Keeping Cash Flow for Cannabis Businesses

There’s a lot of material out there exploring why nine out of ten business and startups fail, and plenty case studies done on the businesses that made it. One theory is that entrepreneurs of successful businesses “failed fast.” They got all their mistakes out of the way in the beginning. 

Maybe that’ll work for a lemonade stand, or some other business that’s in a more reasonably-regulated industry. 

That will not work for, say, a cannabis oil production company or a marijuana dispensary. 

To say that the idea of making big mistakes in business is worrisome to the founder of a cannabis startup would be an understatement. With the marijuana legalization process so temperamental on the federal, state and municipal levels, there’s a lot on the line, and it’s not so simple to just pick yourself back up and try again tomorrow. In fact, the “fail fast” theory is being marked as a fallacy by some who are vocal in the business world.  

It’s clear that the main concern of any cannabis business, big or small, is to not make mistakes. That’s particularly so in the area of cash flow. Indeed, Chicago-based Cresco terminating its acquisition of Florida-based VidaCann is just one of the latest well known instances where cash flow took precedence over growth of a cannabis business. 

Given that cash flow is a top priority and challenge in the cannabis industry, it’s a good idea to scrutinize the production and sale of your product, and identify how you can increase your cash flow. 

From day one of production to the moment you receive payment from the customer or a retailer, there are challenges that can either trip up your business or become points of opportunity for greater cash flow.

Here are 3 ways that you can increase your cash flow starting today:

1. Manage Your Inventory Restocking Cycle Well

Effective management of your stock is not only a crucial part of managing cash flow, it’s the key component of maintaining transparency. And it’s the law. 

From a financial or marketing perspective, if you produce or stock too little product, you’ll risk disappointing your customer base. For example, the cannabis dispensary you source to might start looking for a producer who provides an ample amount of CBD oil, and can therefore meet their market demands. 

On the other hand, produce or stock too much, and you run into costly storage issues, and risk the product going bad. That’s a lot of money down the drain! Luckily, there are ways of staying on top of weekly or monthly consumer trends, so that, if you’re a marijuana dispensary, you know how much cannabis tincture or recreational marijuana products to have on hand.   

pointing to sheet of graphs showing cannabis market trends

Given the delicate nature of the production process, the legal implications of having transparency, and the immense importance of keeping up good ties between cultivators, producers, retailers and customers, there’s a lot weighing on the ability to track your stock well. There are now new platforms out there that are trying to solve this, in line with municipal quotas, so that cannabis startups can succeed in this area.  

Remember, as well, that a clear account of your current stock, and general restocking cycles, should be clearly outlined in your business plan

 

2. Minimize Order Rejection With Rock Solid Standard Operating Procedures (SOPs)

This can be a frustrating one. 

You’ve spent a month getting those cannabis seeds to take form under the led grow lights, and creating a batch of some much needed medical cannabis tinctures by those in your community. You’ve overseen the packaging of your product, and you’ve got it hauled onto a rented delivery truck. You get it to the retailer and…they don’t accept the delivery. 

This happens all too often. Because cultivators, producers, and retailers all have their share of regulations to adhere to, each sector has to be wary of the compliance of the other. 

In this chart, you’ll see the main reasons that deliveries get rejected: miscommunication, issues in the compliance documentation, issues in the labeling or packaging, or a retailer’s downright inability to pay for the order in that window of time. 

This is where having clear SOPs in place, from your annual plan, to your day-to-day operations, becomes crucial. True, you can’t control everything. You certainly can’t control the cultivator you source from, the retailer you provide to, or the producer you buy from. But you can have a system of vetting out the business you work with to ensure that they are compliant, and a way to communicate with them clearly regarding orders, and minimize bottlenecks in every transaction.

 

3. Factor in Payment Terms

We all know about the 280e law that prohibits cannabis startups from opening a bank account at any federally-backed bank. It means more leg-work in simply opening a bank account to keep your cash. This also means more difficulty in getting approved for bank loans. As a cannabis startup, you rely heavily on investors who make it their business to focus on the cannabis space. 

Not only is initial funding a challenge, but payment terms can be difficult to keep up with, as well. 

Given the quota that each municipality has on cannabis retailers, they generally have the upper-hand when it comes to payment terms. More and more, net 30+ are becoming standard in the industry. In fact, one out of four orders carry a 30+ day payback period

That gets complicated, to say the least. 

There’s the logistics of receiving payment, there’s the need for a system for tracking outstanding accounts receivable, and there’s having to deal with the cost of having produced, without the immediate means to pay for things like rental fees, utilities, and payroll. 

Cash flow is a prevalent concern in the cannabis industry. Luckily, there are services, like outsourced CFOs, and platforms like Point of Sale technology, that are filling in those gaps as the legalization process inches forward. 

Know your options. Know your regulations. Know your market and your community, and you can realize your dream of owning a successful and profitable cannabis business. 

Need help getting your cash flowing? Contact us today for your free consultation. Call now: 1.424.274.3188

 

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