Ep 20: Nobody's the Villain: Cannabis' AR Crisis — The Shift

with Filip Gacic · The Shift, a podcast by Headquarters

Retailers, brands & distributors are all stuck financing each other's cash flow. No villains - just a broken AR system. Here's why.

In this episode

Chapters

Transcript

Auto-generated from the episode audio and lightly edited for readability.

0:08 Today we're doing something a little bit different because New York just made accounts receivable a much bigger part of the cannabis conversation. And depending on where you sit in the supply chain, you might have a very different opinion about what's happening. Here's a situation. Cannabis retailers in New York can purchase inventory from

0:27 Suppliers on credit, but generally they have 30 days from delivery to pay. If that payment becomes delinquent, the retailer can be reported and placed on New York's cash on delivery or COD list. And once you're on that list, suppliers aren't supposed to continue extending you credit. You can still buy

0:46 Cannabis, but you're paying cash on delivery, COD. Now, New York has moved that delinquency tracking into Metrc, connecting invoices, payment terms, cannabis transfers, and COD status much more closely inside the state's tracking infrastructure. And this isn't some tiny

1:04 Hypothetical problem. Right now, 87 New York cannabis retailers are reportedly on that COD list, owing suppliers approximately $3.9 million. So today I don't just want to explain the regulation. I want to look at these

1:22 From three completely different sides different perspectives. The retailer who needs inventory to keep the store running. The brand delivered product and wants to get paid and the distributor sitting in the middle trying to manage both. Because I used to work in accounts receivable and from my perspective this

1:41 Is where the conversation gets really interesting. Everybody agrees suppliers should get paid. But what happens when an unpaid invoice doesn't just trigger a collections call? It potentially changes how you're allowed to buy inventory across the entire regulated market.

1:59 Let's talk about it. Now, let's look at this from the retailer's perspective because from the outside, this seems incredibly simple. You bought the product, you had 30 days to pay for it, you didn't pay, so now you lose access to credit. Fair enough, right? But running a dispensary isn't always that simple. Imagine you're a retailer and

2:18 You've got $50,000 worth of invoices coming due this month. At the same time, you're paying payroll, rent, taxes, security, insurance, and every other expense that comes with it operating a licensed cannabis store. Meanwhile, some of the inventory you bought on net30 hasn't even sold yet. Your

2:37 Suppliers want their money understandably, but some of your cash is still sitting on the shelf in the form of inventory. And now imagine you fall behind with one supplier and that delinquency puts you on the COD list. Suddenly another supplier that you have been paying can't continue giving you

2:56 Normal credit terms. You need new inventory, but now you need cash up front to get it. So, the retailer has a cash flow problem and the consequences of that cash flow problem is potentially creating an even bigger cash flow problem. And there's another issue. What if the invoice itself is disputed? Maybe

3:16 There's a credit that hasn't been applied. Maybe the quantities don't match. Maybe a payment was sent but hasn't been reconciled properly. Maybe there's a legitimate disagreement between the retailer and the supplier. That's why retailers need a meaningful dispute process because being placed on COD can affect relationships beyond the original invoice. And this is where I

3:36 Think the retailers argument becomes legitimate. Nobody's saying retailers shouldn't pay their bills. They absolutely should. The question is whether every unpaid invoice represents the same level of credit risk. There's a difference between a retailer intentionally avoiding payment, a retailer experiencing temporary cash

3:56 Flow problems, and a retailer legitimately disputing what they owe. The regulation needs to protect suppliers from retailers who continuously take inventory they cannot pay. But it also needs to make sure that a legitimate accounting dispute doesn't necessarily disrupt a retailer's entire ability to purchase inventory on terms.

