7 Tips for Building a Profitable Company
In every sense of the word, there’s plenty of green in the cannabis industry these days. For companies looking to be profitable, it’s essential to have a strategy that reflects how the market currently operates.
In a highly competitive, ever-evolving industry, putting time and care into your brand’s financial planning is akin to establishing deep roots in fertile soil. By positioning your company to blossom financially, you’ll ultimately benefit your bottom line and your standing in the market as an ideal investment opportunity.
As chief financial officer for MariMed since early 2022, I’ve had the opportunity to oversee such efforts and watch them succeed. In hopes of providing a quick plan to make your brand a viable player in the field, I’ve put together seven strategies that have served us well. From setting realistic goals to evaluating the true cost of capital, the info below is a brief blueprint for building a profitable cannabis company.
Set SMART goals
In this case, SMART stands for goals that are specific, measurable, achievable, realistic, and anchored within a realistic time frame.
When it comes to establishing long-term trust with investors, accountability is huge. Proving yours is the type of company that says what it means and means what it says will inspire investor confidence. To achieve this reputation, set goals that meet the SMART criteria instead of objectives with nebulous or improbable outcomes. For example, deliver one edible exactly as envisioned rather than forcing through a full line that fails to pack the optimal punch.
Indeed, if this tip means being slightly less ambitious during a brand’s early days, know the payoff of planning SMART includes situating your company to make bigger, better leaps down the line.
Not all capital costs the same
Yes, a dollar is always a dollar. However, in the cannabis industry, some dollars come cheaper than others. The scale at play here is capital costs, and a solid understanding of how they work is imperative to developing a winning financial strategy.
Just as home loans and credit cards come with different benefits and drawbacks, the varying ways in which investments may be offered — a stake in the company versus a line of credit or an upfront loan, for instance — must be carefully considered and weighed against your brand’s intended overall vision, projected timelines, and financial needs. What can seem like a simple choice may have lasting ramifications, so know the costs (and benefits) of what’s out there and seek cheap money wherever possible.
MariMed has funded its growth through mortgages on its properties and seller take-back loans. The SAFE Banking Act will help lower the cost of debt in the long term but, in the interim, finding creative ways to grow a business remains challenging.
Cash flow is king
Let’s cut to the chase: The financial metrics most cannabis investors focus on have shifted over the years. When the first state-legal markets arrived in the United States, cannabis brands had big visions for their future earnings. Alas, a combination of the coronavirus pandemic, ongoing economic woes, and slower-than-expected progress on federal reform have combined to leave some early investors feeling burned by false promises or left in the dust.
That’s why their focus has pivoted from the appeal of future profitability to assessing how much cash a cannabis company earns and the level of debt it has accrued. In today’s market, these are the metrics investors want to see — not projected profits for 2025 — so keep them in mind as you strive to position your brand as an ideal destination for investors.
Make hard decisions about people and CapEx
This is a fundamental business tenet that bears repeating in our fast-paced, sometimes-unforgiving industry. Subscribe to any prominent newsletter covering the cannabis space, and you’ll hear about layoffs happening somewhere in the industry before the week is out. Though no one ever sets out with visions of having to sell assets or lay off staff members, hard times can hit fast in this business. That’s why preparing to weather storms often can become a matter of making tough choices regarding capital expenditures (CapEx). It’s a tough reality that companies must accept to ensure they remain viable in the long term.
That said, it’s also imperative to approach these matters with the care and weight they deserve. Remember: If handled indelicately or without a proper CapEx basis, such actions may harm a company’s standing and reputation even further.
Get vertical or you may end up horizontal
Though not every state allows legal cannabis companies to integrate vertically, there are certain financial benefits for brands that can keep everything under one figurative roof. By consolidating the process by which the plant is cultivated, manufactured, packaged, and distributed, you can ensure quality, save on costs, enjoy enhanced flexibility, and ultimately pass such savings on to your customers. Additionally, being a one-stop shop provides opportunities to establish multiple revenue streams while making it easier to respond promptly to market trends as they develop — all while generating stronger margins.
Identify the shortest path to revenue
The goal of your business is, of course, to turn a profit. With cannabis, this can be a delayed reward, as the investment in building out a new cultivation facility can take a year or more to generate revenue. For a point of reference, it may take a dispensary three to four operational months before it hits its groove in terms of revenue.
The point is, keep in mind when your investment will deliver revenue and profit to you and your investors. It may cost more, but growing through acquisition of an operational asset is a much quicker path than a full build-out.
Choose locations wisely
Many factors will play into deciding within which state(s) you choose to operate. Among the most important to consider? Identifying the states with the most complicated or confusing licensing regimes before making any long-term investments.
Watch out for states with both difficult licensing systems and a surplus of supply. Though you may harbor assumptions about which markets match this description, shifting legal frameworks make it a primarily fluid situation where things can change quickly.
By the same token, not all states allow all cannabis products. For instance, suppose you plan to feature edibles, which offer a superior margin to flower, as part of your product line. In that case, you’ll need to ensure your business is in a state that allows not only loose flower but also edibles in the format you want to offer.
Originally published at https://mgmagazine.com/business/finance-acquisitions/tips-for-building-a-profitable-cannabis-company/ on February 17th, 2023.
