Cannabis markets, and the organizations that function within these markets, have respired with the same issues faced by many CFOs across the industry spectrum. Amid the myriad 2023 challenges, the cannabis industry has them all — supply chain, talent acquisition and retention, technology implementation, regulations, and ESG adherence.
In addition to these challenges, the cannabis industry’s financial stability has also faced ups and downs, due to the combination of unclear regulations but still enjoying a massive cash influx. The industry is in a unique predicament of federal laws making them severely underbanked, but also at times severely un-bankable.
Schedule I Narcotic Change: Nice, Not Necessary
With the federal government’s hesitancy to remove cannabis as a Schedule I narcotic, cannabis companies do not have healthy access the traditional financial system and its capital markets.
Removal of cannabis from Schedule I would accelerate the growth of the industry ... [but] many states are not waiting for the federal government to de-schedule cannabis. — Bryan Gordon, Madison Ventures +
According to Bryan Gordon, founder of Madison Ventures +, a private equity firm heavily invested in the cannabis industry’s financial operations, both states and the industry itself aren't sitting around and waiting for the Fed's approval to take the next step toward growth.
“Removal of cannabis from Schedule I would accelerate the growth of the industry as more lending institutions would be eligible to fund cannabis operations resulting in increased access to capital and a more normalized tax treatment,” said Gordon. “However, many states are not waiting for the federal government to de-schedule cannabis, as more and more go medical and recreational to meet citizen's demands and access the tax dollars cannabis sales generate.”
“Other funding sources, including real estate investment trusts (REITs), state banks and credit unions, and ‘non-bank banks,’ will continue to fund the industry in the meantime,” Gordon said.
Financial leaders in the space agree. Kevin Bush, CFO and chief operating officer of Sweet Leaf Madison Capital, whose company Sweet Leaf merged late last year with Madison Capital, agrees that, regardless of the federal status of cannabis, both the cannabis industry and its need for capital, aren’t at the mercy of federal regulators.
Cannabis being removed as a Schedule I substance by the federal government will eventually be necessary for the industry to continue its growth, but we are far from being at that point. — Kevin Bush, Sweet Leaf Madison Capital
“Cannabis being removed as a Schedule I substance by the federal government will eventually be necessary for the industry to continue its growth, but we are far from being at that point,” said Bush. “Medicinal cannabis is legal in 37 states, and recreational cannabis is legal in 21. The footprint of legalized cannabis at a state level will continue to grow for years whether or not there is a federal rescheduling of cannabis away from being a Schedule I substance.”
Solving Supply Chain Challenges
Much like any industry, cannabis companies — especially retailers — face logistical issues.
“Cannabis operators dominate the cannabis industry, in terms of being the chief goods and services providers to customers and other cannabis-related businesses,” said Bush. “These companies have been awarded licenses by the state, or states, in which they operate."
Bush explained that, depending on the license type, it will allow them to either cultivate cannabis, manufacture cannabis products, or distribute cannabis products through retail locations or delivery services. Some companies are fully vertically integrated, and others specialize in one supply chain segment.
According to Bush, companies that are not vertically integrated are at a disadvantage to those who are because, at any given moment, in any given state, there can be supply and demand imbalances for cannabis.
“Non-vertically integrated operators can find themselves at the mercy of their vertically integrated competitors if there is a shortage of [loose flower],” Bush said.
Dusty Wilder, vice president of finance at Prospiant, faces supply chain issues as well. Acting as the lead financial executive for a commercial greenhouse development company, Wilder has processes in place that prevent supply chain issues from being a serious burden on her company’s ability to create fully automated, technology-inspired greenhouses for both produce and cannabis cultivators.
“A fully operational grow facility contains components and systems from a wide variety of sources,” said Wilder. “The availability and timing of how that comes together have a big impact on a seamless build and startup, [and] our manufacturing footprint and supply chain strategy helps us mitigate many of the supply chain issues that our industry experiences today.”
Labor Issues Persist, But a Lack of Good Accountants Isn't One of Them
Despite a widely reported accounting shortage being felt by many finance teams, some cannabis companies haven’t felt such a burden. Bush praises the quality of accounting talent in the cannabis industry.
“I personally have not found a shortage of good accounting; the accountants I have worked with thus far on my cannabis teams have been exceptionally competent,” Bush said. “We need more owners and operators in the industry to understand the importance of hiring good accountants.”
Instead, Bush has found since the cannabis industry began to legalize over the past decade, there has been "an undersupply of good management and an oversupply of good labor.”
We need more owners and operators in the industry to understand the importance of hiring good accountants. — Kevin Bush, Sweet Leaf Madison Capital
“Often, those in management, who typically also provide the funding, know nothing about cannabis or cannabis culture. Whereas those who work in the ranks of the company love the power of the plant and are often doing laborious work, which they are overqualified for, to be part of the industry they believe in.”
According to Wilder, hiring is all about identifying a passion for the industry itself. By making sure potential talent has a vested interest in the business model, she is able to ensure a candidate's willingness to both be productive and stick around.
"Within our finance team, we ensure that all team members are fully integrated into the business operations," she said. "So they can see first-hand how their passion and hard work not only impacts our business results but also our customers and the communities for which we operate."
Mike Goral, national cannabis and hemp tax partner in charge at Armanino LLP, and author of the book "Cannabis Taxation," is aware of the next steps the cannabis industry needs to make to enhance legitimacy. According to Goral, the strategy for the industry should be similar to those taken in the early stages of the now multi-billion dollar alcohol industry.
"The alcohol industry operates like a more mature cannabis industry," said Goral. "Nationally, we have larger, dominant brands, and then across the country smaller, craft brands that are able to grow and thrive."
Current business trends in the cannabis industry are mimicking those that have taken place in the alcohol industry, said the cannabis tax expert.
The alcohol industry operates like a more mature cannabis industry," said Goral. "Nationally, we have larger, dominant brands, and then across the country smaller, craft brands that are able to grow and thrive. — Mike Goral, Armanino LLP
"Mergers and acquisitions (M&A) are increasingly prevalent in the cannabis industry right now, which we saw in the alcohol and food and [beverage] sectors in years past," said Goral. "M&A will continue in this space and it will become increasingly more like the alcohol industry, where dominant players and craft brands coexist. Today’s market is ripe with M&A and I would urge CFOs to consider their accounting and audit measures to ensure they have accurate valuations."
CFOs in the space should also focus on their books, says Goral. "An area that is very relevant right now for CFOs in the cannabis industry is getting a proper valuation. One of the most important aspects of that is having a strong book of audited records."