Key Takeaways:
- Strengthen your cannabis business by implementing solid financial controls, accurate reporting, and professional oversight to support long-term growth and investor confidence.
- Develop proactive tax strategies to navigate 280E and state tax burdens while maintaining full compliance and protecting cash flow.
- Approach financing and diversification strategically to reduce risk, preserve flexibility, and stay competitive in a fast-changing industry.
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Financial resilience, simply defined, is the ability to withstand and recover from unexpected events and financial shocks. Financial resilience applies to individuals, governments and municipalities, not-for-profit organizations, churches, and many other organizations.
Overall, cannabis businesses build financial resiliency much like any other business — by identifying risks and implementing strategies to manage financial uncertainty. These strategies include:
- Strong governance
- Focus on cash flow and capital structuring management
- Diversification and performance reporting and monitoring
However, operating in the cannabis industry means operating in an environment that requires focusing these strategies on challenges that are unique from most industries. A few of the many challenges cannabis businesses experience include:
- Unique tax burdens: Federal disallowance of certain business deductions (i.e., IRC 280E) and state and local tax (SALT)
- Fragmented and dynamic regulatory environment: Rules, compliance requirements, and regulations that vary from state-to-state
- Regularly shifting marketplace: Competition from new operators, impact of non-regulated hemp-derived products, etc.
With these challenges in mind, here are some practical insights on building a financially resilient cannabis operation:
Implement Strong Financial Controls and Management
Perhaps the most critical factor observed in resilient cannabis businesses is financial control and management. The companies that weather industry storms typically share these characteristics:
- Well-developed business and marketing plans
- Strong internal controls throughout the organization
- Sound accounting practices and reliable financial statements
- Professional financial management and oversight
When you implement proper controls and focus on reliable financial statements, it improves company value and operational efficiency and provides clearer decision-making insights. This becomes especially important if you’re considering bringing on investors or planning an eventual exit. Buyers and investors will pay a premium for operations with transparent, reliable financial controls and reporting relative to businesses without them.
The focus on financial controls and management also facilitates internal operational predictability, which improves the ability of management to effectively pivot resources when confronted with unexpected events.
Navigate Tax Burdens Effectively
Tax compliance in the cannabis industry crosses into state and local tax (SALT) — such as sales and use tax, manufacturers’ equipment tax, special property tax, and others. But the most prominent tax burden of cannabis operators is federal tax on income.
Under federal law, businesses operating in the cannabis industry are considered illegal. In 1982, the federal government implemented Internal Revenue Code Section 280E, which, in basic terms, disallowed cannabis operators from taking certain business deductions when reporting taxable income.
Unless federal tax laws change, IRC 280E will continue to impose an added burden on cannabis businesses resulting from the disallowance of certain business deductions.
It is common for operators in the cannabis industry to strategically model their projections in anticipation of cannabis businesses being removed from the rules of IRC 280E. But, so far, the short history of the industry has shown us that a rush by the federal government to remove the impacts of IRC 280E is not a priority. Therefore, building a business model around the hope of repeal may be better redirected to focus on proactive strategies that help mitigate its impact while maintaining compliance.
Partner with cannabis industry-specific tax professionals to:
- Determine an appropriate allocation of costs between deductible and non-deductible activities
- Optimize your entity structure to enhance allowable deductions
- Confirm ongoing compliance while managing overall tax liability
- Monitor and adapt to evolving state tax laws that may impact profitability and cash flow
Effective tax planning is a core component of financial resilience in cannabis. If taking uncertain tax positions to mitigate 280E, consider a fund for potential IRS changes coming from a tax audit.
Be Strategic About Debt and Financing
Access to capital remains one of the bigger challenges in cannabis. Traditional bank financing is largely unavailable due to the federal status of cannabis, so operators often turn to private lenders, sale-leaseback arrangements, or equity financing. However, each of these options carries trade-offs.
The cost of capital in the cannabis industry remains high compared to most industries. Whether you’re looking at debt or equity financing, the terms you accept today will shape your business for years to come.
When considering financing:
- Be conservative in your projections
- Carefully evaluate the cost of capital and structure to preserve cash flow
- Avoid over-leveraging — excessive debt can compromise operational flexibility
- Align financing terms with the company’s short, medium, and long-term strategic goals
- Understand how different forms of capital affect valuation and control
- Don’t base your financial models on regulatory changes that may never come
Operators who approach financing with discipline and foresight are better equipped to weather market shifts and capitalize on growth opportunities.
Diversify to Weather Market Shifts
One of the clearest paths to financial resilience in cannabis is diversification. Relying too heavily on a single revenue stream, product type, or market leaves you vulnerable to changes in regulation, market saturation, or consumer demand.
Consider diversifying across:
- Revenue streams: Add branded merchandise, infused products, or service offerings
- Product mix: Expand into different formats or categories (e.g., beverages, edibles, concentrates)
- Supply chains: Avoid bottlenecks or disruptions by developing alternate vendors and partners
- Customer base: Target medical, adult-use, and niche demographics to balance demand
- Geography: Explore brand licensing in emerging states to expand your footprint without stretching operations
- Distribution partners: Broaden your network to increase visibility and reduce reliance on any one channel
Just as important: prepare for frequent regulatory changes and market shifts. States around you may legalize faster than expected. Your region may flood with new competitors. Build flexibility into your model so you can pivot when the environment shifts.
Operators in mature markets have learned this firsthand. Diversifying into newer markets or adding new product lines can help offset declining margins and regulatory fatigue at home.
Gain Stability in the Face of Uncertainty
Financial resilience isn’t just about surviving the next regulatory change or market dip — it’s about building a business that can thrive in a constantly shifting environment. The cannabis industry is marked by rapid change: state-by-state legalization, volatile pricing, and restricted access to capital. Resilient businesses are the ones that anticipate these shifts, diversify thoughtfully, and build strong financial systems that can adapt.
Whether you’re optimizing tax strategies, strengthening cash flow, or expanding into new markets, each step you take now builds a stronger foundation for whatever comes next. And while cannabis businesses often face added complexities — such as real estate decisions or partnership structures — those risks can be managed with careful planning and professional guidance.
With the right strategies, you can gain stability in the face of uncertainty. That’s the core of financial resilience.
How MGO Can Help
Our dedicated Cannabis practice is here to help your business become more resilient — from getting your financial statements audit-ready and strengthening internal controls to implementing 280E mitigation strategies and managing complex sales and excise tax obligations. Whether you’re expanding into new markets or tightening operations at home, we’ll work with you to build a solid financial foundation.
Reach out to our team today to start building a stronger, more resilient future for your cannabis business.