Mastering the Revenue Surplus Game: When to Invest and When to Save
Learn strategic insights on investment, savings, stakeholder interests, and business growth for long-term success.
Delve into essential financial strategies for the cannabis industry. Key points include understanding 2020 and 2021 industry trends, the importance of balancing spending and saving for maximum profitability, defining business success through realistic visions and KPIs, and aligning financial decisions with long-term objectives. We also discuss strategic investments for growth and ensuring financial stability for long-term success.
The cannabis industry grew at an unprecedented rate in 2020 and 2021, and many brands rapidly expanded, riding a “green rush” that spread around the globe. MSOs, boutique dispensaries, and product manufacturers of all sorts and sizes enjoyed a period of significant profits—thanks to the accelerated legalization and increased acceptance of cannabis.
Cannabis market research firm BDSA chronicled the cannabis industry’s incredible gains during this period of expansion, revealing that worldwide legal cannabis sales surged by 45 percent in 2020 compared to 2019. What’s more, numerous front-running cannabis companies reported a phenomenal revenue growth rate exceeding 100 percent in 2020 relative to the preceding year.
In 2023, the cannabis industry’s euphoric surge started to plateau, giving way to a noticeably cooler period marked by lower profits. This sudden shift was due in part to market saturation, regulatory complexities, and fluctuating demand patterns.
Every cannabis brand leader now must confront a critical question: Amid a revenue surplus, where should we strategically invest and where should we judiciously save to keep our business afloat amid challenging economic conditions?
In this blog, we’ll chart a strategic path forward by examining industry trends, delving into financial decision-making, and identifying areas for both concern and growth
Considerations for Spending—or Saving—Revenue
To thrive amidst changing market dynamics, cannabis businesses need to understand when and where to invest their revenue surplus and when to save. This requires a clear understanding of the industry’s trends and a thorough evaluation of the potential return on investment from different opportunities. Companies need to simultaneously ensure they have a robust financial safety net to weather downturns and market uncertainties.
For example, during times of industry growth, investing in expanding production capabilities or marketing efforts might bring higher returns. However, during downturns or periods of uncertainty, it might be wise to prioritize building a cash reserve or investing in areas with a more immediate return, such as optimizing existing operations for cost-efficiency.
To understand the cannabis industry’s present condition and how it might affect decisions to spend or save, let’s take a look at some of the most notable trends within the cannabis industry during and after the “green rush” of 2020-2021:
- Increased Legalization: This period saw a wave of cannabis legalization in various regions around the globe, most notably in several U.S. states. This opened up new markets and contributed to a significant surge in the industry’s growth.
- Rise in Consumer Demand: As cannabis gained social acceptance, more individuals turned to cannabis products for both recreational and medicinal use. This resulted in a surge in consumer demand.
- Emergence of Cannabis Delivery and E-commerce: With pandemic lockdowns and social distancing norms, the industry saw a massive rise in online sales, delivery services, and curbside pickups.
- Influx of New Players: Given the lucrative potential of cannabis, numerous new players entered the market, increasing competition. From small boutique dispensaries to large-scale manufacturers, the industry saw a significant expansion of its landscape.
- Product Innovation: 2020 and 2021 were years of innovation in the cannabis industry. There was a notable trend towards creating a wider variety of cannabis products, including various edibles, beverages, vapes, and wellness products.
- Investment Fluctuations: These years also saw fluctuations in investments. While the initial “green rush” attracted significant investments, the latter part of this period saw a cooling as the industry began to mature and face new challenges.
- Regulatory Changes and Challenges: Despite advancements, the cannabis industry has faced ongoing regulatory challenges. Varying laws across different regions and evolving regulations added layers of complexity to operating in this space
- Market Saturation and Consolidation: With so many new players, the cannabis market started showing signs of saturation by the end of 2021. This led to a trend of consolidation, with larger companies acquiring smaller ones to expand their market share and streamline operations. Such a situation can be seen in the struggling Michigan marketplace.
