Being a cannabis distribution business seems simple enough…warehouse & transport cannabis, then get paid.
But there’s A LOT more to it than that…
As a distributor, you also take on the duty of the tax-man or tax-woman for your part of the supply chain…and making a mistake with excise tax could legitimately end your business.
Aside from that, you will be operating on razor-thin margins which means your accounting and operations strategies will become incredibly important as you begin to hit scale.
In this episode, Jim will cover:
- Cannabis Distribution Financials
- Optimizing Shelf Space & Reducing Inventory Liability
- Launching Your Own Brands
- Understanding Tax Flows
- Cannabis Excise Tax Budgeting
- Mitigating Tax Issues
- Selling for Brands, or Not…
If you need help with optimizing your cannabis distribution company or remedying any outstanding tax issues, then reach out to us today.
Hey there and thank you one more time for joining us this afternoon for our webinar about making sense of cannabis distribution businesses. Again, my name is Jim Breese, chief marketing officer here at GreenGrowth CPAs. So before we hop into some quick context to who we are at GreenGrowth CPAs. So we are a cannabis only tax and compliance firm. We focused solely on the cannabis industry. We have no other practice areas and we specialize in cannabis taxes. We prepared over 1200 annual tax returns for cannabis business operators spread across all different verticals from dispensary’s, distribution, cultivation, manufacturing, delivery testing. We have over 400 active cannabis business clients, so we get a lot of sight line into what’s happening on the front lines with cannabis businesses over multiple States. We’re in 12 different States from California, Oregon, Michigan, Oklahoma, all over the country. So we get a lot of understanding from the operations and how to optimize those by seeing what’s working in certain areas and then what’s not working in other areas and how to intertwine strategies to help create more value for your business.
We also do audit and valuation related projects, which we did 17 of those in 2018 and 2019 we have a thorough and deep understanding of tax compliance and assurance related requirements for the cannabis industry. So we are bigger than taxes. Yes, taxes is how we start out. We gain that understanding of your business. We can help you stay compliant in the tax manner, but anything cash and cannabis, we can help you out with your business. So now that you know who we are at GreenGrowth CPAs, I need to let you know that the information contained in this webinar presentation is meant for guidance purposes only and not as professional legal or tax advice in further. It does not give any personalized legal tax investment or any business advice in general. So with that out of the way, let’s hop right into today’s agenda. So I’m going to break this presentation down to three parts, finance, tax, and operations.
So for the finances portion, we’re going to look a little bit deeper in understanding the finances of a distribution business, how to optimize your shelf space and reduce your inventory liability. How to launch your own brands and why you should consider doing that. Then we’ll get into taxes by understanding how taxes flow within the cannabis industry, most specifically in California, the importance of budgeting for taxes in steps to mitigate tax issues. Then we’ll jump into operations, understanding your value proposition, deciding to sell or not to sell brand products and then software considerations to help optimize your business operation. So first finance, understanding the nuts and bolts of how your business creates value is essential to building a longterm business and not being just a flash in the pan. So first understanding the finances of distro or distribution. Now distribution businesses operate on very laser thin margins.
You’re not going to get really, really rich on just a few brands unless you have massive volume. And as a distributor you have a lot of cash on hand and it makes you diluted that you have lots of money, especially if that’s tax money. As you’ll learn throughout this presentation, distributors collect and remit a lot of taxes so you could have a lot of money in your bank account. Think you’re doing great, but then you start using that as operating capital and it’s very, very easy to get in trouble when you don’t understand and manage your cash flows properly. So really tie this in your head. You’re at a 10 to 15% margin here and you really have to be cognizant of what money is actually yours and what money goes to taxes. And then beyond that, understanding the cash flows, you need to understand your cost structure.
So really get your head around what are the fixed costs, things like rent, security, software insurance, and then addressing your variable costs. So for example, you’re going to have variable costs of fuel, vehicle maintenance, driver, hourly costs, things like that. So a way to help mitigate variable costs or to reduce those would be two, is to divide your state into regions. So for example, dividing California into regions and say on Mondays you do all of the LA deliveries, and on Tuesday you do San Diego. And what this does is it optimizes for delivery costs, reducing that variable cost per product that you’re shipping out on behalf of your brands. And this helps you save time on the actual deliveries and on cash collections. People know when you’re coming out there, they’re going to be ready for it. You’re not just popping in randomly. So helping create that schedule helps you to really mitigate the wild growth in variable costs, right?
