The Budget Process: A Step-by-Step Guide for Marijuana Businesses

Budgeting is critical to business success – perhaps even more so in the cannabis industry as operators grapple with tight margins, regulation, and stringent taxation. Budgeting enables better decision-making and helps business owners establish and track progress toward financial goals. Suffice it to say that with a firm grip on your budget, you’ll be on the road to financial stability in no time.

Surprisingly, many small businesses don’t bother with budgeting, and that’s a huge mistake. A budget should be your compass, telling you whether you’re on the right track and letting you know when you’ve veered off course. Without one, you’re flying blind and risk overspending or miscalculating your cash flow.

And poor cash flow? Well, that’s a big problem. It’s one of the top reasons businesses fail. Now that we have your attention, let’s discuss the budgeting process, why you need it, and how to get started.

Why You Need a Budget Process

With an informed budget in place, cannabis operators can enjoy the following benefits:

·       Align your income to expenses.

·       There is less danger of overspending.

·       Mitigates unnecessary costs.

·       Informed resource allocation.

·       Pinpoint areas that require attention.

·       It allows you to plan for the unexpected.

You’ll gain more control of your finances and make better business decisions. Think about it. When you create budgets, you’ll pull in other stakeholders or department heads to weigh in on what they’ll need in the upcoming year, quarter, etc. These discussions are valuable as they allow you to evaluate plans, purchases, investments, and new projects. Once you have a budget, you can work those items into the equation to minimize risk and understand what you need to do to reach those goals.

In that sense, creating a budget is like goal-setting. You have a roadmap; you know where you’re headed and how you will get there. Checking in with your budget periodically keeps you on track and allows you to adjust as you go if needed.

Let’s talk about how to do it.

Seven Steps to Creating a Budget Tailored to Your Business Needs

First, we should address the elephant in the room: what’s the difference between a budget and a forecast?

Here’s a simple answer. A budget is a financial plan that includes your financial goals, leveraging planned revenue and expenses you know about. Your budget allows you to set targets for reaching those goals.

A forecast is a forward-looking report that predicts your business’s financial performance based on market trends and historical data. The budget is a plan directed at a specific outcome, and a forecast predicts whether that plan is achievable.

With that out of the way, let’s dive into the budget process steps.

1.       Set your financial goals. Include short-term and long-term objectives. Use past spending and determine if there are any expenses you can cut. Based on your goals, you should know where you can reallocate those funds or increase spending in general.

2.       Choose what type of budget you’re creating. You can choose from one of several types of budgets, each relevant to your growth stage and what you’re trying to accomplish.

·       Surplus budgets are used when you have more income than expenses for the budget period. Ideally, you’d use this to pay down debt.

·       Balanced budgets are often used by nonprofits as they must balance money in and money out. You’re not a nonprofit.

·       Zero-based budgets have a net balance of zero at the end, as every dollar is allocated to an expense (including savings and debt repayment).

·       Value-proposition budgets are focused on maximizing returns, prioritizing spending on expenses that generate the most value for the business. This approach forces you to look at every expense through a profitability lens and helps you understand where to invest to get the most in return.

·       Rolling budgets enable adjustments as circumstances change, enabling greater profitability.

·       Incremental budgets start with the current year’s budget and are adjusted incrementally as expenses or revenue changes or to accommodate inflation or sudden revenue growth.

3.       Project your revenue for the budget period. Consider all income, including from the sale of assets, loans, affiliate fees, commissions, etc.

4.       List your fixed costs. Fixed costs are any expenses that are consistent from month to month, like rent, utilities, payroll, etc. If you expect any of these to increase, consider adding a small percentage to cover it.

5.       List your variable expenses. These could be inventory costs, marketing, office supplies, snacks for the break room, seasonal help, etc. Once you have your list, you’ll need to categorize each item properly, such as admin, R&D, sales and marketing, cost of goods, etc.

6.       Consider capital expenditures. These could include new equipment purchases, employee bonuses, or expected upgrades. Here’s where you can determine what needs to be trimmed to meet your budgetary goals.

7.       Plan for emergencies. Set aside a portion of your budget for contingencies to help protect your business’s finances in emergencies.

Review your budget regularly and compare variances against projected income and expenses. Adjust as needed to keep your budget accurate and aligned to business needs. Your compass can easily go awry if you’re not calibrating periodically.

Best Practices for Budgeting

Creating a budget may seem simple, but the process can be fraught with errors if you overlook key details, focus too much on previous years’ numbers, or fail to review your budget periodically.

Additionally, you may be missing data if you don’t loop in your key stakeholders. Your department heads can tell you a lot, including if you’ll need to hire more people, which is a significant expense.

Do not forget to include contingencies.

Lastly, resist the urge to get lost in too much expense detail. The most important factors where expenses are concerned are COGS and salaries—that’s where you can dive deep. Stay high-level on less important things and add a percentage-based increase as needed.

And that about wraps it! If you need help getting started with budgeting, reach out to the cannabis finance experts at Growise. We know your challenges, and we’re here to help.