Show me the cannabis money!

When it comes to cannabis industry ills, many point to the sector’s chronic lack of profitability. Indeed, that is a big problem but not the biggest one. Most LPs, retailers and MSOs suffer from cash flow problems. Having strong positive cash flows is what really matters, both to fund day-to-day operations and enable future growth.  Plus there are few better drivers of valuation than lots of free cash flow.

Maximizing your cash flow is vital in today’s challenging environment.  Margins are compressing, driven by higher inflation and falling retail prices. A dearth of external capital places a greater reliance on internal cash to fund investments.  Even when debt is available, the cost of capital is almost double what it was 18 months ago.  Finally, many weed companies have sickly balance sheets and cap tables that are complicating their ability to find reasonably priced equity or debt funding, if at all.

Many companies need to figure out their cash flow problem – and fast.  Further rate hikes or ‘Black Swans’ will push them beyond the red and into insolvency.

Here are 5 no-brainer strategies to improve your cash management and reduce financing costs:

1) Understand the real problem – Poor cash flow management has many causes.  For example, are your receivables taking too long to collect?  Do you have a disciplined procurement strategy and process?  Are you capitalizing on opportunities to raise prices and close revenue leakages?

2) Get a handle on your AR - You may (or may not) be surprised how many cannabis companies do not have a defined AR team, policies, metrics and controls around extending credit and collecting receivables.  Fixing this is job one.

3) Be smart with your AP – Like AR, many firms do not have a formal AP strategy and process to keep a lid on expenditures   A prudent AP strategy can improve cash flows through securing extended supplier payment terms, centralizing procurement to reap volume discounts & ordering efficiencies, and employing practical controls to minimize rogue purchasing and customer discounting.

4) Explore alternative funding mechanisms - Finance leaders should consider AR factoring and innovative working capital solutions from companies like Stoke IP to improve cash management.

5) Pay attention – It is critical to track and monitor key metrics such as cash conversion cycle, days of inventory outstanding, and days sales outstanding.

More fundamentally, every business should be contemplating exiting money hemorrhaging markets, shedding underperforming products & assets, and streamlining operations including headcount reductions.

 #cashflow #cashmanagement #AR #AP #financing #debt