Case Study: Optimizing A Cannabis Business
One of the things we at Breakaway Accounting + Bookkeeping pride ourselves on is our ability to help cannabis clients improve performance and enhance financial reporting. Today’s case study examines a situation in which we helped a vertically integrated California operator take a step back, assess performance across the enterprise, and implement practical solutions that lowered overhead, optimized processes, and boosted revenue and profits.
The client had a promising, vertically integrated cannabis business with retail, manufacturing, distribution, and cultivation licenses. The client was generating around $3 million in quarterly revenue when we began our engagement.
Cultivators were efficiently growing high quality flour, and the distribution and retail operations were operating smoothly. The owners knew they could do something to increase revenue, but instead found themselves pouring more and more money into the business.
This client also faced significant issues. They lacked a cash tracking system, and their financial reports were six months behind. Worst of all they were also behind on filing their sales, excise, cultivation, and income taxes, putting them at significant risk for an audit and a regulatory violation that could shut the entire company down.
While the situation with this client seemed dire, in truth they were dealing with issues that are common to cannabis operators and simply fixes:
Past-due tax filings. Cannabis businesses are at a much higher risk of being audited than mainstream businesses.
Lack of cash tracking software. When asked, our client couldn't confidently answer the simple question, “Are you profitable?”
Here are some steps that our team took with our client to help turn their business around:
Ensured cannabis compliance. We worked with their CPA to calculate and file all tax returns and collaborate with tax authorities to negotiate past due penalties and interest, thus establishing a payment plan that would keep the business running while achieving tax compliance.
Cleaned up and standardized reporting. In terms of cash flow management and bookkeeping our team was able to work with the client to implement cash tracking systems, policies, and controls and integrate a payroll system into their general ledger. The client could now answer the question: “Am I profitable?”
Reviewed AR and AP. We also revised the client’s accounts receivable and accounts payable tracking systems, which gave them a real time snapshot of which accounts were outstanding and how overdue. We also gave our client the ability to track their outstanding invoices, which helped them better manage any short-term debts and outstanding vendor payments. This resulted in immediate cash flow.
Examined processing capacity. We determined that the client had excess processing capacity. So the client more aggressively pursued the bulk oil segment, which now comprises nearly half of their processing revenue.
Keep in mind that these may not be the same issues your business is facing, and there’s no such thing as a “one size fits all program.” There are numerous components and data points that go into analyzing cash flow management and improving the financial condition of a cannabis operation.
Scott Tindall
Advisor
Our team of financial and cannabis industry experts can help you improve operational efficiency, find areas of excessive expenditures, integrate standardized reports and controls and improve internal processes. Email us today for more information.
The information contained in this presentation is meant for guidance purposes only, not as professional, legal, or tax advice.