We’ve been teased for some time. Not with full legalization of cannabis, but rescheduling it from a Schedule I narcotic to a Schedule III narcotic. And while this legal change would come with advantages, we could wave goodbye to the deduction-limiting tax code IRC 280E — wave goodbye to this tax code and all its frustrations, such as investors being more likely to throw around cash with the lower risk that they could face legal ramifications, doctors might be more likely to prescribe it (or discuss it with patients), and expanded research opportunities, as well as a host of other advantages.
But what would be better than rescheduling? That’s like asking, “What would be better than dropping this murder charge to manslaughter?”
Ideally, you’d want no murder-adjacent charges. And ideally, what’s better than rescheduling is full legalization (also known as “descheduling”).
Until full legalization, cannabis operators need to know how to flourish during these uncertain times as well as understand why patience is sometimes less of a virtue and more of a death knell.
Why “Wait and See” Kills Businesses
You’ve probably heard the cliché, “good things happen to those who wait.” And there’s a lot of truth to it. But in the cannabis industry, postponing growth until federal reform is like saying, “Yeah, he left hours ago, but let’s not start the party until dad’s come back from the store with his cigarettes.”
Biding your time for legalization can expose your business to a multitude of risks. For one, there’s price compression. In the cannabis industry, price compression indicates plummeting prices at which cannabis products are sold (both wholesale and retail). These prices are dropped, i.e., “compressed,” giving the retailers reduced profit margins. In short, cannabis is sold for less, and operators make less money. It should be noted that this compression isn’t a one-time drop but a sustained period of staying within a narrow range of low prices.
As Ben Stevens argues in the Business of Cannabis, one of the SAFER Banking Act could help ease the financial strain brought on by price compression and other factors by opening up more lending opportunities. We’re still just as much waiting for this Act to be passed as we are for rescheduling and forms of legalization. We are aware that it has been proposed, but we cannot confirm when or if it will pass.
Hesitating to grow your operation while waiting for federal reform can result in loss of market share and differentiation (finding unique ways to be distinctive from your competitors). You can also miss out on improving your supply chain, including finding skilled help, securing raw materials (which can be challenging to obtain), and enhancing inventory visibility — a significant issue for the industry.
Resilient Business Planning
Fortunately, there’s no shortage of advice available on how cannabis operators can remain resilient during these uncertain times. BMO, a financial services provider, has several suggestions for building resilience. They recommend checking out overseas markets (where you might find higher margins and diversified revenue streams) and having a “liquidity cushion,” essentially a cash fund for rainy days. They also suggest maintaining strong relationships with banking partners (you’re going to need their help at one point or another) and having a thorough understanding of customer profiles. The better you understand consumer preferences, the better you can serve them through strategic decisions.
Anthony Coniglio, writing for MJBizDaily, a leading cannabis news site, offers additional suggestions for staying resilient. Coniglio recommends not putting all your eggs in one supply chain basket, including having a range of suppliers and creating in-house supplies where you can. Additionally, stockpiling inventory and adjusting your purchasing strategies on the fly are beneficial for negotiating volume discounts, meeting customer demand, and fostering strong relationships with suppliers. While some of these strategies, such as stockpiling inventory, can be part of your short-term strategy, Coniglio warns that tariffs could become a long-term issue, so the sooner you invest in your supply chain, the better.
To recap, building resilience is a multifaceted process. There’s a host of strategies you can employ, from the short-term to the long-term. You can look abroad for different revenue streams; you can stockpile inventory, and it can’t hurt to build and maintain your relationships with your banking partners and suppliers.
Pivot Readiness
Just because the laws aren’t entirely in the cannabis industry’s favor now doesn’t mean the rules won’t change (for the better). So, how do we position ourselves well for when these laws do change?
The name of the game is agility. Plus — abiding by the Boy Scouts’ code, i.e., their motto, “be prepared,” and not the code about looking out for certain Cubmasters.
What does being “agile” mean? You need to have contingency plans in place for the day laws change. We’re talking about being able to adapt to new regulations and markets quickly, as well as having flexible supply chains. Successful operators will plan for both sudden and gradual changes. They will be proactive and not reactive.
As mentioned above, operators require a thorough understanding of customer profiles. What are changing tastes, and how might new laws reflect them (think: cannabis cafes)?
One of the most basic ways to position yourself to stay informed about agility is by staying abreast of the changing laws. Or, if possible, and much preferable, you have a hand in changing the laws.
Conclusion
We don’t live in a utopia, far from it. It may be more likely that cannabis will be rescheduled before it’s fully legalized. Patience is needed, but time isn’t on our side. Surviving in the ultra-competitive world of cannabis requires constant vigilance. While we wait for laws to change, we can continually look for improvements in our operations. Where are there weak spots in our supply chain? Where can we diversify? How can we make short-term and long-term strategic decisions when the laws change? How can we read the room — what do people want, and how can we help provide it?
There are numerous areas for consideration to improve operations. And there’s no excuse for ignorance. Although it may be a highly competitive industry, we’re not in it alone. Many out there want to see us succeed because our success is their success. Or, more precisely, the more money cannabis operators make, the more money other businesses can make as well. And it’s money that makes the world turn, not ideals.
At BTA Cannabis CPA Tax, we’ll be there to help you with all your accounting and tax needs as the laws change, amendment by amendment. Reach out today — we’d be happy to assist you.