Your rent is always going to stay the same or essentially the same. Your security is the same, your software the same, but those variable costs of deliveries can get way out of hand if you don’t have some kind of system in operation in place that makes it standardized and easy to measure those costs per delivery. Now again, there’s more we could talk about in the finance portion, in all these different aspects of it, but just understand really that distros operate on laser thin margins and variable costs where you can get really out of hand in eat away at those margins. So two things that are very important to a cannabis distribution business are shelf space and inventory liability. So as a distro, you need to optimize your shelf space. You don’t want to lose money, need to protect that shelf space. And your time to which it takes to fill that shelf space and move that product.
Because if a product sits in ages, you’re losing money and you don’t want to be losing money, nobody does, right? So if you carry a brand that’s totally new, they’re not in any stores or they have no distribution yet, then what we would suggest is to establish a minimum per month payment. Something like, you know, $3,000 or 10 to 15% of the sales, whatever’s greater. Now what this does is help you at least cover the overhead for your business, especially for these new companies. There’s a lot of brands popping up. You’ll see a new brand every three days. Now they think they have the greatest product and someone’s going to love it. You just need to believe in them. Well, you’re running a business here. You’re not running a charity. So that’s what we say. Establish that minimum per month payment. And that helps to weed out anyone that’s not very serious about their brand.
And again, this cost helps you cover your overhead such as licensed security people, the space, and if you’re doing sales, you know most of the sales for these businesses that you’re going to be doing is low. So you want to be able to capture some of that lifetime value of a brand every month upfront before you deploy any more human capital or monetary capital to pushing their products. So that’s how you optimize your shelf space. Only take in serious brands that are willing to put out monthly payments and Hey, if they don’t like it, they can go to another distributor. But once you start to create a distribution network, then you can command that shelf. Sometimes they call it a slotting fee in retail. You could also call it I guess a sliding fee in your distribution business, but just a minimum monthly payment. And then once you have that established, I would highly encourage your brands to do their own sales.
Again, like I said, it’s really tough to sell products, especially if it’s not your product. So encouraged a brands to sell their own products and you just fulfill on the distribution. So ABC brand says, Hey, I need you to deliver 60 units to XYZ retailer on your LA delivery day. So you can make these deliveries on behalf of that brand, but make them do or really, really encourage them to do their own sales. Now once you’ve optimized shelf space, you need to reduce your inventory liability. Now, yes, you can keep some inventory in your warehouse for these brands, but for the most part you want just in time inventory and you’ll learn kind of what your inventory turnover rate is. As you get more established and you move more product, but try to have the brand keep most of the product at their facility. And if you do take things on in your inventory warehouse, do it on a consignment basis, make sure you’re staying compliant with any regulations and do not pay for it upfront.
And what that means is you don’t want to pay out to your brands on the number of products delivered on a monthly basis to a retailer. You want to do that. Pay out to the brand on what’s actually collected from the retailer because pretty much it’s consignment from the brand to you, the distributor in there from the distributor out to the retailer and then the retailer remits money back to you, which is money collected or on units collected and then you go back to the brand and say, all right, we delivered 60 units, they paid us on 47 of those units. Here’s your payment for that because if you pay on units delivered, you taking on all of the risk and what if that retailer doesn’t end up paying? What if there’s a lot of returns? Then what happens? You’re out of the money, the brand’s happy, the retailer’s happy, but you’re not happy and you want to make sure that your generating value and not taking on too much unnecessary risk that you start to get into operations.
You’re going to say, Hey, I see a lot of these particular products moving or not as much of this, so you should consider launching your own brands. But I would only do this after you establish yourself as a distribution partner and have relationships within the industry to retailers who can actually move those products to the end consumer. So again, you’re out here, you’re consistently collecting market data just by your simple shipping manifests and everything else that comes along with just being a distributor. But you can be a little bit more active in that. No quick way to execute data collection on the market and what’s moving is whatever delivery driver goes out, had them ask four or five questions. You know, I’m just going to give a few sample ones here, but you could have them ask the retailers, Hey, what products are moving the fastest?
