Cash flow management is an integral part of any business. In fact, it’s one of the biggest contributing factors that determine the success or failure of a new business. Given the unique banking restrictions of the cannabis industry, cannabis business owners are even more at risk than those in other industries. This makes managing the flow of your cash one of the most important business metrics for cannabis operators.
A study by U.S. Bank determined that poor cash flow management contributes to 82% of business failures. This study did not include businesses in the cannabis industry, which poor management of cash flow is estimated to be a slightly higher contributing factor to business failure. Operating a cannabis company comes with unique challenges. It’s a very high cash volume business, although small cannabis operators still struggle to cover operating expenses.
This is partially due to the current cannabis banking regulations, but also because of the product life cycle of cannabis products and inventory. All of these things together can make it difficult for cannabis business owners to cover all of their operating expenses each month. Luckily, there are a lot of things you can do to help prevent this from happening.
Cannabis Business Cash Flow Management Tips
We’ve helped countless business owners in the cannabis industry manage their cash flow. In doing so, we’ve come across a few cash flow strategies specifically for the cannabis industry that help keep your cannabis business operating successfully. Now we’re bringing you some of our best cash flow management tips below. This way, you’ll know exactly what you’re up against, and have a few different ways to improve your cash flow.
Tip #1: Create, Use, and Enforce Cash Management SOPs
Standard operating procedures (SOPs) are needed for every aspect of your business. Having a strong set of procedures is one of the first steps to properly managing the cash flow of your cannabis business. Your SOPs should be extremely well documented, and your staff should be well-trained to execute the procedures as outlined in your documentation.
Some things to consider when creating your SOPs for cash management are your opening and closing procedures for cash registers. Cash drops, payouts, storage, transport, and deposit procedures should all be clearly outlined. You should have at least one person who is an expert on your SOPs to make sure nothing gets missed during any steps. Even with an expert behind the wheel, there could still be times when your counts are off. Employees should know the procedures for handling discrepancies to ensure a smooth flow of their cash from the POS to the bank.
Don’t forget to review your SOPs. This should be done yearly at a minimum and is something a professional accountant can help you to understand.
Tip #2: Perform a Cash Flow Analysis Regularly
This is also something a trained accountant can help you with. Doing a cash flow analysis will help you determine any areas of your cash flow that may need improvement. You’ll want to look at your accounts receivable, accounts payable, inventory, and credit terms. Each of these different aspects gives you detailed insight that you can use to make improvements to your cash management systems.
One of the fastest ways to analyze. Your cash flow is to compare your total unpaid purchases against your total sales due at the end of the month. This is an easy way to identify if you have any cash flow problems. Doing a detailed cash budget for your cannabis business is also recommended, and something one of our accounting experts can assist you with.
Tip #3: Consider Receivables Factoring
Receivables factoring is a special type of financing that can speed up your cash flow so you can take care of payroll and other business expenses. According to Grandview Research, “Factoring is a $140 billion-a-year business, one that’s growing at a compound annual growth rate of 8%”. Factors will examine your receivables history and make an assessment about the creditworthiness of your customers. Then the factor will front you the cash for your receivables.
Instead of your buyer sending you the check, it gets sent to the factor, who gets to keep a percentage of the invoice for the service they’re providing you. The cost for the service is usually 1% to 4% of the total invoice. This does mean you’ll have to pay an extra $1,000 to $4,000 on a $100,000 invoice of receivables, but you’ll also get your cash much faster than working with most banks. With more cash on hand, you have more power to keep the bills paid, and potentially some to invest in other areas of your business.
Tip #4: Shop Around for Cannabis-Friendly Banks
You do not want your money getting tied up by a bank that isn’t cannabis-friendly. We’ve seen and heard too many nightmare stories where banks freeze or shut down bank accounts for cannabis businesses. Sometimes this can happen suddenly, and without any warning, making it detrimental to your cash flow.
One way to find a bank that’s open to working with businesses in the cannabis industry is to work with an accountant who has cannabis experience. We’ve been working with businesses in the cannabis industry for so long now, that we have a list of banks offering services to cannabis businesses. You can do the research on your own, or you can trust our expertise to find you the right bank for your business.
As you can see, there are many different factors that need to be considered with analyzing your cash flow. We offer small business and corporate CPA services for the cannabis industry, including assistance with cash flow management. We can help with cash flow analysis, creating cash flow statements and cash management SOPs, as well as general accounting and tax advice. Contact us today for a free consultation, and let us help you keep your cash flowing freely, so you can continue your business’s growth.