It’s crucial to understand these trends as you navigate the current cannabis climate and make your way toward sound financial decision-making.
The Importance of Financial Decision-Making
In the cannabis industry, the importance of financial decision-making cannot be overstated. With its unique regulatory landscape, rapid market expansion, and a high level of competition, success depends on a robust and thoughtful financial strategy.
Balancing Spending and Saving: Maximizing Profitability
Cannabis companies looking to maximize their profitability must strike the right balance between spending and saving.
On the one hand, spending can take the form of strategic investments that propel growth and ensure competitiveness in this rapidly expanding industry. These investments can range from expanding production capabilities to meet rising demand, entering new markets opened up by ongoing legalization efforts, or investing in research and development to stay ahead in the game of product innovation and differentiation.
On the other hand, saving or holding back on certain expenditures is equally important. Given the volatile nature of the cannabis industry, having a healthy reserve of funds can provide the much-needed financial cushion to navigate challenging times. A responsible savings strategy can also allow for investment opportunities that may arise unexpectedly.
Navigating Economic Uncertainties: Lessons from Recent Years
The cannabis industry has seen its share of economic uncertainties in recent years. From the initial boom to the subsequent cooling period, it’s been a financial roller coaster.
These fluctuations highlight the importance of adaptability and resilience in financial decision-making. Companies that have managed to thrive despite the uncertainties are those that have learned to be flexible with their financial strategies, quickly adjusting their spending and saving decisions based on prevailing market conditions.
The Role of Financial Planning: Ensuring Sustainable Growth
For cannabis businesses, financial planning plays a pivotal role in ensuring sustainable growth. It’s not just about riding waves of growth. You also have to prepare for the inevitable economic downturns.
Financial planning involves developing a comprehensive understanding of the business’s financial health, setting clear financial goals that align with the company’s long-term vision and then determining the best strategies to achieve these goals. This might involve decisions about where to invest for growth—whether that’s in talent acquisition, product innovation, or market expansion—and where to save to ensure financial stability and resilience.
In an industry as dynamic as cannabis, financial planning should also involve regular review and adjustments based on market shifts, regulatory changes, and the company’s performance against its financial goals. This proactive approach allows cannabis businesses to stay on the path of sustainable growth.
Defining Success for Your Business
Success in the cannabis industry can’t be simply defined by immediate profit or rapid expansion. Rather, it’s a more nuanced concept, often varying from one organization to another based on their unique visions, goals, and the values they hold. As such, defining success for your cannabis business requires clarity of vision, goal-setting, and strategic alignment of your financial decisions.
Establishing a Realistic Vision: Setting Achievable Goals
Setting a realistic vision begins with understanding the unique value proposition of your cannabis business and how it fits into the current and future landscape of the industry. It involves charting where you want your business to be in the next three-to-five years, the markets you aim to capture, the products you plan to pioneer, and the impact you wish to make.
A well-defined vision allows you to set achievable goals. In the cannabis industry, these goals could range from achieving a certain market share, spearheading a novel product category, driving a particular revenue target, or even setting new standards in sustainability practices. It’s crucial that these goals are SMART: Specific, Measurable, Achievable, Relevant, and Time-bound. This approach ensures that your ambitions are grounded in reality and that you have a clear path to realizing them.
Key Performance Indicators (KPIs): Measuring Progress and Success
To track your progress towards these goals and measure success, you need to identify the right key performance indicators (KPIs). In the cannabis industry, these might include metrics related to revenue, market share, customer acquisition and retention, production efficiency, or regulatory compliance, among others.
These KPIs should be continually monitored and reviewed. They provide invaluable insight into how effectively your business strategies are working, allowing you to identify areas of success and those in need of improvement.
Aligning Financial Decisions with Long-Term Objectives
The final, and arguably most critical, step is aligning your financial decisions with your long-term objectives. This alignment ensures that every dollar you spend or save is working towards your broader vision and goals.
