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2020 was a watershed year for the cannabis industry, but not all multi-state operators (MSOs) were impervious to global market contractions. While most operators experienced record growth, many companies found themselves in precarious financial positions at the height of the first COVID-19 outbreak.
Marijuana Business Daily found that nearly a quarter of the top 33 cannabis companies did not have more than ten months’ worth of funding in April. These challenges were further exacerbated by constrained capital markets this year, with industry reports citing a 67 percent decline in capital raised by cannabis companies.
While legal sales surged in this exceptionally volatile period, operators should expect more uncertainty ahead in 2021. Given last year’s unprecedented financial and political disruptions, it is more important than ever for cannabis executives to run cash flow positive businesses to stay competitive. Growing mainstream acceptance for cannabis is a significant windfall to the overall industry. Still, only companies that are financially positioned for success will have the ability to reap this latest Green Wave rewards.
Related: 9 Easy Ways to Save Money In Your Cannabis Business
Keep costs under control
Cannabis is a capital intensive and expensive industry. While many industry executives come from finance and consulting backgrounds and are well versed in keeping costs down, running a streamlined and profitable vertically-integrated cannabis business is an entirely different beast. One of the key barriers that preclude the industry from operating like other mainstream businesses is the 280e tax code, which bars cannabis businesses from deducting SG&A and interest costs from their filings –even in states where consumption is legal.
Businesses must therefore be extremely cautious about their balance sheets. Until there is a significant federal overhaul of cannabis regulations, running a razor-thin SG&A is the best, arguably only, way to stay profitable. Since cannabis companies cannot write off major expenses and operate from a gross profit as taxed world, their SG&A and interest have to be less than their gross profit after 280e.
While it is tempting to scale in this burgeoning market aggressively, operators should steer clear from the grow at any cost mentality. This approach may yield favorable returns in mainstream industries, but cannabis businesses need to make sure they can see the bottom line at every growth stage.
Operators should ultimately adopt a growth strategy that is rooted in reality. In light of an incoming administration that may be more cannabis-friendly, quite a few firms have jumped the gun and made critical business decisions that hinge on changes to 280e. Companies anticipating tax reforms are thus more likely to take on the high cost of capital that possibly stretches them beyond their limits in hopes of getting a better deal in the future. Companies should take on these risks at their peril; if they end up miscalculating potential tailwinds, they must be able to afford to offset that error.
Sweat the small stuff
As the company CEO, it is my responsibility to review every check that goes through the ledger and challenge each cost. From the outside, it can be easy to think of this as a billion-dollar business where the company can afford to let things slip through the cracks, but being meticulous about operating costs is one of the simplest ways to run a cash flow positive business sustainably.
For businesses operating in the retail sector, the most effective way to control costs is to become a vertically-integrated operator. When a company has complete control over its entire supply chain, they are not dependent on third party suppliers, wholesale pricing, or fluctuating dispensary demand.
Of course, deciding to take the seed to sale route can be extremely expensive, especially on the cultivation side. This is when internal teams have to find cost-effective solutions that do not adversely affect the harvest quality. In this scenario, operators should proactively strategize how to scale anticipated yields to ensure that cultivation expenses do not take up a large portion of the company’s cost of goods sold.
Related: How to Start a Side Hustle Selling CBD in 2021
Know who you are and who you want to be
Before a retailer or operator starts production or enters a market, they must identify their long and short-term objectives. Running a profitable business requires the forethought of identifying target client segments, optimizing retail environments to attract these clients, and leveraging the business’ core competencies to build a loyal customer base. Is your business geared toward tourists or locals? Which specific demographics do you need to reach? These are all decisions that companies must make from the beginning. Retailers must then set products at a competitive price, sell quality products, and build stores in appropriate locations to ensure continued success. Creating a welcoming retail environment is also integral to building lasting customer relationships. Providing safe dispensary locations, well-lit parking lots, and attentive retail staff puts prospective customers at ease and improves the legal industry’s overall perception.
Finally, operators must own their home markets before committing to aggressive expansion plans. In recent years, it has become commonplace for companies to secure licenses in numerous states before they find their footing in their own market. Granted, cannabis is a competitive space, and operators should continuously be on the lookout for new acquisitions and opportunities. Still, they should have a proven track record and build critical mass first.
Related: Navigating Through Cold Waters: How Businesses Can Prepare For A Post COVID-19 Future
COVID-19 was an enormous stress test for retailers, especially in C21’s home market of Nevada. At the end of March, states told retailers overnight to suspend in-store operations and permitted delivery only. During this period, many of our competitors took the conservative wait-and-see approach and stayed closed but never fully recovered.
Having a nimbleness mindset in a business’ corporate culture is paramount to long-term success. At C21, as soon as our team found out about the initial lockdown orders, we ordered a dozen delivery-compliant lock boxes and bolted them to the back of our cars. We immediately created a delivery policy framework and pushed with urgency to get our new system approved by regulators to mitigate retail disruptions. Before COVID-related shutdowns, C21 served 1,750 customers a day in-store, and we were able to fully pivot by ordering supplies and starting the remote approval process in less than a week.
When the state allowed curbside pick up a month later, our team moved quickly to ensure our store operations complied with pickup regulations and aggressively pushed for regulators to approve our new set up. In the end, C21 only experienced a 10% dip in revenues driving through those speed bumps, and those adjustments now represent 20% of our business. The cannabis industry comes with its fair share of regulatory challenges, but influential leaders must see growth opportunities in certain obstacles.
Businesses that we’re able to stay nimble in this tumultuous year could only afford to do so because they ran lean, cash-positive operations. Industry executives often emphasize the importance of being strategic, but the truth is that businesses have to earn the right to be strategic. Being strategic is about getting to make decisions. If you find yourself no longer making money, you don’t necessarily get to make the decisions anymore. The decisions make them for you.