The difficulty of turning a profit in today’s cannabis industry can sometimes feel insurmountable. Punishing federal and state tax regimes, the lack of intrastate commerce, limited banking access, restrictions on advertising, heavy operating costs, regulatory and reporting complexity can make it seem impossible to turn around a cannabis business. All of these factors combine to limit revenue and take big slices out of profit margins.
A lot of cannabis businesses that are doing nearly everything “right” still can’t seem to turn the corner. And while breaking even feels like a win, to be building a strong business you really need profit surpluses that you can use to reinvest in your business.
Our team at GreenGrowth CPAs has a lot of experience working with retailers, cultivators, distributors and others in the cannabis industry to get their businesses on the right track. Through our Tax, Outsourced CFO, and Advisory service lines, we help our clients to implement better tracking and reporting procedures to identify cash leaks, analyze mismanaged expenditures, find reporting holes, bridge data gaps, and improve payroll.
All key steps in ensuring your cannabis business is operating optimally.
As many cannabis operators continue to tread (or take on) water, we’ve decided to share the learnings from a recently completed client engagement and detail the ways we helped this organization turn around their performance, boost revenue and profits, and ultimately secure a healthy multiple for a profitable exit.
Case Study: California Vertically-Integrated Operator
When our client approached us they had a very promising vertically integrated cannabis business in California. They had secured retail, processing, distribution and cultivation licenses, and were generating around $3M in quarterly revenue.
Cultivators at heart, the business’ operators were efficiently producing high-quality flower and their distribution and retail operations were working smoothly.
However, the owners knew they could, and should, be producing a lot more revenue but instead found themselves pouring more and more money into the business. They didn’t have a clear understanding of where the money was going, how much was needed, or if they were going to be profitable at any quarter’s close. They had no cash tracking system in place, and their books were 6 months behind.
Perhaps worst of all, they were past due on filing their sales, excise cultivation, and income taxes, putting them at significant risk for an audit and/or regulatory violation that could have shut the entire company down.
The owners felt completely underwater, out-of-control, and anxious about the future of the cannabis business they had worked so hard to establish.
Luckily, our team of cannabis accountants and advisors at GreenGrowth CPAs had seen all of these issues previously. As soon as we started working with them, we implemented plans to address several areas of improvement that were holding them back from managing their cashflow, increasing sales, and fully maximizing their profitability.
Common Obstacles to Cannabis Business Profitability
While the situation with this client seemed dire, in truth, they were dealing with issues that are common to cannabis operators. Below, we’ll address core problems we encountered and why they were so important to address.
Problem 1: Past Due Tax Filings and Payments
When our team first met with the client, they disclosed they were past due on their tax filings and payments for their sales tax, excise and cultivation taxes, and income tax.
This is simply an untenable situation for any cannabis business. As we’ve addressed in other articles and videos, the IRS and state and local authorities have specifically targeted cannabis operations for tax violations. The simple reason is: cannabis businesses are far more likely to be in violation of tax laws than mainstream businesses.
Failing to maintain tax compliance is a ticking time bomb for any cannabis operation. Not only do past-due taxes, penalties and fees essentially ruin any attempt at profitability, the consequences can be even greater. Operators risk losing their licenses, and possibly even face jail time, if a tax court determines there was fraudulent intent to avoid taxes.
Problem 2: Lack of Cashflow Software and Tracking Processes for their Cannabis Operation
When our team first met with this client, they couldn’t confidently answer a simple question: are you profitable? This one question revealed a much deeper and more troubling issue, they were not currently able to track cash coming in and going out.
This is a core metric for operating a business successfully, but with their operation, and its many licenses and components, there were so many moving pieces they didn’t have a clear picture whether they would be cash-positive for any stretch of time.
The root of this issue was that the client did not have dedicated software, procedures, and standardized processes in place to track their cashflow.
Simply put: Data is power. As a cannabis owner or operator, it is critical for the success and growth of your business that you:
- Have transparency and awareness of your cashflow state, at all times;
- And, you have the tools, software, reporting, and process to track and measure-up against that data on an ongoing basis.
How to Turn Around a Cannabis Business
Based on our team’s initial findings, we immediately started working with our client to make some improvements in their business operations and processes. Here are some steps that our team took with our client, to help them improve and turn around their business.
Step One: Focus on Cannabis Business Compliance
The first objective our team worked toward with our clients was making sure they were not only tax compliant, but also that they were caught up on their filings, payments, and penalties.
The client had a fair amount of outstanding tax liabilities and penalties, and it was critical that we get them out of this hole as soon as possible. Our team was also able to help our clients navigate, plan, and pay off their tax liabilities and penalties.
First, we calculated and filed all past-due returns, and worked with tax authorities to negotiate past-due penalties and interest, establishing a payment plan that would keep the business running while maintaining tax compliance.
Next, we were able to help the client implement and standardize their bookkeeping procedures. These strategic implementations would allow them to simplify their tax planning and preparation for the foreseeable future of their business.
Step Two: Clean Up and Standardize Reporting
There are a number of powerful tools cannabis businesses can utilize to assist in tracking, recording, and analyzing every key piece of data for your operation.
Our team collaborated with the client to develop an effective software solution to standardize their data collection and reporting processes. In terms of cash flow management and bookkeeping, our team was able to work with the client to:
- Implement cash tracking systems, policies, and controls;
- And, integrate a payroll system and general ledger allowing all payroll information to be automatically integrated into the company’s bookkeeping and accounting software.
As with the standardization of their bookkeeping processes, we also worked with and trained their internal bookkeeper to ensure these processes were carried out in perpetuity.
We were also able to revise their accounts receivable (AR) and accounts payable tracking systems. This would continue to help our clients track AR aging and management by giving them an instantaneous snapshot of which accounts are outstanding and what length of time they were behind.
Our team was able to improve their accounts payable tracking as well, giving our client the ability to track their own outstanding invoices. This helped them better manage any short-term debts and outstanding payments they had with their vendors.
Our cannabis CPA team also introduced new processes for inventory costing and recording. This supported our client’s ability to track aging products, and more so, what brands and products were contributing to the majority of their sales volume vs. the products that were taking up shelf and inventory space, tying up cash in the business. This strategy alone led to a massive and almost instant reduction in overhead and boost in sales.
Furthermore, our team put an accounting function in place, where books are closed and results are provided to management by the 15th of each month.
12 short months after implementing these changes our client achieved 6.7 times sales growth. We were able to help our client scale company revenue from $3 million in sales in Q4 of 2018 ––– to $20 million in Q4 sales in 2020 with a 25% EBITDA margin.
Other Recommendations: How to Turn Around a Cannabis Business
Though the principles in this article can help cannabis business owners and operators improve their tracking, processes, and cash management, keep in mind that these may not be the same issues your business is facing. Therefore, this information on how to turn around a cannabis business are good rules ––– but not necessarily a one-size-fits-all approach. There are countless variables, key components, and data points that go into analyzing cashflow management and improving the financial state of any cannabis operation.
At the end of the day, you need a team of industry experts and cannabis CPAs to help you improve operational efficiency, find areas of unnecessary or excessive expenditures, integrate standardized controls and reporting, improve internal process flow and efficiency, and help you manage your bookkeeping, cashflow, and taxes.
If your cannabis business isn’t performing to your expectation, reach out to GreenGrowth CPAs. Our experienced accounting and advisory teams have the insight and experience to help prepare your books, accounting processes, controls, compliance, and support due diligence.