Risk Management for Cannabis

Confidence and success come from being prepared


Risk Management for Cannabis

by | Sep 16, 2020 | Risk Management

The Dark Cloud of 2020

Our hearts go out to all those who have suffered and lost due to the relentless tragedies 2020 continues to serve.  This year will be immortalized in our lives forever as probably the worst year in our lifetime.  We have seen the death of an NBA legend and his child, worldwide fires, a pandemic resulting in nearly one million deaths and rising, a police officer murder a black man on camera, police ambushed and shot, protests, riots, racism, theft, destruction, economic collapse, Beirut…  The list goes on and on of the hardship, suffering, and loss we have encountered.  The hits continue to come, and my heart goes out to everyone.  I would not wish 2020 on my enemies.

I say all this to say that, for many of the issues enumerated above, risk management may or may not have had any impact. For a cannabis (and really ANY) business, risk management could mean the difference between success and failure.

Why Risk Management?

Risk management is the process of identifying potential risks, problems, or disasters before they happen and, once identified, developing procedures to avoid risks, minimize their impact, or cope with the aftermath.  The overall goal is to create a contingency plan to address risks associated with operations, reporting, and compliance.

Cannabis still an emerging industry

Having been previously illicit and now legalized (in some capacity) in most states, cannabis is often referred to as the gold rush of our time.  Businesses are in a hurry to expand, make millions, cash out, or dominate the market.  People who know little of the industry, the market, or the consumer profile run some of the largest cannabis businesses in the world. Because of the immense opportunities, people forget to walk before they run.  Not all businesses in this industry have the luxury of financial backing to bail them out from a crisis or compliance violation.  Most resources go towards operations and particular components of compliance, but many cannabis business operators neglect the numbers and internal controls.  This neglect will be the downfall of many cannabis companies in the next few years.

Buildings without foundations?

To use a construction analogy, most cannabis businesses went right to framing the structure without pouring a foundation or even developing blueprints.  It does not take a lot of force to knock a frame down when it lacks a foundation.

Here are some examples of the kinds of issues we have seen (not an all-encompassing list):

  • Businesses with multiple locations yet unable to generate timely or accurate financial statements
  • Large multi-room grow facilities that cannot say how many grams produced per square foot of canopy or what it costs to produce those grams
  • Acquisitions without proper due diligence
  • Flowthrough entity structure coupled with aggressive 280E positions that could result in a personal audit following an entity audit
  • Investors surprised when they get a last-minute K-1 and there are no cash distributions to cover taxes
  • Comingling of personal and business banking
  • Credit cards shut down
  • Neglecting to file Form 8300
  • Distribution companies identifying 100% of their costs as COGS
  • Harvests fail test
  • Outdoor operations decimated by fire and snow
  • Businesses give 10% of gross proceeds indefinitely for a short-term loan

Could some of these be prevented or mitigated? We say yes.  Often businesses suffer hardships that could have been avoided, and sometimes we have seen things out of our control cause more damage than if operators had implemented risk management practices.

So…what is the point?

Risks and issues arise in life and business all the time.  To run a successful business, you must implement risk assessment to understand how your business can mitigate, avoid, or cope with risk and loss.

Risk assessment process questions:

  1. Risk identification – what could go wrong?
  2. Risk analysis – How will it affect us?
  3. Risk control – What should we do?
  4. Risk treatment – If something does happen, how will we pay for it?

What should the plan include?

  1. Commitment from all levels within an organization
  2. Clearly defined policies and procedures for all staff, management, and those charged with governance
  3. Clearly defined roles, responsibilities, and accountability
  4. Adequate tools and resources to allocate to the plan
  5. Ongoing training, testing, and monitoring of the plan

The benefits of a risk management plan:

  1. Maximize time and resources
  2. Creating a safe and secure environment for staff and customers
  3. Reduced legal liability
  4. Mitigate loss
  5. Being prepared
  6. Strategically utilize capital resources
  7. Grow the top line while managing costs

Not sure where to start? Give us a call at one of the numbers below…we can help! Be well and stay safe.