The cannabis industry is experiencing both exponential growth and significant challenges. Some markets, such as California, Colorado, Oklahoma, and Oregon, are currently facing challenges. These include lower flower prices, decreased customer demand, and issues with taxes and regulations. In spite of these hurdles, the market’s overall future seems to hold promise. In order to navigate these market downturns successfully, cannabis businesses need to implement effective strategies to lower overhead and optimize operations.
This article will discuss six strategies to help cannabis businesses succeed in tough market conditions and overcome challenges.
The Importance of Cash Flow in the Cannabis Industry
Cash flow is the number one reason why businesses fail, and this is especially true for cannabis companies. According to a study by Business Insider, 82% of small businesses fail due to cash flow issues.
The other top reasons are all also connected to cash flow issues:
- 79% fail due to a lack of start-up money
- 78% fail due to an insufficient business plan/operational model
- 77% fail due to unrealistic product pricing strategies
- 73% fail due to inaccurate estimations of sales, operating costs, and profit margins
- 70% fail due to an unwillingness to recognize or accept operational or financial failures
In the cannabis industry, navigating cannabis regulatory burdens alongside high operational costs makes managing cash flow vital for survival. It is crucial to devise strategies that bolster the cash flow of your cannabis business to enhance your financial standing.
Taking a Step Back and Reviewing Business Strategy
All business owners will eventually face tough times regardless of the industry or how detailed the business strategy is. Pausing and assessing your situation without bias is crucial to creating or updating a successful plan. Ask yourself key questions such as:
- What is the root of the problem?
- Is the problem temporary or long-term?
- What are the “low-hanging fruit” opportunities for improvement?
By answering these questions, you can better understand the challenges your business is facing and identify potential solutions.
Strategy #1: Lowering Operating Costs
Lowering operating costs is a fundamental step in improving profitability. To achieve this, it is essential to have clear visibility into your financial situation.
Start by producing financial statements that demonstrate cash inflows and outflows. Doing so will help you identify areas that are dragging down performance. Here are some common areas where operating costs can be reduced:
Real Estate Costs
Real estate costs can be a significant expense for cannabis businesses. Review your office space and any other locations to determine if you carry more space than you need. Selling unused land or renting out unused space can provide a quick capital infusion and reduce ongoing expenses.
Adjusting staffing levels according to sales volume can help reduce operating costs. Conduct a sales analysis to identify slow times or days and trim staffing during those periods. Additionally, consider outsourcing certain functions like marketing and accounting to save on full-time employee costs.
Implementing cost-saving measures for electricity, water, and gas bills can help decrease utility costs. If you operate a light deprivation cultivation operation, explore strategies to optimize light usage and reduce energy consumption.
Evaluate the return on investment for your marketing efforts. If certain channels are not providing a return on your marketing budget, consider reallocating those portions of your budget to more effective channels. It’s essential to ensure that your marketing efforts are generating tangible results.
By identifying and implementing these cost-saving measures, you can immediately lower your operating costs and improve your bottom line.
Strategy #2: Taking a Proactive Approach to Cannabis Tax Planning
Cannabis taxes are a significant burden for operators in the industry. Therefore, it is important to take a proactive approach to tax planning. Make sure you are thinking and planning for cannabis tax compliance year-round, not just during tax season. In fact with strong bookkeeping standards cannabis companies can utilize 471C as a method of reducing 280e tax burdens. By implementing a proper tax strategy, you can estimate and pay taxes beforehand, avoiding surprise tax bills.
Additionally, proper allocation of Cost of Goods Sold (COGS) can help lower your tax liability at the end of the year. Consulting with a cannabis-focused tax professional can ensure that you maximize your tax savings and comply with regulations.
Strategy #3: Diversifying Cannabis Operations
Diversifying your cannabis operations can provide several benefits for your business. By owning more of your supply chain, you can gain cost efficiencies and lower overhead. Additionally, adding new verticals can bring in new revenue streams to help your company weather market downturns.
Diversifying your operational structure can also create opportunities for tax savings. For example, specific business deduction rules are more favorable to cultivators and manufacturers than retailers. You can allocate and deduct costs by developing a manufacturing operation, improving your tax position. However, it is essential to consider local regulations, licensing requirements, and access to capital when implementing this cannabis strategy.
Strategy #4: Altering Harvest Schedules
One of the challenges currently faced by the cannabis industry is declining flower prices in established markets. To address this issue, consider altering your harvest schedules. As an indoor grower, you can control the number and timing of harvests.
To save money, reduce operations when the market is saturated and increase operations when it’s the best time of the year. By aligning your harvest schedules with market demand, you can maximize profitability and navigate market downturns more effectively.
Strategy #5: Negotiating with Debtors
Mounting debts can severely impact your bottom line. Taking a proactive approach to debt management is crucial to the survival of your business.
Reach out and negotiate with your debtors, as they may be willing to work with you to establish better terms. This applies to both loans and debts within the cannabis industry and tax and regulatory authorities. Ignoring obligations causes more financial problems. It’s crucial to face them and find solutions that benefit everyone.
Strategy #6: Selling Excess Inventory
If you are facing a surplus of inventory weighing down your finances, consider selling it at a discounted price. It’s better to recover some of your investment instead of keeping excess inventory that ties up your money.You can make money quickly by offering discounts or promotions. This will give you more money to pay off debts or invest in better products. Effective inventory management is essential for implementing this strategy successfully.
Final Thoughts: Navigating the Cannabis Market Downturns
Navigating the ups and downs of the cannabis industry is a challenging task. However, implementing these strategies can improve your operations and finances and position your business for long-term success. It is important to stay proactive, seek expert guidance, and remain committed to finding innovative solutions to market challenges.
With our cannabis industry financial advice, you will gain valuable insights and support to help your business thrive. Success can be challenging. However, with the right strategies and determination, you can overcome challenges.Need help with operational, financial, or tax planning strategies? GreenGrowth CPAs’ team of experts is here to guide you. Book a free consultation or call us at 1-800-674-9050 to discuss how we can help you achieve long-term success.