January 15, 2024

Annual Planning for Cannabis Retailers

Dynamic forecasting is the cornerstone of the work we do as Virtual CFOs which means regularly updating our clients’ strategy as new data sheds light on market dynamics.

Real time adaptability is key: market conditions, industry fluctuations, regulatory changes, all those forces need to be considered. At the same time, we need to have a benchmark against which to judge how the year has been going. 

That’s why we create a year-long financial plan with our clients – and lock it for the next twelve months. Then, every month when we review monthly financials, one of our questions will be: Where did you land against that original plan?

As the forecast changes, we continue to refer back to the plan throughout the year to observe how close our projections are to the actual results and, above all, to hone in on why things are different than expected: Did the regulatory environment impact sales? Did our industry shift? Is our customer retention way off from what we anticipated?

When we talk about the cannabis industry, change is the only constant. Sometimes, that change comes out of the blue, like with the announcement of the federal recommendation to reschedule cannabis from schedule 1 to schedule 3. Other times, like with the constant congressional debates on SAFE banking, it seems painstakingly slow.

Here are some factors for cannabis retailers to consider when building a 2024 financial plan.

Cannabis Retail Sales Projections

To come up with projected revenue, a retailer needs to consider their historical sales data, the 2024 addressable market, as well as any specifics in local demographics.

In the Missouri cannabis market, where we know the $1 billion market is expected to grow to $1.2 billion in 2024, a retailer could consider their current market share and use that to project their 2024 sales, taking into consideration whether there are any expected consumer changes to their local base. A goal might be to maintain the same percentage of a growing market share, or a stretch goal might be to capture a larger share. Or perhaps expand on a growing and loyal customer segment.

Any goal should be rooted in data, however, so before trying to stretch too far, it’s important to check additional metrics and set realistic goals for increasing one or more:

  • Customer retention
  • Number of customers
  • Average transaction size
  • Year over year sales (for big retail days like 4/20 or the Wednesday before Thanksgiving)

By setting these smaller growth goals and understanding how they impact your big-picture target, you become more likely to create a plan that is within your control to achieve. 

Cannabis Market Projections

Profit-focused accounting is about helping clients turn their attention to the things they can control. But an accurate year plan depends on considering market changes and trends, such as supply chain issues. For a newer market like Missouri, a cannabis retailer could consider increasing their projections because product availability should no longer be a limiting factor. In cannabis, conditions vary so widely, not just by state but by city, that any annual planning needs to be granular when it comes to the local market.

Cannabis Operations Planning

What will operations look like for 2024? Any plans to scale should be included in your forecast – especially insofar as opening new locations will negatively impact cash flow for a period of time before the investment pays off.

Wages are another factor to take into account: Hiring decisions should be considered alongside any potential wage fluctuations in the local market.

Cannabis Cash Flow Planning

This will continue to be a challenge in 2024, in light of the – likely – federal reschedule. With razor-thin margins, cannabis companies traditionally struggle with cash flow. Given that the timing of the reschedule is uncertain, companies would be prudent to continue to forecast a scenario assuming 280e is in effect for the 2024 tax year. In other words, cannabis retailers need to plan and set aside enough money to fund tax liabilities as a taxpayer subject to 280e. While there might be potential for positive developments, adopting a conservative financial approach is recommended.

Track Key Metrics to Stay on Track

For cannabis companies, the idea of setting a year-long plan might feel unfeasible, especially at the start of a year like 2024 with the potential for so much change (above all the proposed federal rescheduling of cannabis). But keep in mind that the plan is just an internal benchmark, not a to-do list. By stepping back and considering the key metrics that drive revenue, you can give yourself a clearer idea of what the year could look like – and still be able to pivot day to day with the help of the real-time forecast.

If you’re a cannabis business looking to plan for a profitable year, reach out to us to learn more about our cannabis virtual CFO services. We would be happy to help.

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