For instance, if one of your objectives is to pioneer a new category of cannabis products, your financial decisions should reflect this. This might mean allocating a larger portion of your revenue surplus to research and development, even if it means saving less in the short term. Conversely, if your goal is to secure your business against potential downturns, building a respectable financial reserve might take precedence.
By aligning your financial decisions with your long-term objectives, you create a cohesive strategy where every element of your business works together towards defined success. This equips your cannabis business with the strategic clarity it needs to find its way in the industry, maximizing its potential for growth and long-term sustainability.
Stakeholders and Their Interests
In the cannabis industry, stakeholders range from investors and employees to customers and regulatory bodies. Understanding the deeply nuanced interests and perspectives of all these groups is vital in making informed, balanced, and responsible financial decisions that contribute to the business’s overall success.
Identifying the Key Stakeholders: Internal and External Perspectives
From an internal perspective, stakeholders include employees, managers, and shareholders. And each group has different interests: employees may value job security and growth opportunities; managers often focus on meeting targets and driving operational efficiency; shareholders are interested in profitability and the business’s overall financial health.
Externally, stakeholders can include customers, who seek quality and consistency in products; investors, who look for strong returns; and regulatory bodies, which expect compliance with the evolving rules governing the cannabis industry.
A clear understanding of these stakeholders will allow you to make financial decisions that meet diverse expectations while staying true to the company’s core vision and goals.
Potential Gains and Losses: Impact of Spending and Saving Choices
Every financial decision you make will impact your stakeholders, bringing potential gains or losses. For instance, investing in product innovation might attract new customers and satisfy existing ones, but it could also lead to short-term profitability dips that may concern investors. Similarly, saving through cost-cutting measures might improve short-term profitability, but if it leads to a decrease in product quality or employee morale, it could harm the business in the long run.
A comprehensive risk–benefit analysis for each financial decision considers the interests of all stakeholders. By assessing the potential gains against the possible losses, you can make financially sound decisions that contribute to stakeholder satisfaction and the overall health of your business.
Balancing Short-Term Benefits and Long-Term Sustainability
Ah, the delicate act of balancing short-term benefits with long-term sustainability. For decades, companies across all sectors have tried mastering this vital skill. Achieving quick wins can be beneficial, but they should not come at the cost of long-term sustainability.
For instance, investing in areas like talent development or sustainability initiatives might not yield immediate financial benefits, but this move could enhance the business’s reputation and performance over time, leading to sustained success. The key is to consider both the immediate impact and the long-term implications of your financial decisions. This balance allows your business to enjoy short-term success while laying a solid foundation for sustained growth and resilience.
Strategic Investments for Business Growth
Strategic investments in the cannabis industry are critical for businesses to drive growth, stay competitive, and respond effectively to changing market dynamics. Three key areas where these investments can significantly contribute to business growth include research and development, marketing and advertising, and talent acquisition and development.
Research and Development: Innovating for Competitive Advantage
Innovation is the key differentiator in the tightly packed cannabis market. Companies that consistently deliver remarkable, high-quality products are more likely to capture consumer interest and loyalty.
Research and development (R&D) can cover a wide range of activities, from developing new strains and improving extraction methods to researching consumer behaviors and preferences. These initiatives can help businesses stay ahead of industry trends, meet evolving consumer needs, and set themselves apart from competitors.
A strong commitment to R&D can also attract investors who are looking for forward-thinking companies with a clear pathway to future growth. Despite the potentially high upfront costs, the long-term benefits of investing in R&D can be substantial.
Marketing and Advertising: Reaching Target Audiences Effectively
In the age of digital media, strategic investments in marketing and advertising have the power to dramatically boost a business’s visibility, reputation, and reach.
For cannabis businesses, this could involve leveraging digital marketing techniques like SEO, content marketing, and social media advertising to increase brand awareness and reach potential customers. Additionally, targeted ad campaigns can help businesses effectively reach their specific customer demographics, leading to higher engagement and conversion rates.
