Thought Leadership from Tim Berggren of Point Seven Group
Tim Berggren is an experienced strategic finance professional in the regulated medical and recreational cannabis industry. His prior work experience reflects a history of passion for the cannabis and technology fields. With skillful attention to detail, he has created comprehensive financial models, operational strategies, and business initiatives spanning more than 100 cannabis companies across the supply chain nationwide. In addition, he has shown an interest in advocacy and public policy by taking on the volunteer position of Treasurer for North Carolina NORML with hopes of positively influencing the next wave of cannabis industry markets.
Interview – Tim Berggren
Q: Hey Tim! Thank you so much for taking the time to speak on this topic with your busy schedule. Let’s get right into it! In your experience, what would you say are common mistakes in financial models?
A: This is a complex question because each group will have a unique business model and will be facing different challenges. One recurring mistake is not correctly identifying the startup and operational timeline. Groups who do it on their own will often work with a model from a template and, unfortunately, these templates don’t always work for the cannabis industry.
For example, you must consider your startup timeline and all of the necessary costs to get your business licensed to operate legally. The average financial model template will have you generate revenue in ‘month one’ with metrics for monthly growth and customer retention/loss. In reality, there is a delayed startup phase with different necessary steps to become operational.
First, you have to apply for a license and wait for conditional approval. After the license is awarded, there can be timely and costly facility renovations before you can complete your regulatory inspection and become officially licensed. There are also common expenses for marketing and advertising, staffing, security, product procurement, and your unforeseen expenses that need to be accounted for.
Generally, uninformed new entrants to the cannabis industry tend to have a hard time grasping the perspective of how long it could take to become operational and how to properly budget for all the required steps to successfully launch operations. Once you can pin down your startup and operational timeline, then you can consider what your anticipated revenue and operating expenses are.
Q: How would someone make the projections, especially in states like New York, just releasing the license types in waves?
A: The best method is to look at comparable markets to anticipate potential performance, especially similar large population adult-use states with a dual-licensing process for the state and local level. A comparable market to New York could be New Jersey or even California. Without actual market performance data, using a precedent from comparable market growth rates and performance metrics is the most impactful strategy. Each team will have unique market differentiators based on their location and skillset that should be considered in the financial model, making it a wise decision to work with an experienced cannabis finance consultant to advise your team on what projected performance could look like.
Q: That was an amazing point for those who might be feeling lost as things move so quickly in newly recreational adult-use states. What are some other mistakes people should be aware of?
A: People often do not correctly anticipate the tax burden of the business. The tax burden for cannabis businesses is much higher due to IRS Tax code 280E, which limits the allowable business deductions for anyone ‘trafficking in federally controlled substances’. Unfortunately, despite the incredible progress being made at the state level, the federal government still classifies cannabis as a Schedule 1 drug and legal cannabis businesses operating compliantly are still subject to higher tax burden than any other business type.
Currently, cannabis operators are only allowed to deduct the very limited definition of cost of goods sold. In addition, many individuals make errors in their valuation methods or don’t consider the value of the business in general. Many are unaware of how to actually determine the value of the business and how to grow the value of the business over time. This is of great importance when considering how to bring investors and additional funding into the business at a competitive market value.
Q: Are there some technical-based mistakes you commonly see in cannabis financial models?
A: There is a lot that we do here at Point Seven Group to make it easy for non-finance, non-technical people to understand what the model is supposed to convey. I’ve seen many different financial models that either over-simply or over-complicate and people either get misinformed or lost in the sauce. There are basics of financial modeling theory that play into the design and flow of information in our models, such as hardcoding input data in certain tables/tabs and putting outputs on a different tab.
I’ve seen common mistakes where groups crossover and blend inputs and outputs on a single sheet, which can cause confusion and headache when trying to do sensitivity analysis. Combining essential pieces of data within collective tabs, such as revenue assumptions for customer base and price points, make it easier to create different assumptions for scenario modeling. Linking to external excel files is a no-no. Instead, have separate tabs in a single spreadsheet to avoid data mishandling.
How Can Point Seven Group Help?
The team of cannabis consultants and professionals at Point Seven Group have worked extensively in the U.S. and international cannabis markets and are familiar with the unique challenges of the cannabis industry. Follow us on social media to stay up to date with more cannabis industry updates!
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