(You can have cannabis finance content delivered directly to your inbox. Simply sign up here for our weekly MJBiz Finance newsletter.)
In the wake of President Joe Biden’s pardon of those convicted of small amounts of marijuana under federal law, cannabis stocks appeared to be making a comeback, with investor sentiment toward MJ becoming more positive.
But there’s more (potentially good) news for cannabis lurking in the are-we-or-aren’t-we-in-a-recession stories flooding the media.
Consider that sin or vice industries (historically gambling, alcohol and tobacco) are generally regarded by investors as defensives that typically outperform other sectors during recessions and can be thought of as “beacons of hope in grim financial times.”
Per Investopedia, “consistent consumer demand for their products helps sin stocks during recessions.”
Cannabis has yet to experience a recession.
The 2008 downturn predates the legalization of recreational marijuana sales by four years. During the COVID-19 boon, same-store sales of cannabis products increased significantly from 2019 to 2021.
So, sin-sector performance suggests this might be time to add cannabis to the vice list.
Even so, while the jury’s still out on whether or how deep a recession might occur, this is a good time to think about steps you can take to best position your company for optimal performance in the event of a recession.
Cash flow is key
Successful past strategies help craft a new strategy.
During recessions, firms typically stretch out payments, if possible.
Slow payments can stress cash flow, so implementing a plan to collect slow-pay receivables will help maintain consistent cash flow as well as provide an insight to the financial health of your clients.
The corollary to receivables is credit. There’s probably not much wiggle room in the credit terms companies can offer since they tend to be market-standard.
Terms are part of the deal. The challenge is, who is a good credit risk? How many times have you extended credit to a big company assuming they’ll pay on time – only to find out you’re the substitute bank?
Pre-recession is the time to tighten up collections and be extra vigilant about past-due payments.
Got a customer who’s consistently late? Payment-on-delivery might be the way to go. Every company has problem customers.
While things might slide a bit in good times, a pre-recession profit analysis to determine whether a particular client is worth the headache might be in order. If there’s no gain, it might be time to gently transition that client out.
With the credit shoe on the other foot and assuming your firm is a prompt payer, the time might be ripe to negotiate the best possible terms for your own company.
As a good payer, it’s likely you’ll keep good terms if there is a downturn, and your cash flow might benefit in the near and long terms.
Build a reserve
If you have a cash reserve for a rainy day, you’re ahead of the game.
Whether or not a recession comes along, this is a good time to start building a reserve. Easy to say, a little harder to do, but taking a bite from revenue to stash away just in case is never a bad idea, recession or not.
While managing expenses is an ongoing process in virtually all companies, it’s also possible that things can get a bit loose when the good times are rolling.
Looking at expenses in anticipation of headwinds can turn up areas where cost-cutting can help position you to meet future challenges.
On the flip side, overzealous cost-cutting might be harmful, so a scalpel is better than a machete for this process. If you have a resiliency plan in place, you’ll already have guidelines to follow.
Typically, firms anticipating a recession reduce inventory because excess inventory drains cash. The idea here might be to optimize inventory. Have enough ready, plus a safety stock, with plans and suppliers, should demand remain normal or even increase.
History might not provide any insight, so flexibility is key to maintaining balance between enough inventory to support sales, but not so much it becomes overstock.
Depending on where your company fits in the industry, you might want to examine product profitability with a view to cutting back on unprofitable lines. You also could choose to dial back or pause projects that can be delayed without causing undue stress on the company.
On the flip side of cost controls, several areas require careful consideration.
R&D and M&A
Research and development present a double-edged sword.
Cutting back might yield immediate savings – but at the expense of a competitive advantage.
In both cases, committing at least a portion of savings harvested in anticipation of a slowdown can pay outsized dividends as business starts to recover.
Here again, a surgical approach is in order. Your R&D road map might suggest a path forward that will permit adding bells and whistles later.
Depending on where your firm is in the industry, from equipment manufacture to retail, consider redoubling the parts of your marketing efforts that pay off best and temporarily shelve the nice-to-haves.
Consider that, in uncertain times, customers might be spending more carefully and looking for best-value alternatives.
Purposeful relationship building can not only cement existing customer relationships but also encourage new ones and actually grow market share.
If history is a guide, it might be time for M&A.
Investors are already showing renewed interest in cannabis. If yours is a strategically strong and financially sound firm, this could be the time to improve your competitive position going forward by adding new capabilities on attractive terms.
In retrospect, you might discover that the steps you take in just-in-case anticipation of a slowdown turn out to be best practice in any circumstance – and something you can fine-tune as part of a long-term resilience plan.
John Stearns can be reached at firstname.lastname@example.org.