But marketing isn’t just about attracting new customers—it’s also about retaining the existing ones. A well-strategized loyalty program, for instance, can go a long way in nurturing long-term customer relationships, leading to sustained sales and growth.
Talent Acquisition and Development: Building a Skilled Workforce
One of the most significant assets for any cannabis business is its workforce. Remember: without people, you’re nothing. It might sound harsh, but it’s true.
Investing in talent acquisition and development maintains competitive advantage and drives business growth. On the acquisition front, this involves attracting talent who fit your company’s culture and vision. A well-structured onboarding program helps new hires hit the ground running, while a fair and transparent remuneration system sees that you retain top talent.
Meanwhile, investing in talent development ensures your employees continually upskill, stay updated with industry trends and regulatory changes, and contribute to the company’s growth effectively. This might involve offering ongoing training programs, mentorship opportunities, or even funding for further education.
Ensuring Longevity Through Financial Stability
It doesn’t matter if you’re in the business of cannabis, kitchenware, or candy bars—financial stability leads to surviving and thriving. This stability can be achieved by building a robust financial safety net, diversifying your revenue streams, and maintaining a culture of continual evaluation and adaptation.
Building a Financial Safety Net: Emergency Funds and Contingency Plans
Given the relatively high-risk nature of the cannabis industry, having a solid financial safety net is critical. This involves setting aside a portion of your revenue surplus into an emergency fund, which can act as a cushion for economic downturns or unexpected expenditures.
Developing contingency plans can further help your business navigate potential financial crises effectively. These plans should outline the steps to be taken in various scenarios, such as sudden market downturns, regulatory changes, or disruptions in supply chains. By preparing for these situations in advance, your business can respond swiftly and efficiently, minimizing potential damage and ensuring business continuity.
Diversifying Revenue Streams: Reducing Reliance on a Single Source
Relying solely on one product or market for revenue can leave your cannabis business vulnerable to changes in consumer behavior or market dynamics. Diversifying your revenue streams can mitigate these risks and provide additional avenues for growth.
For cannabis businesses, this could mean expanding your product range, venturing into new markets, or even offering ancillary services related to cannabis. For instance, you might consider launching edible cannabis products alongside your existing dried flower offerings or expanding into wellness and cosmetic products that contain CBD. Additionally, investing in e-commerce capabilities can open up new online markets and customer segments, increasing your reach and revenue.
Continual Evaluation and Adaptation: Adapting to Market Shifts and Trends
The cannabis industry is marked by a long history of ingenuity and innovation. In order to achieve financial stability in this ever-changing marketplace, you need to channel your cannabis forebears and commit to continual adaptation. Assess and reassess your business strategies and financial plans on a regular basis, changing course as the market dictates.
Keep a close eye on market trends and consumer preferences to identify new opportunities or potential challenges. Regularly review your financial performance and adjust your spending and saving strategies as needed. Encourage feedback and ideas from your team to identify areas for improvement or innovation.
Stay proactive, remain agile, and always be open to change!
Sowing Seeds for Long-Term Success in the Cannabis Industry
In the fertile yet unpredictable soil of the cannabis industry, financial stability is a careful balance between nurturing growth and conserving resources. Financial decisions should be rooted in your long-term objectives.
Remember, proactive financial planning isn’t just about preparing for the next season—it’s about caring for your business so it flourishes for many harvests to come. So, cultivate wisely, conserve diligently, and adapt to the ever-changing conditions of the cannabis landscape to promote longevity.
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Jen Lamboy
- Jen is Hybrid Marketing Co's Director of Strategy. She entered cannabis through seed genetics and has passionately worked to help grow the industry into a global game-changer ever since. As a strategist focused on business outcomes, Jen has worked in numerous highly-regulated industries with B2B and B2C organizations. She doesn't step lightly; she charges but with a collaborative spirit, intention, intelligence, humility, compassion, and grit.
