It’s no secret that the cannabis industry is significantly growing. According to Forbes, the legal cannabis market sales is expected to have an economic impact of $160 billion in 2025.
But despite the growth potential, many cannabis businesses still fail. So what are the top reasons cannabis businesses fail? And more importantly, how can you avoid them? Here are the top five reasons cannabis businesses fail, and some tips to make sure you don’t fall for these.
Reason One: Not having a solid cash flow management plan.
One of the most important things for any business is to have a good financial plan in place. This means ensuring you have a good understanding of your expenses and income, how much cash you have on hand, how much cash you expect to have in the near future, exactly when it’s coming in, and when it’s going out. Asking yourself these questions will set you on the right path:
- How many days will my current available cash be able to sustain my company?
- How much cash do I expect to come in and go out within the next month?
- What are my gross profit margin and my net profit margin?
- What are my most significant expenses each week/month?
Reason Two: Failing to research and understand the current industry.
When you break down your sales potential, two major reasons why your sales are not higher are due to your competition’s share of the market or the demand and expectations of your market not being met.
Research is critical to understanding what the market currently looks like. Research gives you insight into potential future trends that could impact your business. Doing your market research will help you stay ahead of the curve and make better decisions that can give you a competitive edge. Ask…
- How does my pricing compare to other local cannabis businesses in my vertical?
- What are the top-selling brands and how can we get access to them?
- What are the trends in consumer behavior? (e,g. Are consumers purchasing more in the summers or winters?)
- Did sales increase or decrease in the overall state compared to last month or this month last year?
Reason Three: Poor marketing and branding.
Marketing is key for any business, but it’s especially important in the cannabis industry where opportunities are already limited. If you’re like our firm, your social media accounts have been flagged and disabled at least a handful of times.
If you don’t have a strong marketing and branding strategy in place, customers will be less likely to know about your product or service and you’ll struggle to make a profit. A strong marketing effort will require investing in a quality marketing company or individual with proven experience and success in the cannabis space, being creative with customer focused promotions, and paying attention to your online presence.
- What are our marketing channels?
- Are we being consistent with using our marketing channels?
- How many customers are we servicing each month?
- How many repeat versus new customers are we seeing each month?
Reason Four: Lack of capital and financial planning.
If you don’t have financial planning in place, you’ll struggle to make a profit. If you are not profitable, you will find it challenging to acquire capital.
The sad and surprising truth, most cannabis businesses don’t know whether or not they are profitable. Typically, you tell us how much cash is in the safe vault or the amount that is currently in your bank account. The bottom line is that this is a very inaccurate assumption of profit.
The amount of cash you have on hand or in your bank account does not take into account your current inventory purchases that have yet to clear the bank, upcoming payroll pay dates, and of course taxes due. True profit take these things into account.
Investors and those providing financing understand the importance of positive cash flow and profitability. With the lack of access to traditional financing and higher associated risks within the cannabis industry, the criteria for cannabis businesses to be financially healthy is even greater.
Often capital is needed to really lift a company off the ground and an already established cannabis business from 0 to 100. Because of the strict requirements of most cannabis legal states, this type of capital is needed to even open the doors.
- What are my capital needs?
- Will taking on additional capital be worth it? (Will the projects you use the capital funds for result in greater cash flow and profitability?)
- What financial position does our company need to get to in order to attract better financing?
Reason Five: Not having a strong team in place.
When starting a business, it’s important to have a strong team in place who can help you achieve your goals. This means having people with the necessary skills and experience to help run the business successfully while you focus on the most important areas. Without a good team in place, your chances of success are greatly reduced.
For a cannabis business, this looks like having coachable and quality staff that work together to provide the best experience to customers. This means having someone who focuses on always remaining compliant as things are constantly changing. Lastly, this includes having a finance team that understands how to manage cash, create a roadmap to profitability for the year ahead, and understand how to maximize tax planning strategies.
Financial success is a journey, not a destination. Planning for business success starts with having a good foundation. A good team, strong marketing efforts, and an experienced finance team will provide the foundation needed for short and long term success.
Contact us today if any of these issues sound familiar, and let’s get started!