Keep the Green Flowing: Top Cash Flow Tips for Cannabis Businesses

If your cannabis business struggles with cash flow, it’s only a matter of time before it will all catch up to you. But take heart—many cannabis operators are similarly afflicted, so you’re not alone.

And let’s face it: running any kind of business is hard. But the cannabis industry is particularly challenging for reasons that are no fault of yours. Regulation, compliance, and 280E taxation are just a few reasons why profits are scarce. Adding to the challenges, competition is fierce, suppliers are scarce, and inflation is affecting every aspect of day-to-day operations.

Additionally, we’d wager that most cannabis operators aren’t accountants, so financial strategy may not be a natural strong suit. Financial literacy aside, you don’t have to be a genius to get a handle on this.

Learning how to improve and better manage your cash flow can help you rise above these issues. With the tips we’ll share with you today, you’ll be on top of your cash flow in (almost) no time.

Three Top Tips for Better Cannabis Cash Flow

1.      Prioritize Your AR Process

A good accounts receivable (AR) process is non-negotiable in cannabis accounting. Here’s why you need to pay attention to it:

·       AR is an asset that can be turned into cash.

·       The higher your AR balance, the less cash flow you have.

·       The longer your AR are in arrears, the greater your financial risk.

You want to ensure you’re collecting your receivables quickly and efficiently. As a business owner, you may prefer to focus on other things, but let’s be clear: if you’re trying to improve cash flow, this is where you need to start.

Poor AR processes mean it takes longer for you to get paid. Additionally, if you’re recording invoices or purchase orders (POs) as revenue, your accounting reports will be misleading and could result in over-optimism or overspending.

Here are a few tips to improve your AR process:

·       Issue invoices quickly, as soon as the product is sold.

·       Do not offer terms for new customers: COD until they prove themselves.

·       Go paperless. Issue email invoices that customers can pay directly using their preferred payment method.

·       Set up automated reminders for overdue invoices. This can be configured in your accounting software.

·       For customers to whom you do provide terms, offer incentives (such as a small discount) for early or immediate payment.

·       For large wholesale orders, request a deposit upfront.

·       Review AR weekly. Follow up on unpaid invoices diligently. Do not let things fall through the cracks!

Lastly, ensure that any personnel handling AR are well-trained and have a straightforward process to follow. A consistent AR process establishes expectations with your customers and helps you get paid faster.

2.      Slow Down Your Accounts Payable

While this might seem counterintuitive as a follow-up to tip #1, slowing down your accounts payable (AP) is not an irresponsible business practice. Pay your bills on time, yes. But you don’t necessarily need to pay them as soon as they land on your desk.

Good AP practices help you stay on top of cash flow and maintain good standing with your suppliers, which may lead to better terms down the road.

Check out our guide on how to improve the AP workflow, and keep these tips in mind:

·       Limit the number of people who handle accounts payable. Doing so will reduce errors and streamline the approvals and payments process.

·       Encourage your vendors to go paperless. Electronic invoices are harder to lose, ensuring you won’t be left owning something you didn’t know about.

·       Stay on top of your accounting. Recording payments as they occur ensures that your cash flow statements are accurate.

3.      Optimize Inventory Management

Be strategic about inventory purchases to ensure your cash isn’t tied up in a product that’s going to sit around forever. In other words, only purchase what you need and be proactive about selling through your existing inventory.

If you’ve been in business for any length of time, you likely understand your seasonal ebbs and flows. This data also comes in handy when determining which products to invest more heavily in. Focusing on high-volume and high-profit products makes the best business sense.

We love the 80/20 rule of inventory management for cannabis businesses. Here’s how it works:

Determine which 20% of your products are responsible for 80% of your sales – and focus heavily on those items. Make sure you always have them in stock. The other 20% of your inventory can be purchased as needed.

It’s great to have a massive array of products, and some might be fantastic—but if they aren’t working for you, you need to cut them loose. Or at least deprioritize. Too much slow-moving inventory ties up a lot of cash and slows your cash flow to a trickle.

If you find yourself sitting on a pile of stock that fits this description, consider discounting it, blowing it out in a sale, including it in your subscription boxes, or finding another creative way to get it out the door. Don’t be too concerned about profits; you’ll be making room for your hero products and better cash flow.

The Bottom Line

In an industry that relies heavily on cash flow, any measure that can improve it should be considered. With these tips in your back pocket, better cash flow is just around the corner. In the cannabis industry, cash flow is everything, and paying attention to it now will help you mitigate the impact of inflation, prepare for market changes, and avoid financial disasters in the future.

For more tips to help you improve your cash flow, speak to the cannabis accounting experts at Growise today. We are dedicated to helping cannabis operators in every sector of the industry with focused tax preparation, accounting, bookkeeping, and financial leadership to help them grow and thrive. Set up a call today; we’d love to show you how we can help