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What Cannabis Operators Need to Know About Cash Flow

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April 17, 2019

Cash flow is a key business metric that all cannabis operators must pay close attention to because it can mean the difference between staying afloat or slowly sinking into financial ruins.

According to one study, poor management of cash flow is the cause in 82% of all business failures in the US.

And as we all know, cannabis is not a cheap industry to participate in and cannabis operators of all sizes can do a better job a managing cashflow.

While all small business owners struggle with cash flow, the production life cycle of cannabis, as well as taxes and banking regulations, can make it difficult for operators to have enough cash on hand to cover operating expenses.

So if you’re wondering how to manage your cash better, here are some tips and lessons that we’ve learned from working with dozens of operators around the country.

Know What Your Inventory Restock Lifecycle Looks Like

This goes for those of you who sell products to the end-consumer as well as those who create products for retailers from raw materials.

Each operator will have a different cycle of cash inflow and outflow.

Some brands will see a 60-day window from the first day of production to sale of their product.

Cultivators will likely have an even longer window from seed to sale. Meanwhile, operators will have ongoing operating expenses, including staff salary, utilities and rent, and other day-to-day costs.

Strong inventory management can help prevent peaks and valleys in your cash flow which makes those thing months hurt a lot less.

And to best control your inventory, you need to be able to have a method of forecasting demand for your product. 

Proper forecasting can cut down on overstock, reduce shortages, and keep customers satisfied that you're providing a steady stream of their favorite product.

Cultivators should keep close watch on the state’s trends in supply and demand.  For example, Oregon, Oklahoma, and California all face a surplus of cannabis on the supply side that can make it difficult for growers to compete for sales due to depressed pricing.

As you plan demand for your products, you will also be able to deploy your labor and cash-on-hand more effectively.

Plan for the Worst-Case Scenario

Plan for the worst, but hope for the best. 

There is evidence that a majority of businesses fail, so don't be delusional thinking that things will be different and work out perfect for you.

Stay rooted in practicality. 

Every business owner has a few speed bumps on the road to success, but it will be worth it in the end!

There are two common obstacles identified by industry analysts that prevent cannabis operators from keeping cash flow consistent and cause headaches for cannabis operators in nearly every sector of the market.

  1. Rejected deliveries, and
  2. Payment terms.

Rejected Delivery

Rejected delivery is a common issue that frustrates cannabis operators managing careful profit margins throughout the supply chain. Miscommunication and packaging and labeling error are the two main reasons why deliveries fail or orders are rejected – making compliance the reason for 50% of order rejections.

Prevent order rejection by paying close attention to packaging and labeling regulations – from vehicles, to the employment status of drivers, to product packaging, documentation, and more.

If you're white-labeling products, do small product runs or create many samples that get approved along the way so you have evidence of acceptance during the production process.

Payment Terms

Payment terms also contribute to cash flow blockages.

The regulations of the 280e make it difficult for cannabis operators to open a bank account, and as a result, receiving payment becomes complicated.

By one measure, one out of four cannabis-related orders carries a 30+ day payback period. Waiting more than one month for cash to arrive is unsustainable for any new business, let alone a high-value market like cannabis.

Cannabis operators need to be aware of these potential risks, and keep a close eye on their accounts receivable balance, delivery rejection rate, and local packaging regulations.

By some estimates, operating a retail dispensary requires cash flow break-even costs of $1 - $2 million. It’s important to have rational financial projections and to find an investor who can support you when issues arise.

Remember, things always cost more than you anticipate and always take longer to complete.


Practice Good Bookkeeping

Too often, cash flow issues can be attributed to poor bookkeeping practices.

It’s easy for cannabis operators to fall behind on keeping their books up-to-date, invoicing, and managing the multiple checks and balances necessary to be compliant with regulations.

And we get it, those things are not fun and seem like busy work. However, it’s critical to use strong accounting best practices to keep track if payroll, vendor invoices, sales tax, and other accounts receivable reports.

These are the transactions that will give you a clear picture of your cash flow and prevent any surprises down the road.

This is why we suggest you work with a CPA who can give you the financial guidance you need every month of the year instead of just in April at the tax deadline.

You may accountants as simple service providers, but they are thinkers and problem solvers.

CPAs can help you keep a pulse on the financial health of your business and offer some solutions to financial problems you will surely face.

Find an Investor to Provide Ongoing Financial Stability

It’s expensive to compete in the cannabis market – taxes alone can send many new operators into the red.

Because banks often won’t provide loans to cannabis businesses, operators should seek other sources of funding to supplement their cash flow.

There are many ways to get additional funding – from cannabis crowdfunding to going public on the Canadian Securities Exchange, US companies have a growing number of options available.

First and foremost, make sure your cash flow is stable enough to pay your taxes compliantly and on time.

If you need help figuring out the financials for your cannabis business, then click the "Get Started" button below to speak with one of our experts today!

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Filed Under: Finance