In a recent CMA Member webinar, Guillermo Rodriguez, a Virtual CFO at Anders, and Lisa Buffo, Founder & CEO of Cannabis Marketing Association, delved into the potential impacts of cannabis rescheduling on budgets and tax returns in the cannabis industry in part two of CMA’s summer Cannabis Marketing Summit web series, “Ask a Marketer Anything”.
Understanding Tax Rescheduling and Its Implications
The Impact of 280E Rescheduling
Guillermo highlighted the significant changes that the potential rescheduling of cannabis under federal law could bring, particularly concerning Section 280E of the Internal Revenue Code. This section currently prohibits cannabis businesses from deducting ordinary business expenses, leading to higher effective tax rates.
- Potential Savings: Many companies are already treating 280E as no longer applicable, anticipating savings on estimated tax payments.
- Historical Context: Lisa noted the precedent set by President Biden’s October 2022 directive, suggesting analysts expect rescheduling to occur by summer 2024.
Changes in Taxpayer Behavior
Rodriguez discussed how rescheduling might alter taxpayer behaviors within the industry. Some companies might opt to pay more taxes upfront, while others might continue to operate on low margins to manage cash flow more effectively. Guillermo showed a few slides outlining what this means on a profit and loss statement.
Trends in Marketing Budgets
Decrease in Marketing Expenditures
Both speakers noted a trend of decreasing marketing budgets across various industries, including cannabis. Specifically, Rodriguez mentioned:
- Decrease for CMA Members: Confirming a slight dip in marketing expenditures among Cannabis Marketing Association members and industry marketers as a whole.
- Economic Challenges: Clients outside of the cannabis industry are also cutting back on outdoor advertising due to broader economic challenges.
Amended Tax Returns: Risks and Rewards
Rodriguez addressed the complexities surrounding amended tax returns. There is a potential risk of the IRS pulling back funds, but filing amended returns could also recover overpaid taxes from the prior 3 years.
- Cost-Benefit Analysis: Companies must carefully evaluate their cash flow and tax history to determine if the potential benefits outweigh the costs and risks of filing an amended return.
Financial Forecasting and Budgeting for Cannabis Retailers
Insights on Profitability
Rodriguez provided detailed insights into financial forecasting and budgeting for cannabis retailers, emphasizing the importance of gross margin optimization and overhead control.
- Transaction Metrics: Retailers are seeing an average transaction size of $71, with newer markets experiencing higher margins.
- Profitability Strategies: Improving profitability involves achieving a 45% gross margin and maintaining consistent overhead costs, for some retailers in cannabis.
Collaboration Between Marketing and Finance
Aligning Goals and Projections
Effective collaboration between marketing and finance teams is crucial for aligning financial projections with marketing goals and sales targets.
- Optimizing Gross Margins: Rodriguez emphasized the importance of working together to optimize gross margins and manage overhead costs to drive profitability.
- Scaling Operations: Buffo and Rodriguez discussed the importance of overcoming challenges to scale and mature as an industry, highlighting a positive outlook for the future.
Conclusion
The discussion between Guillermo Rodriguez and Lisa Buffo provided valuable insights into the financial landscape of the cannabis industry. From understanding the potential impacts of tax rescheduling to navigating marketing budget trends and improving profitability, their conversation offered practical strategies for cannabis businesses to thrive in a dynamic environment. As the industry continues to evolve, the collaboration between marketing and finance will play a critical role in achieving sustainable growth and success.
CMA Members: log into the Member Portal to watch the full recording, and register for the full virtual ‘Ask a Marketer Anything’ Cannabis Marketing Summit mini series here.
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