Management of cash cycles


An old friend of mine is a successful Silicon Valley investor and venture capitalist. When I asked him recently what he wanted from the companies he invests in, he was blunt, “Hire good people and don’t run out of money. That’s all I ask.

While running out of money seems like an obvious thing to avoid if you want to stay in business, it’s also one of the biggest causes of business failure. For cannabis companies, running out of money is an extremely serious situation because banks and other traditional lenders do not offer short-term loans to companies that sell Schedule I drugs.

Even for companies with high-demand products, managing inventory, distribution, and invoicing is an act of continuous juggling that can wreak havoc for cash flow in cannabis. If the treasury system fails and a business runs out of money, it can’t pay the rent, utility bills, payroll… and the CEO quickly moves from the cat seat to the hot seat.

Go with the flow

As an incumbent operator in California for fifteen years, Friendly farms The COO, Chaz Smith, is an experienced treasury manager. With the rapid growth of the business, managing the money and business relationships and hiring new staff are constant challenges, he said. Since the recreational market opened in 2017, Friendly Farms, a high-end extract company specializing in live and hardened resins, has run five distributors, in part because the distributors failed to collect invoices from retailers. on time. “It sucks when you take out a million dollars in product and only get $ 400,000 back,” Smith said. “Retailers are good at paying if your product has value and they want to keep it on the shelves. They are also good at paying if you have open communication with them. In order to manage communication and invoices, Smith hired an internal accounts receivable team; he said that decision made a big difference in maintaining a stable cash flow.

In today’s market, as products work their way through the supply chain, from distributors to retailers, only the top performing brands are able to negotiate cash on delivery payments. For others, it’s a waiting game. In the early days of medicinal cannabis retailing on the West Coast, dispensary managers were known to rig the cash flow in their favor while waiting for the products to be sold to pay the producer. Sometimes that meant weeks or months before growers saw even a dime for crops that took months to grow and harvest. If the products didn’t sell – or if the dispensary fell behind on its bills – producers and distributors would hear an apology or “the check is in the mail.”

Cash flow options

Tailor-made finance President and CEO George Mancheril is somewhat of an expert in cannabis cash cycles. As one of the first licensed commercial lenders to work with cannabis companies in the United States, Bespoke offers short-term lending options to businesses that want to grow or scale faster than their capital allows. investment and their cash flow. Mancheril said bill payments for Bespoke customers in 2019 ranged from 100 days to 110 days from the date of delivery. In 2021, this conversion time is closer to forty-five days to fifty days.

In a typical scenario, if a Bespoke customer wishes to borrow between $ 100,000 and a few million dollars on a short-term business, the lender will extend 75-100% of that amount to help the customer cover their day-to-day expenses. commercial charges until its distributor or retail customer pays the full invoice. The interest rate normally ranges from 3% to 4%, depending on the customer’s credit rating and other variables.

“I think 90% of our borrowers currently have credit limits two or three times higher than they were originally approved for,” Mancheril said. “Once you go into underwriting and start borrowing, we track your credit performance and provide ongoing monitoring. So if you come see us in one to two quarters and say “my sales have doubled [and] I need more capital ”, it’s a very quick decision for us to say“ yes, that makes sense ”.

Friendly Farms was able to leverage a line of credit from Bespoke to take advantage of unique business opportunities, as well as to increase inventory and accelerate business plans. Smith said its window for converting to cash is forty to fifty days, but due to its manufacturing process, the actual return on investment could be as high as 100 days. “It can take fifty days from when I sell our product to when I get paid, but it’s also another fifty days from when I get the product from a farm to when I get it. ‘ve in packaging ready to be sold. So when I spend $ 200,000 on frozen farm fresh material, it takes me about 90 days before I see the money come back on that cycle.

Expand the pool of lenders

Mancheril said he expects more lenders to offer similar services after federal legislation (such as the Safe and Fair Banking Bill) is passed that protects lenders from lawsuits, but it could take Congress another three years to make these laws a reality. In the meantime, cannabis operators can only hope that more lenders like Bespoke will be open to extending lines of credit to businesses that can tick the right boxes for regulatory compliance – licenses and bank accounts in order and a strong business. and growing with supporting adults.

“We got into this because we think it’s just a crush of an idea because you lend to an industry with strong fundamentals, great macro factors and strong growth in business. year to year, “Mancheril said. “So that makes a lot of sense to us, and I expect it to make sense to other people as well.”

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