In the early days of California’s medical market, dispensaries set the rules, payment terms, and timetables, and growers and other vendors could either fall in line or take a hike. One of the most onerous terms was that growers would be paid after, and only after, all their buds sold.
Once cannabis was legalized in states across the country, most operators expected a more professional approach to accounts receivable to take hold, and the industry would start to function like older, more established sectors. That was wishful thinking, as it turns out.
More than a decade after Colorado voters legalized recreational weed, vendors still struggle to collect bills on time from retailers and distributors. Unpaid receivables are stretching well past the thirty days that is standard in many other industries.
The aging of accounts receivable is a critical business metric, helping companies measure the effectiveness of their credit policies and collection procedures—and, in many cases, the trustworthiness of their partners. Without a clear picture of receivables, it’s nearly impossible for any business to evaluate its cash flow, revenue projections, and the overall health of the company.
“The best-case scenario for any operator is cash on delivery (COD) terms,” said Jason Nelson, chief executive officer for St. Louis-based Avail Professional Services’ Agriculture Division. The company offers business and financial consulting to the industry. “You might say, ‘I’m going to give you, my purchaser, a 5- or 10-percent discount if you do COD.’ After that, you would start to go into more extended terms, maybe seven to fourteen days for preferred partners. Typical in a lot of industries is certainly a thirty-day term.”
Whitney Economics’ 2023 U.S. Cannabis Delinquent Payments Report revealed the industry is awash in past-due receivables—about $3.8 billion worth. That figure is expected to grow to $4.2 billion this year. Same as it ever was, cultivators are taking the biggest hit, and retail business carry the lowest accounts-receivable balances. Some 57 percent of survey respondents indicated delinquent receivables have a greater impact on their business than the much-reviled Internal Revenue Code Section 280E, which unfairly burdens cannabis businesses with federal taxes on expenses companies in other sectors can deduct.
But take heart. Nelson said specific strategies can help companies limit the damage from aging receivables while maintaining good relationships with customers.
For example, as a hedge against unpaid accounts, Nelson advises clients to construct their budgets based on the assumption they will get paid more slowly than they expect—say forty to fifty days (the industry norm, according to Nelson) instead of thirty. That should help them keep their books and projections in balance with reality.
Sometimes, reaching out to partners who are struggling and working out payment plans is the best long-term solution, he said. “You can’t be overly antagonistic or aggressive,” he warned. “The challenge of a cycle could be, ‘If I have an existing partner and they’re late on payment terms, then I’m not going to send them any more product,’ for example. In that relationship, all of a sudden you’re starting to limit your ability to generate revenue. So maybe you could approach it with some payment terms to make it easier for a partner to pay what they can, and then build that relationship over time versus cutting it off. In limited-license states, you can’t go through that type of activity writ large and expect to maintain your revenues.”
Nelson also advises companies to create a broad partner base that includes reliable, “preferred” partners that will help balance any that are risky or unproven. Preferred partners that pay on time or COD might receive discounted prices in return. In addition, he said, companies should review their financial records with an eye to anticipating ups and downs in the market. Patterns often emerge indicating times of the year when certain partners struggle to keep up with their bills.
“Our financial services side does cost modeling and reads market patterns,” Nelson said. “There’s typically a slowdown in the third and fourth quarters—the “croptober effect”—which shouldn’t be a surprise to anyone by now. I get a little bit surprised at some of these larger operators that have been doing this for a while and still don’t anticipate disruptions. You need to be able to model that in so that when your receivables stretch to forty to forty-five days, it doesn’t put you in a situation where you have to make tough decisions, which unfortunately does happen.”
