There are many misconceptions about cash flow in the cannabis industry. The truth is that there are some “hard truths” which make it difficult for a new player to enter or exit the market without considerable pain and risk.
The “cash flow statement” is a document that provides information about the cash flows of the cannabis business. The statement includes revenues, expenses, and changes in cash.
When you hear that legal cannabis sales in the United States would increase by 30% to $22 billion in 2020, overtaking the $17.5 billion spent on wine, it’s natural to become enthused about the cannabis sector. You can mistake a flourishing market for a chance to make a rapid profit if you’re a clever, experienced businessperson.
However, there are a few characteristics of running a cannabis company that are significantly different from running a regular corporation. Before ever contemplating starting a cannabis company, individuals need be aware of three harsh facts concerning cash flow.
Hard Truth 1: To start and run a cannabis business, you’ll need a lot of cash.
It’s possible to earn a lot of money in the cannabis industry, but it won’t be “easy money.” Cannabis companies are very costly to establish and manage, whether you’re interested in growing, processing, or selling goods. Hundreds of thousands to millions of dollars might be spent on:
- initial operational authorizations,
- recurring compliance costs,
- Purchases or leases of real estate
If you’re leasing your facility, don’t be shocked if your landlord attempts to back out or increase your rent significantly after finding that you’ll be running a cannabis company. It’s not a secret that the purpose to run a cannabis company must be included into your lease in many states. Due to greater insurance costs and most banks’ inability to finance a property used for a cannabis company, landlords worry at the mere mention of cannabis. We’ve seen landlords increase rent by five or six times, knowing that cannabis entrepreneurs can’t afford the cost or time it takes to relocate their operating license, start the licensing process again in a new jurisdiction, or have their license revoked due to an eviction.
Taxes are also a significant outlay. Those states that have legalized marijuana have done so primarily to boost their tax revenues from cannabis sales. Marijuana items, for example, are subject to a 37 percent excise tax in Washington. However, although the government is eager to receive your money, don’t anticipate any tax breaks for your company. Cannabis enterprises aren’t eligible for typical company deductions or other tax incentives since cannabis is still illegal on the federal level.
As a result, although cannabis-related enterprises might be profitable, they’re also disproportionately costly to run. Money that comes in will go just as fast as it came in. And that flood of money, which is mostly in the form of cash, brings with it its own set of issues.
Hard Fact #2: Your company may be unable to get a bank account.
Here’s a problem that no other legal, taxed sector has to deal with: where will you put your money? Where are you going to store your suitcases full of cash, to put it bluntly? How will you keep track of your funds, keep them secure, and utilize them to pay your bills and suppliers?
These strange inquiries occur because cannabis entrepreneurs are unable to rely on regular financial systems. Only 515 banks and 169 credit unions nationally offered financial services to marijuana-related firms as of the end of 2020. As a result, many cannabis companies are unable to function since they do not have access to bank accounts, cheques, credit cards, loans, or lines of credit. Cash is king in the marijuana market. Cash, however, is also a significant burden.
Businesses that deal largely in cash—and a lot of it—must deal with the threat of robbery and invest in security measures to safeguard their assets. At the same time, they lack the security of a bank line of credit or the capacity to float credit card payments.
Hard Truth 3: You Must Become Accustomed to Handling That Amount of Money
When someone opens a briefcase full of pristine stacks of money, everyone’s eyes light up with want and greed? You have to remove that glimmer if you work in the cannabis sector. You’ll come across a lot of cash heaps, which isn’t always a good thing.
Keeping track of cash money and thorough company records of cash profits and expenditures is very tough, particularly given that cannabis firms are already under regulatory scrutiny. How will you set aside enough money for taxes and other unforeseen expenses? How will you pay your rent, utilities, license fees, suppliers, and staff logistically? It’s critical to have a reliable, leak-proof cash flow system.
However, monitoring and managing finances isn’t the only issue. How are you going to get to the point of sale if you’re paying cash? Trying to go anyplace with a briefcase full of cash, unless you have a private jet, is an excellent way to have your legitimately earned money seized. Driving has its own set of dangers, particularly on multi-day journeys.
Because all of this cash handling requires time and effort, most cannabis companies need at least one or two workers to count cash, make money drops, and get money orders and cashier’s checks. That, of course, renders them very susceptible to financial misappropriation and staff theft; employee theft has been blamed for up to 90% of monetary and product losses in the cannabis sector.
Fortunately, with a cannabis-related firm, there are better methods to handle money. Businesses may, for example, create a corporate structure with two connected organizations, one of which owns the cannabis product and the license and the other of which owns the real estate, machinery, and equipment and pays the staff of the firm. That auxiliary organization, which is separate from the cannabis industry, has access to traditional banking services, which eliminates many of the day-to-day challenges of dealing with cash. Despite this, the cannabis industry’s regulatory difficulties mean that there is no such thing as a fast and simple profit for a cannabis-related firm.