If you’re reading this, chances are you’re already in the cannabis business and are starting to hit financial or operating snags. It’s understandable. In a highly-regulated and ever-evolving industry, cannabis businesses are charting new territory at a rapid pace. And while there is profit to be made, significant fees and severe tax rates mean that it may take time before you’re operating in the black. Here are a few of the common roadblocks that cannabis business owners face when trying to maximize their operating capital, with solutions from our team of experienced cannabis experts.
Read Time: 5 minutes
Roadblock 1: Expensive Redos
Perhaps this roadblock would be better titled “The Cost of Excitement.” Getting into a hot industry, like cannabis, is thrilling and can lead many adventurous investors to dive head-first into projects. It’s a challenging paradox, because on one hand you need the agility to meet local and state licensing windows, often with little notice, while at the same time needing the prudence and pacing to ensure you’re making well-planned choices.
In our experience, we’ve seen cannabis businesses blow their budgets on expensive redos, from costly fees and time setbacks in the reapplication process due sloppy paperwork, to major floorplan overhauls due to lack of specific technical knowledge. Nearly all of these redos, however, could have been avoided with proper planning on the front end by those with solid industry expertise.
Project redos are a large consumer of operating capital and delay your time to market. To avoid this roadblock, we recommend creating a thorough and detailed operating plan upfront. Even if you’re in the throes of your operations, it is not too late to go back and revise your operating plan or have it reviewed by an experienced consultant, like BeGreenLegal.
Understanding where you could operate more efficiently or identifying potential risk areas is an upfront expense that will save you several times over during the course of your business. If you’re struggling with operating capital now, start with an operating analysis first.
Roadblock 2: Misplacement of Funds
Track-and-trace programs from seed to sale are an important regulatory piece of the cannabis industry that requires stringent and well-documented protocols. However, some businesses become so focused on documenting the operations of the business that they lack the same level of detail when tracking their finances and spending. Not having a solid idea of where your dollars and coming and going can create major operating capital issues. And, unfortunately, with poor tracking of funds it becomes even more difficult to identify where the problem areas truly are.
Having a solid operating plan, like we mentioned in Roadblock 1, is a great first step to give you a better idea of your cash flow needs, your projected revenue, and what your expenses are. Once you have a solid operating plan, your next step is to tighten the reins on your financial tracking. This requires a high degree of organization and accountability, both on the receipt of revenue from various streams and the approval and documentation of expenditures.
And while positive projects with impressive ROIs might fill your business plan, until that money is actually coming through the door it’s important to be thoughtful in your spending. Avoid getting caught up in the excitement of the industry until you have a solid track record of operating profitably under your belt. Because, without the proper cash flow, those ROI projects may not be attainable.
It’s important to have a strong internal accounting team with control procedures in place, however adding in an external evaluation from a cannabis expert can help you efficiently identify where your operating capital lies.
Roadblock 3: Lack of Experience and Accountability
Payroll is typically the largest operating capital expense of any cannabis business. While the cost of bringing in the right people may seem like a financial challenge upfront, the cost of hiring the wrong person will be even greater to your business in the long run.
Investing in the right people upfront as two major benefits:
- It will save you from operating redos mentioned in the first point, due to the knowledge and experience of the team.
- It strengthens the confidence of your investors when they see an experienced management team who are all pulling toward the same goal. (We’ll talk more about this in the next point).
But improving your operating capital by spending wisely on the right people isn’t enough. Your cannabis business also needs thorough training processes and continued accountability when something goes wrong. Employees should have evaluation metrics and your business should follow best practices to ensure that the dollars going out in each pay period are well-spent.
Roadblock 4: Poor Investor Confidence
Because cannabis industries cannot utilize traditional lending channels when operating capital is tight, it’s important to maintain positive relationships with your investor pool and continue to build your pipeline of potential investors. One way to do this is through regular reporting of performance, including Key Performance Indicators (KPIs) so that your investors can see the trends within your business. Transparent and professional financial reporting is another way to instill confidence, even when you’re in a growth phase where profits may be non-existent.
It’s also important to bring in the right investors who align with your vision for the business. Understand if they’re looking for a short-term or long-term investment opportunity and the level of involvement they’re seeking. Actively seek to connect with your investor base and instill confidence in the direction your cannabis business is headed. Never underestimate the value of a quality investor who is willing to support you through operating challenges.
Evaluate the Health of Your Cannabis Business
If you’re already struggling with cash flow, your instinct may be to tighten your wallet on any excess spending. However, evaluating the health of your cannabis business is a worthwhile investment– ESPECIALLY if you’re struggling. You will not get better results by operating the same way you have been. Oftentimes, an outside perspective from an industry expert can give you just the direction you need to get your cannabis operation back on track.
If struggle is on the horizon (or happening now), contact our team of consultants at BeGreenLegal to learn more about how we can help your cannabis business not only survive, but grow and thrive. We specialize in cannabis business scaling and the smartest ways to vertically integrate your operations. Our mission is to see you succeed and be there to support you every step of the way.