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Where finance meets cannabis

Understanding your financial statements

Understanding your financial statements

You’ve started making some sales and your company is picking up speed. Now it’s time to raise some capital and grow your business. Here we will review the three main financial statements that are used for financial analysis and how they relate to each other. This will help you understand your financial projections and give you more credibility when pitching investors.

1)      Income Statement

The Income Statement, also called PNL (Profit aNd Loss) is where the sales and expenses are reported and where you can see the company’s net income. The net margin (Net Income / Sales) is what determines the overall profitability of the business (negative = the business will always lose money, positive = the business is making money).

Sales and Net Income are important, but they don’t consider another crucial factor of finances: cash. This is because some of the expenses reported on the Income Statement aren’t actual cash expenses. Also, some of the sales may be reported before the company has received the money. When payment plans are in place, it may even take months before the cash is received. The company needs to have enough extra cash on hand to support the business for the time it takes until the cash is received.

2)      Cash Flow

The Cash Flow statements starts with the Net Income from the Income statement, and readjusts the spending based on actual cash spending and receiving. It considers the working capital requirements, capital expenditures, and financing (debt or equity). The Cash Flow statement allows to see how much liquid cash the company has in the bank.

3)      Balance Sheet

The Balance Sheet brings the Income Statement and the Cash Flow together by showing two important categories: where the cash is (assets), and where the cash comes from (liabilities). This breakdown is important to evaluate important financial metrics for the business: the working capital (how much capital to business needs to cover ongoing operations), the quick ratio (how readily the company would be able to pay off short terms debts if needed), and the debt to equity ratio (too much debt may reveal the company is over leveraged, too much equity may show that the company is not taking advantage of debt leverage – although for cannabis companies debt is not always an option).

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Kim Geraghty