Opinion: How to handle accounts receivable as inflation eats at cannabis profits

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Image of a calculator, credit cards, pen and piggy bank sitting atop an invoice marked "Paid."
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Brett Gelfand

Despite the fact the world is gradually returning to some degree of normalcy after the onset of COVID-19, the pace of inflation in the U.S. is still surging unabated.

In 2021, inflation reached a peak of 7%, and over the subsequent 12 months, it continued to increase.

Businesses and consumers are equally struggling.

While most people focus on the damage that inflation causes consumers, the same damage is also inflicted on businesses that are attempting to keep prices low enough to service their customers while still surviving difficult economic times.

The stock market is also falling sharply, and the certainty of whether it will recover is unknown.

Early in January 2022, the Dow Jones Industrial Average was about 36,800; by the week before Christmas, it had dropped close to 4,000 points.

Inflation has had a substantial detrimental impact on the cannabis market, particularly in terms of how it is impacting accounts receivable.

Industry-specific problems

Major contributors to the dangers of inflation within the cannabis industry are the abundance of supply, challenging tax requirements and banking restrictions.

With an abundance of cannabis in the market, supply increases and drives down the cost of the product, making it harder for brands to compete.

Thus, cannabis companies are forced to lower their pricing and, in exchange, reduce their margins and cash flow.

With the expensive excise tax regulations imposed on cannabis transactions, plus the greater challenge to compete within an oversaturated market, it is extremely important to collect whatever accounts receivable are owed in a timely manner.

With the strict banking restrictions, many cannabis companies are forced to use trade credit since standard credit lines are not easily accessible.

Trade credit without proper credit and collection management result in serious issues regarding default and collection activity.

No love from federal officials

Since marijuana remains federally illegal, extending trade credit is used to encourage business-to-business cannabis sales because most banks do not lend working capital to marijuana companies.

Despite recent successes for the sector at the state and local levels, the federal government continues to do it little favors in terms of encouraging ethical business practices or considering this industry as a crucial part of the American economy.

Since the marijuana industry does not have access to standard banking relationships, cannabis companies are unable to hedge against inflation in the same way as other businesses.

And not being able to use conventional banks makes it difficult for the industry to protect against the effects of inflation.

So, business owners are forced to face inflation’s hardships and are put in a difficult position.

Three things your accounts receivable team should know

It is imperative to define best practices within your accounts receivable department in order to collect payments in a timely fashion.

When dealing with accounts receivable in the cannabis business, especially when inflation is high, there are a few important things to keep in mind:

  • Collect as fast as you can. The longer you wait to get paid, the more flexibility your clients will think they have with regard to your payment terms. This can create major cash-flow hurdles for your company long term.
  • If someone is having difficulty paying you, they are probably having difficulty paying their other bills as well. If you are unable to collect and must proceed without that payment, you are harmed twice: You’ve lost a potential long-term customer and must decide whether to write off the loss or send the account to collections – with no way of knowing if the account will ever be settled.
  • Collect quickly when operating a business in an inflationary environment. If you wait, the amount owed will be much less valuable in the future. For example, if the inflation rate is 7% and you owe $100, you must collect $107 to keep your purchasing power the same. This is referred to as the time value of money. That is, “a dollar today is worth more than a dollar tomorrow.” The higher the inflation rate, the faster each dollar loses value.

Those key points are critical, because the prices you charge your customers today are being used to pay for the costs of doing business tomorrow – your supplies, raw materials, payroll, processes, overhead and everything else.

Those service providers will have to charge you more in the future for what they contribute to your business, and your employees will become more vocal about their wages as it becomes more expensive to provide for their basic needs and pay their personal bills on time.

The new solution for cannabis debt collection

When you own a small business in the cannabis sector, your client relationships are critical to your long-term financial health.

If a client gets behind on payments, contact them and try to work out a payment plan that keeps some money coming in.

If they disregard your correspondence or refuse to agree to terms, it’s necessary to contact a debt-collection service that specializes in assisting cannabis businesses with debt recovery.

The longer you wait, the greater the inflationary risk will be imposed on your accounts receivable.

Brett Gelfand is managing partner at CannaBiz Collects, based in St. Petersburg, Florida. He can be reached at brett@cannabizcollects.com.

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