Understanding Dispensary Cash Flow and How to Manage It

By LaKia Bourne and JoAnne Williams

There’s no question that the cannabis industry is growing, and growing rapidly. 

While Americans have started to spend big on buds, with legal dispensaries grossing over $17.5 billion in sales this past year, the criminal classification of cannabis on a national level presents some drawbacks for entrepreneurs looking to capitalize on a rapidly rising market. 

With an extreme shortage of banks open to taking and servicing cannabis clients, many dispensary owners are forced to deal in exclusively cash transactions, which can lead to unwanted liabilities, security risks, and more. 

In this article, we break down the basics of dispensary cash flow and how to manage it properly so your cannabis business can grow. 

What is Cash Flow Management?

Simply put, cash flow management is the process of tracking how much money is coming into and out of your business. 

Managing the movement of cash is essential for any business looking to grow, helping you identify unnecessary expenditures, potential areas of improvement to increase profit. It also helps you determine the amount of cash needed to cover debts like employee payroll, supplier contracts, and monthly rent.

Why Dispensaries Struggle With Cash Flow

As of March 2021, an estimated 174 credit unions and 510 banks reported that they provided services to cannabis companies, a number that on the surface seems significant, but does not nearly meet the current demand of a rapidly growing industry. 

While banks in adult-use states do accept cannabis businesses as clients from time to time, the choice to take on a dispensary is a risk-based decision, with most banks unable to service such a compliance-intensive industry. 

Due to the shortage of cannabis-friendly financial institutions, many business owners feel they have no other choice but to operate on a strictly cash basis.  Without a banking relationship they do not have access to checking accounts, credit cards, loans, or lines of credit. This results in serious liabilities and safety concerns, leaving businesses vulnerable to diversion and accounting issues down the road, if the cash is not managed properly. 

Dispensary cash flow management can be extremely difficult to manage alone, as these types of business typically have many moving parts and high volumes of cash transactions. Between navigating the seed-to-sale systems, managing inventory, and handling employee payroll, staying on top of your cash needs can sometimes take the back-burner.  

While offloading cash-flow duties to employees can save time, it also poses a security risk leaving you vulnerable to potential misappropriation of funds. According to a Forbes article last year, nearly 90% of monetary and product loss in the cannabis industry has been attributed to employee diversion.

How to Avoid Cash Flow Issues

Finding yourself in a cash crisis can be devastating for any company, especially a small business. One way cannabis entrepreneurs avoid cash flow mistakes is by outsourcing services from an experienced accountant with knowledge of the industry. 

Have an Emergency Cash Reserve

Preparation is key for any business owner, but in the cannabis industry where most enterprises don’t have a bank account or access to credit, a cash shortage can be particularly devastating. 

In the same way that people have emergency funds, dispensary owners should always keep an emergency cash reserve. This allows some security in the event of an economic recession, or if you run into any other unexpected setbacks. 

A good rule of thumb is to have enough to cover at least three to six months worth of expenses.

Hiring a Cannabis Accountant

Outsourcing your cash flow needs to an experienced cannabis accountant will free up your time to focus on growing your business and establishing yourself in the industry, and give you the peace of mind knowing that your finances are in a compliant and secure position. 

A good accountant will be able to analyze the operations of your business and recommend more efficient options to lower costs, boost revenue, and increase your overall profit.

Get an Accurate Cash Flow Projection

Most financial crises can be avoided by first getting an accurate projection of your company’s cash needs. An accountant experienced in the compliance and cost associated with dispensaries can help develop both short-term cash flow projections to help you manage daily cash, and long-term projections to develop a strategy that will propel you towards meeting your business goals.

On top of projections, many cannabis accounting firms will provide additional cash flow solutions such as:

• Assistance obtaining an appropriate credit line.
• Cash collection acceleration techniques.
• Effective collection and payment policies.
• Help getting the maximum rate of return on your idle cash.

As mentioned above, avoiding cash flow management can expose your dispensary or cannabis business to safety risks and inaccurate reporting, leading to an overall slower growth for both your business and the industry itself. 

About the Co-author

Jo-Anne Williams: With her exceptional credentials and years of accounting experience, Jo-Anne is a leader in ever area of accounting and business consulting. Driven by a deep commitment to client satisfaction, Jo-Anne has helped non-profits and businesses of all sizes across various industries. Client satisfaction is her number one goal, making her a leader in every area of accounting and business consultation.