What gaps in product offerings do you see? Are there any products or brands that you don’t have as a retailer that people are asking for by name? Are you seeing a shift in the types of clients that you have been attracting? Now what this does is allows you to see opportunities and then make moves to either launch your own brand or go out and find other brands to fill in those gaps because not every retailer just takes on one distribution partner. You may be only distributing for 30 of the 125 brands that they carry. Okay? Now you have to really say, all right, I need to learn more a high level picture of what’s going through this entire dispensary. That’s why you ask these questions because if you’re only distributing vaporizer cartridges or only distributing raw flour, then you start to think, okay, well what else can I do to make more money in this industry?
What opportunities are there out there for me to tap into? So when you start asking these questions of your retail partners, it helps you understand the market. Maybe they’re telling you, Hey, flower is better. Ultra premium flower that’s at four X. The normal top shelf is actually moving a lot better. Maybe it’s a seasonal type of product, people like particular flavors or something like that. During a season if you’re going to be heading into the holiday season and people are asking for edibles that are pumpkin spice latte or gingerbread or hot chocolate, whatever that’s going to be. Maybe you started to say, all right, we need to start planning out three to four months ahead and finding people that offer these unique products that are seasonal and have deal terms that make them right for us to carry and happy for the retailer to take them on and sell them.
Data is powerful in your in a very powerful position as a distributor because you have access to that retailer, that final retailer. Granted, everybody can go to the retailer, but you’re establishing a business, trusting relationship with them, and they typically share a lot more information than you would think they would because you’re building friendship between these people. And to build on this, when you launched your own brand, this will take an entire new set of skills, a lot of talent, probably a heavy amount of cash, but you could recapture margins and improve the financial health of your business. But again, establish yourself as a distribution partner that’s trusted in the industry. Create that reputation for yourself. Create those relationships and connections so that you can if and when you do launch a brand, move units quickly. So now that we understand a little bit about the finances of the business, let’s talk about taxes.
I know it’s the most unfun thing to talk about, but this is where distribution businesses can get into huge trouble with cash and thinking that they’re very cash rich, but then they end up having to pay taxes and penalties build up in so many other things. So first you need to understand your local tax authorities. In California, we have the CDTFA, which is a California department of tax and fee administration. You’re going to talk to these people a lot. They issued the sellers permits, they collect the taxes. This is the California tax authority responsible for sales and use tax excise and cultivation tax. So if you’re a cannabis business operator, overall, you’re going to need to get a seller’s permit and if you’re a distribution partner, you will need to get a cannabis permit and they are really, really hard to get ahold of is a lot of this stuff is done through the website, but just at any rate, it’s hard to get ahold of these people.
So make sure you set your profile up online so you can do all of your filings online. Make sure basic here, save your password in a safe place and you have to do those excise tax filings quarterly. Don’t forget this because lots and lots of distributors get in trouble. We work with a lot of distribution partners in California and it gets out of hand very quickly because failure to pay your cannabis excise tax on time results in an immediate 50% penalty. That is a huge issue. It can compound very quickly and as we’ll get into later, there’s no built in abatement program for this. And then building on top of that sales tax is a really, really big issue. So if you’re a retailer out there, especially if you’re a delivery, you have origin and destination taxes in LA, you’re going to have 88 different tax rates.
And then if you have a delivery into one city from the origin of another city, you’re paying taxes in all these different places. It’s really, really important that you get a wrangle around what’s your local taxes are and who you have to pay them out to. I know this seems very basic, but this cannot be an afterthought. Taxes are something you need to plan for ahead of time because again, if it gets out of him, you’re going to be bombing. So now that you know who the taxes need to be paid to, let’s just break down how taxes flow within the cannabis industry. Now these charts on the screen here, there’s two of them. There’s a California cannabis taxes flow chart with the manufacturer in the loop as well as one without the manufacturer on the right hand side. Now these charts are just the basic representation for cannabis taxes and do not include all of the tax obligations for cannabis businesses and anything else that they may have for tax obligations, right?
Cannabis distributors are required to hold again that cannabis tax permit file those returns and pay any cultivation and cannabis excise tax due to the CDTF fame. So if you look here at the graphs, just a high level, those solid green arrows are the flow of taxes from different people within the industry. And you see they all end up leading to the distributor, which means you’re going to be holding a lot of cash in taxes for the industry and you have to then remit that over to the CDTFA. So you see those outlined green ones, the cannabis excise tax and the cultivation tax. That is very important that you do not miss any of those payments because it can end up in a huge, huge issue and cannabis excise tax is 15% of the average market price from the retailers. So we’ll get into a little bit more about planning for taxes, but it can become a lot of money very quickly.
