanted information badly, because they knew there was a direct correlation between the information on the page and how much money they made. They also knew that the financial success of the practice was directly related to their individual productivity, but again, they couldn’t see the connection. It was my job to illustrate the connections in a way that was simple and clear without requiring a lot of their time to grasp. I had to provide the picture and show them how the pieces of the puzzle fit together.
So how did I do it? Basically I put together a “money” flow chart. I started with their productivity, say the number of surgeries they performed, which then led to how much income they brought into the practice. From there I showed them the expenses that reduced their income in the practice, resulting in a net income that they could count on to take home to their family. I categorized expenses in such a way as they could see that certain expenses would go up if they were more productive (like payroll) but other expenses would remain the same (like rent). Over time they were able to master their understanding of this money flow chart and we moved on to other items like changes in the balance sheet and cash flow planning.
How is this done in a cannabis business? In this industry, the flow chart starts with sales. Sales is the top line income and below are the reductions from sales. The first thing to reduce sales is the cost of the items sold, so this is the next item on the flow chart. Below that are the expenses and again, I categorize these in terms of those costs that will change as sales go up or down (variable costs) and costs that will remain the same regardless of sales numbers (fixed costs). What I am describing here is an income statement, but what I’m suggesting is that it be formatted in such a way as to have greater meaning to its readers.
Some readers of financial statements don’t need to see a lot of detail. For these folks I recommend a balance sheet and income statement presented in summary form that tells the general story of what has happened to the business for that specific period. It’s also important to show comparative information, such as month by month activity, or year over year activity, so that trends can be observed and readers can see changes from prior periods to the current timeframe.
Those in charge of managing the business on a day to day basis, need to see the detail since they are the ones responsible for the success of the business overall. When I say detail, I don’t necessarily mean that every type of sale or every separate expense needs to be listed on the income statement. It needs to be relevant. For example, a dispensary doesn’t necessarily need to see their electric bill separated from their water bill on their income statement, because it doesn’t have a lot of relevance, and it won’t be material (see previous blog for description of “material”). A grower, however, will find that electricity and water costs are two valuable pieces of information that should not be combined because they are relevant and material to the cost of their product. If a grower sees his water expense increase by 50% in a given month over prior months, he should be looking into why. That increase might be masked if it was combined with other utility costs.
I’ve seen lots of people with managerial responsibility open their financials, look for the bottom line on the income statement to see whether they made or lost money, then toss them aside. Later they wondered why things weren’t going as well as they had planned or hoped. Financial statements can provide a world of information to help you manage your current operations and chart the course for future activities. Set them up in a manner that is practical and useful, then spend the time needed to grasp their meaning and make them an integral part of your management toolbox.