Weathering the Storm: How the Colorado Cannabis Industry Can Thrive Amidst Market Disruption

A perfect storm of macroeconomic conditions, including higher interest rates and rising inflation, have combined with cannabis industry-specific challenges like a growing black market, increased competition from neighboring states and supply dramatically outpacing demand. This combination has led to plunging profits for the Colorado cannabis industry. 

Beyond their impacts on individual businesses, the challenging market conditions will no doubt result in significant structural changes to the Colorado cannabis industry as a whole. While the current environment continues to evolve, it is clear that the cannabis market of 2024 and beyond will look far different than the one of today. 

READ: Polis Administration Announces Cannabis Business Loan Program

Although it’s difficult to predict where the market is headed with any real certainty, it’s critical for cannabis businesses to take a look at their own operations to identify how they can position themselves to both endure in the short term and thrive in the long term. 

In the short term, consider the steps below. 

Take stock of your financial position

Every decision you make about your cannabis business today must flow from a realistic, honest internal review of your current financial situation. Evaluate the impact of a prolonged slowdown on revenue, cash flow and profitability. This will provide a clear understanding of the resources available for sustaining operations during the downturn. It’s also important to use this time to build or enhance your finance and operations foundation to aid in making critical decisions during these uncertain times.

READ: Navigating the Economic Crossroads — Fed’s 11th Rate Hike and Its Impact on Investments in 2023

Revisit financial forecasting

The assumptions made during boom times need to be given a second look through an updated lens to ensure they remain accurate for today’s market. It’s also a good idea to make contingency plans that factor in worst-case scenarios and other potential challenges. 

Make the tough decisions

Cutting costs is an unfortunate yet necessary step during slowdowns. Every business has non-essential or discretionary expenses that can be reduced or eliminated, including renegotiating contracts and finding efficiency improvements. In addition, identify areas of your business where outsourcing could make financial sense. For example, some businesses will elect to find third parties for their accounting services and finance needs.

While these are often triage steps to survive the downturn, it’s important to also think long-term and identify the steps that can be taken to better position your company to succeed in what looks to be a much smaller and more concentrated market. 

READ: How to Prepare Your Business for Success in 2023 — Financial Forecasting Insights from Fractional CFO, Dan DeGolier

Strengthen governance and controls

A strong governance and control culture stands at the heart of every successful business. By ensuring your company’s financial and operational processes are well-documented, transparent and compliant with relevant regulations, you can run a far more efficient and profitable organization in both good and bad times. It also helps to prevent fraud and mismanagement.

Additionally, companies with strong governance and controls will stand out above the competition in a tighter credit and investment market. If you are anticipating a need for additional working capital or hoping to be purchased, strong governance and controls will be critical to demonstrate your organization’s stability and potential for long-term viability and success.  

Reevaluate investment decisions

Depending on the type of cannabis business you are running, your capital needs can be quite extensive. However, tight credit markets, rising costs and overall uncertainty can make planning for strategic investments in your business difficult. Analyze your needs and postpone or scale back projects that are not critical to current operations or strategic goals. 

READ: How to Maximize Your Investment Potential — Asset Diversification Strategies and Allocation

Find the exit

If you’ve thought about the steps above and the pathway to survival looks insurmountable, begin planning for an exit strategy. Consulting with legal, accounting and other experts can help you understand your unique situation and the available options to get out with as much of your investment left as possible. The methods of exit range from outright sale of the business to liquidation of assets or intellectual property. In your unique situation, every option should be on the table. 

The bottom line

As the Colorado cannabis industry navigates uncharted territory, business owners must contend with these complex decisions, steering their businesses through the storm with a combination of short-term considerations and long-term strategic vision. The evolving landscape holds both challenges and opportunities, and those who respond with agility, insight and a commitment to adaptability stand a better chance of navigating the shifting currents to become a key piece of the Colorado cannabis industry. 

Kevin McLaughlin is a Managing Director at Centri Business Consulting, LLC and is the leader of the Cannabis Practice. He has over 10 years of public accounting and consulting experience. Kevin specializes in supporting clients with documenting the accounting treatment of various transactions, including complex debt and equity analysis, acquisition accounting process integration, and due diligence.