We’ll talk about the magnitude and how that kind of gets out of hand with just the basics between these two charts here is that there’s a manufacturer who collects that cultivation tax from the cultivator and then sends it up to the distributor on that left side. And then on the right side without a manufacturer, a cultivator just sends the cultivation tax to the distributor who then sends it to the CDTFA. So just high level look at how taxes flow within the cannabis industry essentially. For most States, this is how it will go. There will be some other nuances to it, but this is what you can expect in the cannabis industry for flow of taxes. Now the importance of budgeting for taxes. Again, this is not going to be an afterthought. You have to walk in, eyes wide open to the cannabis industry and know that you are going to be on the hook for a lot of taxes and collecting and remitting a lot of taxes throughout the industry.
So first budgeting, what you want to do when you are collecting that 15% excise tax, right? I said it’s 15% but that’s on the consumer prices of the product. So what we tell our clients that we are the CFO for, we offer an outsource CFO service in a fair amount of those clients. Our distribution partners, what we tell them is to budget 23 to 24% of wholesale costs as what your excise tax is going to be because there will be a markup from what you sell it as a wholesale to a retailer who then marks it up and adds that 15% on the markup. So we’re showing you here, Hey, get you know about a 50% markup on that 15% which would be eight more percent, which leads you to that 23 or 24% of the wholesale costs. So for example, if you sell something that’s $10 to a dispensary, make sure your excise tax collected or budgeted is going to be $2 and 40 cents.
Remember that you have to collect this from the dispensary. Your liability gets triggered once you sell that product. So make sure you collect tax cash on delivery right away. This is not something you can float to the dispensary. They must at least pay that excise tax. You know, you can front them the product, but not the tax. You cannot allow them to, Hey, we’re going to pay you the tax once we start selling the units. It doesn’t work like that. Your liability gets triggered once you sell the product and move the product to the retailer. So make sure you budget for those taxes and collect them immediately. So why is tax budgeting important? Well, it’s very easy. So a small distributor can get into big trouble quickly. So say you’re doing $100,000 per month in distribution sales, right? It’s not a lot. It’s $300,000 per quarter now to 24% budget for wholesale costs on that excise tax.
That’s a $72,000 liability within just one quarter, and you get hit with that bill at the end of the quarter. You have to pay the month after that quarter closes. Now that’s a lot of money. 72,000 bucks, and it can happen really quickly, and especially if you’re not sitting on that money, don’t have it put somewhere safe. You could be in big, big issues with not being able to pay that because again, you will be hit with a 50% penalty if you pay late. So do not use this money as working capital. Don’t overextend yourself. Make sure you’re putting this money away because this liability is for life. If you’re an officer of a cannabis company, this is now on your personal shoulders. There is no bankruptcy for taxes in the cannabis industry, right? This is like student debt for cannabis businesses. It never goes away in bankruptcy. Overall for cannabis businesses is not an option because it’s a federal protection and this business is federally illegal still.
So just be really, really cognizant that you cannot take people’s word on, Oh, we’ll pay you the taxes later. You need to collect that tax money right away. Now, how to mitigate tax issues. Now the first and foremost already talked about this, but get your 20 40% down payment on taxes that need to be collected as soon as you drop off the product. That’s one way to mitigate nearly all the tax issues. Get the money up front. Next, you need to be cognizant that when you collect any cash for products at all, that cash needs to go to the headquarters in that tax when it needs to be put aside in a separate safe or separate bank bag. Same with the cultivation taxes. Do not use this money as operating capital. Again, at the beginning of this presentation has said you’re gonna be collecting a lot of cash.
It could delude you into thinking that you have a lot of money to spend. You don’t, that’s not your money, you’re just the keeper of the money until it’s due. And you have to move that over to the CD TFA or whoever your local excise in sales and cultivation tax authority is. So make sure you’re allocating that money somewhere else so that it doesn’t accidentally get spent. And then third is someone a distributing under your license. So there are some businesses that have lots of excess capacity, a big warehouse and they want to have other distribution partners distribute under their license cause maybe they’re becoming the distribution hub for someone who’s already up in San Francisco, they want a distribution center in Los Angeles. Now you are essentially letting them operate under your license. What you need to understand is that they’re now collecting excise tax under your entity name and under your license.
