Cannabis Industry Financing
Posted by Marijuana Doctors on 06/05/2018 in Economics
Updated on June 6, 2018.
Medical content reviewed by Dr. Joseph Rosado, MD, M.B.A, Chief Medical Officer
The marijuana industry is quickly growing all across the United States, as is its financial value. Forbes says the marijuana market was worth around $7.2 billion in 2016, with a projected annual compounded growth rate of 17 percent. Medical sales are expected to increase from $4.7 billion in 2016 to $13.3 billion in 2020, and recreational transaction values should grow from 2016’s $2.6 billion to $11.2 billion in 2020.
Despite all this, the cannabis industry is facing several financial roadblocks due to the gray area between federal and state laws throughout the country. Marijuana is still considered to be a Schedule I substance in the eyes of the federal government, so companies involved in the industry are technically not following United States legislation. However, several states have decided to allow the sale and consumption of medical marijuana — many have even legalized recreational use, as well.
Despite its growing popularity, we can see the financial challenges companies in this new sector face when we look at cannabis industry accounts receivable processes. Large companies that cultivate marijuana, sell paraphernalia and engage in any other cannabis-related activities could struggle when it comes to both giving loans and getting loans.
The Roadblocks Working Against Cannabis Industry Finances
Right now, many cannabis businesses operate on a cash-only basis to avoid issues with legality. However, to grow a company in the marijuana industry, owners need to be prepared for the financial world to catch up with the cannabis world. It’s crucial for these organizations to start planning now to ensure the most prosperous future for their marijuana business, whether it’s a dispensary or something else.
In an up-and-coming sector like the medical and recreational marijuana industry, these businesses could grow exponentially, but only if they’re able to implement and follow adequate financial and infrastructure management — including the risks that come along with accounts receivable and credit processes.
The Importance and Function of an Effective Accounts Receivable and Credit Collection Department
Cannabis industry credit could refer to a few different situations. On one level, it can relate to large cultivation farms and paraphernalia creators giving dispensaries credit for large orders. It could also come into play if dispensaries choose to offer their medical or recreational customers the ability to open an account and purchase goods on credit.
The first step in the process is to create an accounts receivable and credit collection department if you haven’t already. No matter how talented you may be at working with customers and running a business, you’re bound to have customers and accounts that won’t pay on time — or at all. As your company grows, you will need designated team members who are prepared and skilled at handling these situations. Setting up your cannabis business ahead of time to be able to manage the additional accounts you’ll be serving in the future is a smart move.
It’s important to collect your accounts receivable and other credit payments as promptly as possible to achieve financial success. Another factor of this success is establishing an official, documented collection strategy. This plan should at least include the two primary points:
- At what point your business will consider an unpaid balance on an account “severely delinquent”
- What your company will do about it when an account does reach this point
While the decision about these two factors will likely be up to the owners of the business, it is the accounts receivable department that will enforce these rules and take action when an account does become delinquent. In addition to this role, the primary functions of your cannabis company’s accounts receivable and credit collection division should include:
- Evaluate credit risk
- Optimize cash flow
- Manage orders and cash processes
- Develop a trade credit policy
- Create a credit application
- Maintain relationships with collection and credit reporting agencies
- Handle customer disputes
- Communicate financial aspects to management
- And more
One of the most crucial roles of these staff members is deciding a customer’s creditworthiness to determine whether they should be able to receive a loan or line of credit from your company. This task is critical because you need to have a team that isn’t afraid to deny another company or customer credit if they are not eligible or have shown signs that they would likely not make their payments on time. Accounts receivable personnel for cannabis companies should be able to determine when they should or should not grant loans.
The Challenges of Outsourcing Your Marijuana Company’s Accounting Tasks
The primary reason cannabis industry businesses need to be proactive about establishing a streamlined accounts receivable department or system is because outsourcing these services is a bit complicated. Due to marijuana’s Schedule I standing in the eyes of the U.S. government, many accounting firms are hesitant to work with these businesses. It’s a good idea for cannabis business owners to do their own accounting until the government gets on board with legalizing marijuana on a federal level.
Of course, the decision of whether to work with a company in the marijuana industry is up to accounting firms themselves. While some firms may see this as a significant risk, others located in legal states may see it as an opportunity to break into a new sector to serve. Dispensaries and other companies in the marijuana industry should also weigh the pros and cons of outsourcing these functions in relation to their unique business goals and preferences.
Learn More About Cannabis Industry Finances From MarijuanaDoctors.com
Interested in learning more about how the marijuana industry will be changing through the next five, 10 or 25 years? Stay up to date by checking back to our news and updates blog on MarijuanaDoctors.com. We’ll bring you the latest information on legislation changes on the state, federal and international level. You can also use our site when you’re ready to find a reliable, compassionate marijuana doctor near you, as well as a knowledgeable and friendly dispensary staff.