Understanding Your Cannabis Business Cash Flow

Cash flow is king! But what is it? And why does it matter?

By definition, cash flow is the money that flows in and out of your business. All companies need a steady flow of cash to stay in business. Whether you do business in person or online, good cash flow keeps you moving forward, while inadequate cash flow inhibits growth.

Cash inflow includes money you collect from sales, cash received from selling assets of any kind, and funding via loans.

Cash outflow includes loan payments, business expenses, the amounts you pay for inventory products you sell, cash withdrawals, and dividends paid to shareholders.

Understanding your cash flow is essential to satisfying financial commitments—and it’s the first thing investors and lenders want to see before getting involved. For these reasons, reviewing your cash flow statements and performing cash flow forecasts regularly is vital.

Is Cash Flow the Same as Profit?

While there is a strong correlation between cash flow and profit, they are not the same things. However, without good cash flow, your profits will surely suffer, if not now, eventually.

Profit is the amount you’re left with when subtracting expenses from revenue. The number you arrive at can be negative, indicating a loss, or positive, showing profit. Along with cash flow, profit is a significant indicator of a company’s financial health.

You have positive cash flow when your revenue exceeds your spending. This is good, as it indicates you have enough money to make payments and cover your overhead.

A few words about negative cash flow

Negative cash flow happens when your income falls short of your expenses in a given time period. This can happen for many reasons. For example, you may have hired new staff to cover seasonal surge, purchased equipment, or built up your inventory. These temporary situations don’t significantly affect your long-term financial outlook.

However, if you’re constantly in a negative cash flow position, it’s usually because your spending doesn’t stop. If this continues, your business will fail; it’s as simple as that.

When you consider that 82% of business failures stem from cash flow issues, you’ll want to pay attention.

Negative cash flow can happen when you have trouble collecting customer payments, lack sufficient cash reserves, have unexpected expenses, or practice poor financial planning.

Reviewing and analyzing cash flow periodically ensures you understand what you can and can’t afford to do and helps you plan for future growth.

How to Calculate Cash Flow

Now that we understand how critical cash flow is to business success, the next step is to learn how to track it. Regular tracking helps you evaluate your company’s liquidity and financial performance.

Cash flow statements are financial reports used to better understand your company’s ability to generate cash.

There are two basic methods of calculating cash flow. The most common and most straightforward strategy is to use the net cash flow calculation:

Net cash flow = operating cash + investing cash + financing cash

Let’s break it down.

Operating cash in:

·      Sales

·      Interests

·      Dividends

Operating cash out:

·      Income taxes

·      Payroll

·      Accounts payable

·      Interest payments

Financing cash in:

·      Shares in the company

·      Loans

Financing cash out:

·      Loan payments (principal)

·      Dividends paid

·      Reinvesting

Investing cash in:

·      Sale of assets or investments

·      Sale of equipment or property

Investing cash out:

·      Long-term investment purchases

·      Property or equipment purchases

To calculate net cash flow, add the difference in these categories (cash in – cash out). The result will be the net change for the period you’re looking at.

Cash Flow Statement vs. Balance Sheet vs. P&L Statement

While your cash flow statement reports money in and money out, the balance sheet is a snapshot in time. It considers other matters, like assets (including accounts receivable, inventory, property, etc.), liabilities (money you are owed, expenses, taxes, wages, and debt), shareholder equity, and retained earnings.

The balance sheet does not consider revenue, expenses, and cash-based activities. These items will be found on your cash flow statement.

Profit and Loss statements (P&L) are focused on income. Here, you’ll find reports on revenue, expenses, profits, and cost of goods sold (COGS). Relying too much on the P&L statement may not provide an accurate snapshot of your cash flow.

Most P&Ls leverage accrual basis accounting, which means income and expenses are noted when they are incurred, not necessarily when the money enters or leaves your account. So, you can see where problems might arise.

The cash flow statement tells you what cash you actually have on hand.

Common Cash Flow Issues

Your net cash flow will be greater than your net income in a perfect world. Here are a few causal factors that might prevent that from happening:

·      You are operating your business at a loss. If your company is not profitable, you are losing money. Dive deep into your sales and expenses to see where you can rebalance the scales.

·      Too many outstanding receivables. Neglecting your AR is a surefire way to put your cash flow in negative territory.

·      Debt repayment. Paying off debt might temporarily tank your cash flow, but this scenario is less concerning as your debt-to-income ratio will decrease.

·      Excessive fixed assets. Investing in too many fixed assets can leave you cash-poor. Recurring expenses may sometimes masquerade as fixed assets.

·      Holding more inventory than you can sell. If you’re buying more than you can reasonably sell, adjust accordingly to get your cash flow back on the plus side.

Tips to Improve Your Cash Flow

Boosting cash flow can be accomplished in various ways. Some might make more sense depending on your business model (retail vs. online vs. production vs. cultivation).

Number one—always—is to keep your books up to date. If you’re pressed for time or don’t have the wherewithal to do your own books, consider outsourcing this function to ensure it gets done.

·      Stay on top of AR to ensure timely payments and collections.

·      Automate AR processes to get paid faster.

·      Sell off outdated inventory at a discount.

·      Offer subscriptions to drive more consistent income.

·      Monitor your cash flow reports regularly so you know exactly where you stand.

We're always here for you if you need help with any of the above. Speak to the cannabis finance experts at Growise today, and let’s get you back in the black.