We’re about a year into what is undoubtedly the most challenging stretch the cannabis industry has faced since the legalization movement began.
The initial hype surrounding the industry’s potential as the next great American boom has slid back to a harsh reality. The combination of local government blunders and federal government inaction, crippling levels of taxation, and an illicit market that largely operates with impunity has mired legal operators with challenges.
As a result, businesses are operating in a drastically different climate from the one that attracted so many to the industry. And different climates call for a different way of doing business.
We should be asking ourselves, can we operate sustainable, profitable companies during challenging market dynamics? Are we able to switch our mindset from growth at all costs to survival at any price?
These are the moments when the mettle of the entrepreneurs and executives in the space is put to the test. We’ve assembled a list of four practical things every cannabis company can do right now to ensure they’re positioned to weather the storm.
1. Ruthlessly cut costs
As the great Scottish-American steel magnate and philanthropist Andrew Carnegie once said, “Watch the costs and the profits will take care of themselves.”
Costs are the biggest variable you control as a business owner. Packaging’s too expensive? You can find a new supplier, switch from tins to mylar bags, or move from glass to plastic tubes. Can’t afford that salaried art director right now? You can make the tough decision and outsource the job to a contractor.
Get as relentless about cutting costs in 2023 as you were about driving sales in 2020. It should be seen as a matter of survival, and the victories should be celebrated the same way.
Cost cutting and driving efficiency is a mentality, and it’s one that can be fostered and incentivized within a team.
Make sure you draw a line and communicate your position well before anyone begins cutting things that reduce product quality. Operations can be restructured, launches can be put on ice, and nice-to-haves can stay on hold. But as soon as your core product starts slipping, you run the risk of harming the business through a misguided effort to help.
2. Collect what you’re owed
At this point, almost every cannabis company is holding debt for someone else.
Accounts receivable (AR) and accounts payable (AP) are necessary for most businesses, and managing cash flow between the inflow and outflow of capital is essential for staying solvent.
AR and AP are sources of considerable difficulty in the industry at the moment, as the decline of California distributor HERBL demonstrated in June. Dispensaries owed HERBL, and HERBL owed the brands it distributed. Brands owed their suppliers, suppliers owed their staff, and so on. When HERBL couldn’t collect what it was owed, the whole system collapsed.
Although retailers weren’t entirely to blame for HERBL’s collapse, their position on the industry’s front line—collecting the consumer cash the entire system depends on—means that any problems in-store inevitably cause problems upstream.
Brands should get serious about getting paid by the stores that owe them so that they can pay their staff and suppliers while bringing liquidity into the supply chain. Send emails, call buyers, stop by stores, and limit payment terms to only the most reliable accounts. Don’t ship new product if an account is current on previous orders. Take whatever reasonable steps are necessary to get delinquent accounts to pay up while maintaining your best customers.
New brands, be wary of offering terms to dispensaries with reputations for “churning and burning” suppliers. Dispensaries, reduce your costs where you can. Lean into ecommerce and kiosks to reduce overhead and increase basket sizes. Switch to less expensive software systems. Downsize your inventory, and make sure the product SKUs on your shelves are what customers seek. Outsource team members, if appropriate. Do whatever you can to ensure your business can support the people who depend on it: customers, staff, and suppliers.
The future health of the industry depends on everyone in the supply chain working together.
3. Monitor the creditworthiness of your partners
While it can be difficult to distinguish good potential partners from bad ones, it’s crucial to develop some kind of process to avoid getting burned.
California distributor Nabis has created a credit-rating system in its backend, allowing brands and their sales teams to see which dispensaries are paying their bills in full and on time. This system can be extremely valuable in helping determine whether a potential new account is trustworthy. If you’re managing credit on your own, use the resources at your disposal. Do you have a prior relationship with this potential partner? Do you know anyone who works with them regularly and can provide insight about their creditworthiness?
Periodically reevaluate the companies to which you have extended credit. Situations change, and it’s easy to overlook early signs of financial distress unless you routinely examine each account’s payment status.
4. Adopt a smart tax strategy
Doing more business in states that have enacted tax policies meant to reduce the impact of Internal Revenue Code Section 280E may help reduce cash outflow while we wait for some variation of SAFE Banking or federal legalization to address the industry’s overwhelming tax burden.
“With regards to reducing 280E, there are ways to categorize expenses in COGS [cost of goods sold] vs. expenses [below gross profit],” said Dai Truong, an investment banker and author of the popular “Highly Objective” newsletter. “Companies should optimize [earnings before interest, taxes, depreciation, and amortization] margin over gross margin to reduce tax liability.”
Thankfully, we’ve seen twenty states including Illinois, New Jersey, and Connecticut pass legislation recently to eliminate conformity with 280E, allowing cannabis operators to deduct ordinary and necessary business expenses on their state taxes. However, businesses operating in these states are still required to comply with 280E’s guidelines when filing federal taxes.
Finding opportunities to get together with other operators to share notes and best practices while galvanizing support for reform is essential for the industry’s health.
“I’ve seen competitors come together to push for legislative reform and improve the industry,” said Truong. “Conferences like the Benzinga Cannabis Capital Conference are well attended by industry stakeholders and provide a great opportunity to informally discuss these efforts.” (Full Story)