How Do You Make Money in Cannabis?
“The only thing new in the world is the history you do not know” Harry Truman
One way cannabis firms can make money is by not squandering it.
Self-evident? Yes.
Easy to action? Maybe.
I wish I penned this piece 8 years ago when I entered the legal cannabis space. Though the lessons below are decades old, a good number of cannabis companies still need a refresher course.
Let’s break it down 5 ways.
1. Prioritizing financial risk
In my experience, cannabis firms do a poor job (compliance notwithstanding) of identifying and managing financial risk with external & internal initiatives. Consider Lenders. They rise and fall on their ability to closely follow and manage their loan portfolio. Creditors can make lots of money on 9 loans but give back all the profit on the bad, 10th loan.
2. Protect your downside
Cannabis leaders are frequently over-optimistic, setting their businesses up for failure. In his seminal work, The Intelligent Investor, Benjamin Graham talks about investing with ‘margins of safety.’ Essentially, you would still make money on a deal if the actual returns came in 30% lower than expected. Establishing a higher ROI or payback benchmark with a safety margin will reduce the likelihood of investing in a white elephant.
3. Shrink & Grow
Having an objective and pragmatic business view enables you to cut your losses if your results go south, freeing up scare capital for other uses. This approach could involve having a safe space for managers – those with front line accountability or who performed the initial planning - to raise concerns or cancel the initiative.
Paying close attention to your portfolio’s Return on Capital and cash flow generation will also help you determine the winners. Generally, you should be doubling down your investment and efforts on successful products and markets.
4. Follow common sense
Pay close attention to the sequencing and quality of spend in big, opaque expenditures. For example, I’m amazed how much money is spent on branding without a good understanding of the consumer and channel. Firms will buy assets without performing proper due diligence. Finally, many companies never bother to scrutinize their professional services, utility or agency bills.
5. The CapEx to OpEx linkage
Scrimping on CapEx purchases like IT and equipment will often lead to higher OpEx. The cheapest thing or person is often the costliest over the long run.
In cannabis, operating profit is hard to come by. Don’t make the challenge any harder by frittering away your cash.
I'll help you close your cost leakages and redeploy CapEx. DM me.
PS: you aren’t making money by not paying your bills
#CapEx #OpEx #financialmanagement #MSOs #LPs #ROI #cashflow