For anyone outside our industry who was paying close attention toward the end of 2019, the news about layoffs at several cannabis companies may have seemed overly dire. Multiple companies reported a pulling back of their workforce including CannaCroft, Flow Kana, Ease, Emerald Triangle, and WeedMaps.
While these weren’t positive headlines for our still booming market, some course corrections are to be expected and can be healthy as companies find their way, as business models are tested and growth plans are challenged by outside forces. The recent cuts of hundreds of jobs are similar to what many startups in the tech industry have experienced when they lacked the finance foundation to scale and grow.
Many of the layoffs occurred in California, labeled as the “largest recreational cannabis industry in the world,” according to Arcview Market Research, with $3 billion in sales last year. There is certainly a lot of opportunity here, yet it’s also natural that some companies will struggle. While the reasons for rethinking specific growth paths vary by company, the cluster of layoff announcements reaffirm a need that all companies have: constant, reliable insights into the business so that they can minimize missteps, be nimble in a volatile market, and set themselves up for making smart, strategic moves.
What 2019 Reminded Us
The exact reasons for any workforce adjustments vary by company. It is likely that some of it has to do with the unique financing challenges these companies face as well as the overriding uncertainty and increasing costs as local and state regulations for the recreational market continue to unfold. Companies in our industry have always had to cope with high levels of volatility, and 2019 was no exception. Cannabis companies were dealing with topsy-turvy capital-raising issues, the inability to deduct business expenses on federal tax filings due to IRS 280E, an unexpected ban on vaping devices in some locales, and the navigation of different regulations in different communities.
As companies address these challenges something rather important can get lost in the shuffle: the finance function. It may get short shrift and be underfunded, and this can have a dramatic impact down the line on the company’s viability. Having the finance essentials in place, like accounting systems and reliable reporting, is critical for any company’s success.
A tightly run ship gives leaders the knowledge about what’s going well, what needs improvement, and where the business is heading. For rapidly moving companies, in particular, they can quickly lose touch with understanding their business performance as the company’s complexity expands if they don’t have a solid financial foundation. They need well-defined systems, processes, and talent to properly track and evaluate what’s happening. Or they face a wobbly future. Reliable, actionable, timely information is necessary for fully understanding the business situation and being able to produce a realistic forecast of what’s next.
Consider this: Companies’ hiring and expansion decisions are only as good as the information they have in front of them. If the information they’re viewing is fuzzy—based on loose calculations, inconsistent information, or out-of-date data—the information is questionable and so are the decisions it’s based on. No one makes the right calls all the time, but you are more likely to make the best decisions for your company when you have reliable and timely financial information at your fingertips, along with finance and cannabis accounting expertise to help you understand it.
Canna at a Crossroads
The sheen of the green rush has worn off for a select few, but there continues to be a lot of positives in the industry. As the National Cannabis Industry Association recently noted, the cannabis sector saw the addition of more than 65,000 jobs over the past two years. And we continue to be amazed at the entrepreneurial spirit, innovative solutions, and range of diversity evident at cannabis companies.
Still, for some companies, incredible patience will be required, and not all companies will have the time or capital to make it through these turbulent times. As Marijuana Business Daily noted after its inaugural Investor Intelligence Conference, the cannabis industry is “at a crossroads.” To thrive, companies have to set themselves apart, industry experts said, by showing that they’re profitable, that their capital structures are sound, and that they value communicating with investors. I find this to be a positive move forward for the industry—this level of understanding demonstrates the evolving maturity of the industry.
Another role that is maturing is that of the investor. Larger investors are moving in, and are more demanding as they consider deals. Known to be inquisitive, they check for a clear business plan, a robust finance function, and a trail of accurate financial reports that can be evaluated. An uptick in strategic acquisitions could be likely as well, increasing the need for companies to shore up their financial records if they want to be a credible partner. As always, companies that have a solid financial foundation have the best chance for moving ahead of the pack.