So if they don’t give you that money or if they run into cashflow issues, you are liable for that money. So have some type of centralized accounting and compliance, like a metric type of system to make sure that all the taxes are accounted for and collected. The moment those invoices are shipped out, you do not want to run into an issue where four people up the chain owe you money. It’s going to be a lot harder to get that cash when there’s so many more parties involved, so speak with your lawyer. Maybe you can get this new distribution partner who’s operating under your license to bond money and put money into an account or an escrow and they can contribute to that, but keeping a minimum threshold amount of cash in there, it’s totally up to you. There’s a lot of different ways to approach this, but make sure that you’re collecting that tax and don’t get in trouble with people operating under your license, right?
It’s good to have other people do that because it covers your, some of your overhead costs, but it can turn into a huge liability if not watch under a close eye. Now, what do you do if you do trigger a penalty? Say you pay the CDTF a pass a deadline, well understand that you will get a 50% penalty, but what you can do is reach out to the CDTF Fe because there is no official abatement plan, as I said earlier in this presentation. So what you need to do is contact a collection agent and set up a payment plan ASAP. Typically the interest rate is six to 9% on an annual basis, so make sure you manage your flows really, really well and do not miss a payment. The moment you start missing a payment, that means you’re operating in bad faith and don’t bank on getting any type of abatement of that penalty.
But what you need to do again is make those payments and pay the principle and the interest off. And what will be left is that 50% late payment fee. Then what you do is you apply for an abatement to the CD TFA to your collections agent and you cannot apply for that abatement of penalty right away. Remember you have to pay off the principle and the interest and once you submit that application for a Bateman, that process takes a few weeks to a month to get a response. You know, a bigger penalty is going to need more approval from people within the CDTF Fe and we’ll see how it shakes out. Maybe you get an abatement, maybe you don’t. So that’s why it’s really, really important. You make sure that these tax are sent in on the right time is there is not a huge window of flexibility in this. You have to pan a specific date.
Don’t be late, pay early, don’t pay late, and not knowing the rules does not absolve you. The responsibility to pay taxes, fees, and associated penalties. Okay? The first time, you may get some leeway with the CD TFA, but it’s not likely to continue to happen a second, third, fourth, fifth time. If you start missing more and more of these payments on the just quarterly basis or even within your payment plan, if you do miss instead of a payment plan, the CD TFA is not going to take that very lightly and they will come down on you very, very hard. So that’s why it’s very important to make sure you have a tax plan before you start to operate. Now we’ve unpacked a little bit about financials, a little bit more about taxes. Now let’s peel into a few operations considerations to help optimize your business and relieve some of that headache that we noticed from some of our more green entrepreneurs who don’t have a lot of experience in the cannabis industry, especially in distribution.
So first you need to really find where you fit in and deliver on your value proposition. You have to figure out your place in the market and really fulfill on that specific aspect of the market. Essentially, you’re a true transport and delivery company at the beginning, right? If you’re going to start launching your own brands, potentially you stand for something more, but as a distributor you are going to be pretty much a transport and delivery company, so to serve your customers best, your value proposition revolves around reliability and fast delivery. Also, if you are a more well established distribution company, you now have access as your value proposition where you have access to more distribution channels, more retailers, more delivery partners, and the true value of a distribution company is to have a network. There will only be a few winners in each region, so make sure that you’re making those human personal connections.
Business are just essentially contracts, but people execute on those contracts. So make sure you’re making good human connections with your retail partners and your brands. Keep everybody happy, make your money, and then you start establishing this network because there’s a lot of people that know how to run a business. You know this number minus this number equals this number. They know the back of the envelope, how to make value and create value in a business, but do they know how to really build that human connection? Because cannabis is a team sport, you need a lot of people to make a cannabis business work. So focus on the value proposition of building a valuable network by becoming a reliable distributor with fast delivery, quick payment turnaround for your brands, and being a good customer service representative in steward of those brands. Now when you start to cut down on delivery times, once you hit bigger scale and bigger volume, that means a lower fixed cost per unit.
Kind of tying back into the finance portion of it. So as you start to grow your network, you can reduce that fixed cost per unit is, and then you can start expanding to having more DCS, expanding your footprint. Again, if you’re established up in San Francisco and you want to start to distribute brands down in Los Angeles, you can reach out to other distributors and say, Hey, I’d love to cover some of your fixed overhead costs. Would you mind renting me 5,000 square foot of your space and I can pay you some minimum monthly rent. I can pay you a percentage of our sales or whatever that is. Try to find a way to create a distribution network, not just one hub for your local area. Brands want to go and have bigger reach. So if you start to create and establish those connections, you can command a higher percentage of the sales that you do for cannabis businesses and cannabis brands.
