Armanino Blog
How Cannabis Investors Can Minimize Their Risk
by Chris Lee
April 21, 2020

With the disruption of COVID-19, minimizing risk is more crucial than ever for cannabis investors. They need to look closely at the businesses they invest in to make sure they have a strong operational framework and the right controls and technology in place to adapt quickly to an ever-changing environment.

Here's a quick look at some key areas investors should focus on.

Regulatory and Compliance Processes

Make sure that the business has the appropriate controls in place to be compliant with state and city ordinances. For example, is the cannabis company able to track the plant throughout its life and report that necessary data back to the state? Can the company provide estimates for tracking?

The business should also have the ability to adapt quickly to changing market conditions. Many cannabis companies have been declared an essential business during COVID-19, for example, and have moved to online or phone orders with curbside pickup.

Internal Processes and Systems

Cannabis companies need to have the appropriate financial processes, controls and systems in place to create accurate reporting for investors and state tracking and tracing systems such as METRC or BioTrackTHC. From a process and control standpoint, companies should have an enterprise resource planning (ERP) solution in place that gives them instant visibility into their cash position, product line sales, and costs for labor, rent, utilities and more at any time.

These days it's particularly critical for cannabis companies to be able to make informed business decisions from accurate data since they do not qualify for many COVID-19 assistance programs due to federal laws.

We often see companies still relying on QuickBooks or Excel with their seed-to-sale software. This prevents them from closing their books in a timely fashion, as the system is not robust enough to manage the appropriate accounting and finance functions. For example, cannabis manufacturer Jetty Extracts scaled their finance and accounting software solution because they had limited functionality and were using three different systems, which made their processes very inefficient. Their executives and investors wanted real-time forecasts and reporting, so they could make more informed decisions about the company's burn rate and its future financial health.

An ideal tech stack for a cannabis company would include an ERP or accounting software solution, a financial planning and analysis (FP&A) solution, a seed-to-sale solution and a point-of-sale (POS) solution.

Well-Established Cash Process

From the moment cash enters an establishment to when it is stored in the safe or deposited in the bank, companies need to have daily cash reconciliations to be able to appropriately account for this process and mitigate risk. It is more important than ever to make sure the business has an accurate count of cash on hand. Not knowing the exact amount of cash could have negative downstream impacts on future planning and decision making. You also need strong internal controls to prevent fraud.

Budgeting and Forecasting

The business should have carefully thought out 13-week and annual forecasts. For an investor, it is important to see the burn rate and how the cash invested will be used.

Since the business changes on a weekly or even daily basis, especially during the current crisis, the CEO/owner/CFO should be running regular updates and be able to provide them weekly for any significant fluctuations.

Our Cannabis team can help you mitigate risk in your investments during this volatile time. Contact our experts to learn more. For the latest regulatory updates and more information on keeping your cannabis business thriving through disruption, visit the Armanino COVID-19 Resource Center.

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Chris Lee - Sr. Consultant, Consutling - San Ramon CA | Armanino
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