Cannabis businesses face cash flow issues for a few reasons. The first big reason is taxes. Being subject to the tax laws under Internal Revenue Code 280E means there are less eligible expenses to deduct. This means income taxes are one of the biggest costs for cannabis companies.
Secondly, the cannabis industry faces strict regulations which make it hard to get financing from a bank. Also, the life cycle of cannabis, from seed to sale, can take six months or longer. So, how do you sustain such challenges and keep the cash rolling in? Here are some tips on how to better manage your cash flow.
Inventory Management is Key
Knowing the cycles of your inventory, such as the time it takes from seed to sale, is crucial. Every type of operator, from a cultivator to a distributor to a retailer has a different inventory cycle. And that equates to a varying cycle of cash inflow and outflow. A good inventory management system can track this information for you. It can also help you forecast product demand. Forecasting helps reduce shortages and overstock while maintaining enough supply of the products your customers love. Also, forecasting the demand for your products helps you better schedule your staff and manage your cash on hand.
Have a Plan when Business Complications Arise
According to the Small Business Association (SBA), 30 percent of new businesses fail in the first two years, and 50 percent fail within the first five. These statistics aren’t meant to frighten or discourage you. Rather, they highlight the realities businesses face when starting out and building a name for themselves. When a cannabis business fails, the likely cause is insufficient cash flow. Some of the primary factors for lack of cash flow is delivery rejections and net payment terms.
Retail Deliveries get Rejected
Retail deliveries are one of the most regulated aspects of a cannabis business supply chain. When your deliveries don’t get accepted, it can hinder cash flow. Not only is this frustrating, but it can negatively impact a company’s financial standing.
The main reasons for rejected deliveries include; compliance errors with labeling and packaging and having inaccurate documentation. To make matters more complex, there are state and municipal regulations that need to be met.
To avoid complexities in your own business, make sure you stay compliant with current regulations. This can relate to the words used on product labels, product packaging and compliance of delivery vehicles. As a recommendation, start off making a small batch to sell to your retailer, then see if those get accepted. If not, at least the adjustments are only needed on a handful of products, compared to hundreds or thousands.
Net Payment Terms
Many retailers place cannabis businesses on net payment terms. Meaning the invoice gets paid on a future date, rather than at the time of delivery. And it can take 30 or more days to receive payment. So, like rejected deliveries, payment terms can hinder working capital. This is all the more reason to reduce your risk of delivery rejections, adhere to labeling regulations, and track your accounts receivable balance.
Make Accounting and Financial Analysis a Priority
Failure to keep timely accounting records can lead to cash flow problems. Not having an up-to-date regular financial snapshot of cash movement can catch a business off guard, such as when it’s time to pay bills and you discover there isn’t enough cash to cover the expenses.
Although tedious and time-consuming, staying current with your forecasting, budgeting, and cash flow analysis is crucial for managing cash and it can aid in the financial success of your company. Not only that, but your vendors, employees, and taxes get paid on time.
If keeping up with this kind of accounting and financial analysis sounds too complex, there are specialists, like Northstar, who can assist you. Accountants are valuable throughout the year, not just at tax season.
Besides providing tax and accounting advice, seasoned cannabis professionals offer solutions to many other financial problems that may arise. They also provide answers to the most difficult business and regulatory questions.
Have a Financial Investor as a Backup
The initial cash outlay to start a cannabis business is undoubtedly high. Even more, daily operation costs aren’t exactly cheap. And since many banks won’t finance a loan for a cannabis business, it can leave a new business feeling empty-handed. Yet, there are alternative forms of financial backing out there. A few examples include cannabis crowdfunding and seeking out personal investors.
But, investors alone can’t keep you out of the red. It takes meticulous planning and bookkeeping to maintain adequate cash flow records. Accurate record-keeping helps you pay your taxes on time while ensuring tax compliance and so much more. To receive forecasting or other financial advice from expert cannabis accountants, contact Northstar at (424) 274-3188 or info@nstarfinance.com.