Now we talk about sales in the cannabis industry. Who really is responsible for those sales? Well, there’s two schools of approach. As a distributor, you can do sales and distribution or distribution only. Now if you do just distribution only, you can get 10 to 15% of the value that you deliver of the product to the different retailers. Now if you’re going to include sales, you can probably bring that up to 15 to 20 maybe even 22% but if you do sales and now you have to hire salespeople, create [inaudible], pay commissions, have more software to trace all the different sales that you’re doing. And being able to pay out the right commission. So it can be a headache just in the amount of resources that you need to get together if you have sales. But beyond that, you can start to pit brands against each other and really sour certain relationships.
So for example, if you have brand a and brand B, right? In the same arrangement for sales and distribution in both of these are say top shelf cannabis flour. Now your sales guys and gals are going to go to shops with two competing products. Now that is a conflict of interest. Now what if some of those brands are pushed more heavily because you get paid a higher commission on those? Well then it starts to say, all right, well we don’t like the second brand because they don’t pay us well, right? Some brands will do worse and it creates that conflict of interest. So one way to get around if you’re going to do sales is to make sure that your product offerings are exclusive. If you already have a super premium top shelf, you know high level product, don’t take on another high shelf super top grade product.
Try to find someone in that mid tier, someone on that lower tier so you have a dependable in big fleshed out menu of products instead of competing products, you want to find that best product that fits into that little bracket and then build out from there. Another thing you see is that when you create a brand, you create something that resonates with people. Now what if you have sales guys that are trying to move a female-oriented product? Maybe they don’t understand the value proposition or it doesn’t resonate with them. They will not push that product as much as maybe a female sales associate would. So that’s why it’s really hard in the balance when you start to do the sales. At the beginning of this presentation, I said, encourage your brands to do their own sales. They know their product the best. They know what their brand stands for.
Allow them to do that sales process because what you could say is, Hey look, if we end up not working together anymore, you at least have a sales channel that you can sell product to. It’s easy to find on their distributor, but it’s hard to ramp up sales when you are moving a lot of sales for them as a distributor, you were doing the sales for them and then you cut them off for some reason. Maybe you run into cash issues and your business goes out of, you know you don’t operate anymore. Now what does that brand do? So you kind of give them a few nuggets to grab onto like yeah, you know what, it actually would be a good idea to do sales for ourselves and just really understanding that sales adds a lot of complexity and issues to the distribution business, which already has its own complexities and issues.
So just be thoughtful about that. Don’t just try to go make more money right away. Again, start with something small. Get really good at distribution. Then potentially take on sales for a few brands or maybe launch your own products. It’s up to you. But that’s just some things to consider with selling for brands or not to sell. And then software, it’s essential to have great software to make sure your business is running smoothly. There’s going to be a lot of numbers floating around, a lot of units floating around, a lot of money flowing around. So it’s important that you document, document, document because software is the one thing that separates a successful business from a failing business in the distribution vertical of cannabis. You have to invest in software and SOPs that implement that software. It’s not enough just to pay for the license for the software.
You actually have to use it. And you may say, Hey, we do everything in Excel. We’re good, don’t worry about us. Excel just doesn’t cut it anymore. It has limited capabilities and it’s still a very manual process. So how does suggest you look at a few different types of softwares? You need to have an inventory software that can cross post to QuickBooks. It’s important that all your software speak to each other. Now building on that your inventory software needs to also do aging of the inventory. How long has something been sitting on the shelves? There’s going to be sometimes products that have expiration dates. You want to make sure you’re not selling any expired products, so make sure that inventory software has something to do with age of the inventory so you know what’s coming up, what’s aging too fast, what’s not moving fast enough.
Another thing with inventory is being able to have counts of what’s on hand so you can move into that just in time inventory. Well, we walk into a lot of times with distribution partners that we work with is that they’re still doing hand count inventories and that creates errors. You want to have as much automated as possible so you can just reply back to an email real quick to a brand and they ask you, Hey, how many units do we have in your warehouse? And you can reply back. You have nine and a half cases. Great. Something you don’t have to worry about going out and counting that. It just an essential thing to have to make your business run smoothly. Next billing software, your POS, that is metric compliant metric is the track and trace software out in California. I’m sure other States are implementing something of that nature, but make sure that your POS system is metric compliant and make sure it can do the basics like running invoices out of it, making sure you have the ability to track receivables and run an accounts receivable aging report, right?
Seeing who’s coming up on bad debts and who you really need to put the pressure on to collect back on that. Then if you have salespeople, if you chosen to do sales, make sure that that software is able to attach a salesperson to each invoice to calculate commissions and have sales by person to calculate commissions because calculating commissions is very much done by hand right now and to create trust and transparency with your salespeople to make sure they know that they’re getting paid the right amount. Having this kind of software as backup information can really just create transparency in that conversation in your POS system should be able to do the basics. Again, run sales, but also collections by product and by brand and byproduct. I told you earlier, don’t pay out on delivered product. Pay out to the brands on collected sales. This helps you get the ability to settle and reconcile with brands in a transparent way because there will be multiple brands in a delivery to a dispensary.
So it’s super important to able to break out your invoice to such a granular detail that everything is there to again, calculate the commissions for your salespeople, how much you have to pay out to your brands and even being able to look at your margins for each brand for each product. Now lastly, if you end up starting to do your own brands and launching your own brands in most States, distributors can do their own light manufacturing. Things like bottling flour, filling up cartridges. So if you’re going to do those, make sure you get a software that has bills of materials or BOMs so that you can put this activity in these materials into cogs. If you understand two 80 E you cannot deduct any expense that is not cogs cost of goods sold. So having this BOM software that can track all of these inputs is really essential to mitigating your tax liability.
It allows you to track the margins of your products that you launch under your brand. So I know we covered a lot of ground here from finances, taxes, and operations. Again, this is just a 30,000-foot look. It gives you a little more color and context to the pains that distributors feel as they operate their business and grow their business. So let’s just jump into a few key takeaways. Again, distributors run on razor-thin margins and a small issue can magnify quickly. Again, you miss one tax payment. So over you’re doing that $300,000 a quarter. You have your $72,000 tax payment, you miss it, you get a 50% penalty. That’s 36 K. now you’re looking at $108,000 tax liability and you’re only making maybe $30,000 in profit on that $300,000 in sales so it can get out of hand really quickly. So make sure you create SLPs and have the softwares that actually help you mitigate those tax issues.
Now be vigilant in collecting and remitting taxes again, or you’re going to pay for it dearly and know that it’s like, Oh, I don’t want to have to worry about this tax stuff, but that’s just par for the course. When you hop in as a distributor, you will become the taxman or tax woman for your distribution network. So make sure you take that very seriously. Now, next, establish and deepen relationships with your retail partners for data collection and potentially launching in house brands where it comes to worse. If you’re not going to launch your own brand, you want to be able to give thoughtful feedback to the brands that you do service and say, Hey, this is why this product is not moving. People don’t like your packaging or you’re having a high failure rate or this part of the market is very, very saturated.
People don’t want disposable cartridges. They want high almond flour or they want pre-rolls or they want these higher-end pre-rolls or whatever it’s going to be. You want to create two-way communication with your retail partners so you understand the industry better than any other distributor because there will only be a few winners. There cannot be hundreds and hundreds of distributors. There is only going to again be a few winners. There’s a lot now brand this really, really rapid expansion of the industry, but a lot of people are going to fall into these pot holes. Their businesses are going to crash, they’re not going to be operating anymore and you want to be positioned to take over all that excess capacity when it becomes available in fill in those gaps in the distribution network. So collect data, create those deep relationships and benefit from them. And lastly, don’t waste time.
Automate your reporting with your software just for the sake of your mental space, knowing that you’re doing the right things and can track things down to the granular detail, creating trust and transparency with your salespeople, and even more importantly, creating trust and transparency with the brands that you distribute. For now, thank you for taking the time to sit and learn with me today about the distribution vertical in the cannabis industry. So if you need help with optimizing your cannabis distribution business, please reach out to GreenGrowth CPAs greengrowthcpas.com or give us a call at (800) 674-9050 we’d love to help you walk through and unpack any issues within your business, help you remedy any tax issues, any operations issues, any finance issues, anything that we can help out with. We have a lot of collective knowledge with 400 active clients throughout the industry. We know what a lot of good, best practices are and we can help you implement those and recover from any issues that you may be suffering from. So again, if you need help with your distribution business, please reach out to GreenGrowth CPAs greengrowthcpas.com or give us a call at (800) 674-9050. Have a great day and we’ll talk to you soon.