4:16 Because once credit problems start affecting inventory, the inventory affects sales. Sales affect cash flow, and cash flow affects the retailer's ability to pay the invoices that created the problem in the first place. So, from the retailer's perspective, the question isn't really whether suppliers deserve

4:34 To get paid. Of course, they do. The question is, how do you create consequences for genuine non-payment without turning a temporary or disputed AR problem into a much bigger operational problem? Now, let's move to the other side of that invoice, the brand. Because everything we just said

4:52 About retailer cash flow can be completely legitimate, but if I'm in the brand, I have a very simple response. Why am I financing your business? Think about what happens before that product ever reaches the dispensary shelf. The brand has already paid to cultivate or manufacture it. They've paid

5:11 Employees, packaging, testing, compliance, transportation, taxes, and depending on the businesses potentially a long list of other expenses as well. Then the product gets delivered to the retailer and instead of receiving payment immediately, the brand

5:29 Effectively says, "We'll give you the product today and you can pay us later." That's credit. And in New York, we're generally talking about 30-day net terms. So, from the brand's perspective, net30 isn't a suggestion. It's part of the commercial agreement. Now, imagine

5:47 Day 30 comes and there's no payment. Day 40, nothing. Day 60, nothing. Meanwhile, the retailer may have already sold some or even all of that inventory. The consumer paid the retailer, but the

6:05 Company that actually supplied the product still hasn't been paid. And that is where the brand's frustration becomes very easy to understand because a retailer's cash flow problem doesn't eliminate the brand's cash flow problem. It transfers it. The brand still has payroll. The brand still has taxes. Uh

6:25 The brand still needs to manufacture the next batch. And now its working capital is sitting inside somebody else's accounts receivable. This can be especially brutal for smaller brands. A large company might be able to absorb an invoice being 30, 60, or 90 days late. a small operator might

6:45 Have that invoice represent next week's payroll, the next production run, or whether they can continue operating at all. So, when a retailer says putting me on COD could hurt my business, the brand can reasonably respond, not getting paid is already hurting mine.

7:03 And that's really the argument for having a COD system in the first place. If a retailer isn't paying one supplier, why should they be able to continue receiving inventory on credit from everybody else, potentially accumulating even more debt at some point? Somebody has to stop the cycle. Now, does that

7:21 Mean every unpaid invoice should immediately destroy a retailer's access to credit? No. Legitimate disputes happen, credits get missed, payments get misapplied, accounting mistakes happen on both sides. There absolutely needs to be a mechanism for resolving those situations. But once we've established

7:39 That the invoice is legitimate, the product was delivered, the payment is actually due, and the retailer simply hasn't paid, the brand's position becomes pretty difficult to argue against. How long should a supplier be expected to wait? Because credit is supposed to give a retailer time to sell

7:58 Inventory and manage cash flow. It's not supposed to turn the supplier into the retailer's bank. And I think that's the strongest argument from the brand side. New York's COD system isn't necessarily about punishing retailers from the supplier's perspective. It's about preventing one company's cash flow

8:16 Problem from continuously being financed by everybody upstream. So, if the retailer's question is, "How do we make sure our temporary problem doesn't destroy my ability to operate?" The brand's question is equally important. How long should I be required to finance someone else's problem before I'm

8:34 Allowed to protect my own business? And then we have the distributor. And honestly, this might be the most complicated position of all three because the distributor is often sitting directly between the retailer and the brand. the retailer says, "I need inventory. Give me a little more time."

8:52 The brand says, "You delivered my product. Where is my money?" and the distributor is sitting in the middle thinking, I have to somehow keep both of you happy because distribution isn't just moving boxes from point A to point B. There's an entire financial operation happening behind those deliveries,

9:11 Invoices, payment terms, collections, credits, disputes, cash flow, and now increasingly COD compliance. Let's say a retailer is approaching the end of their payment terms. They're a good customer. They order consistently. Maybe they have historically paid, but

9:30 This month they're struggling. From a relationship perspective, the distributor might want to give them some flexibility. Maybe another week solves the problem. Maybe there's a payment coming. Maybe keeping that retailer stocked ultimately helps everybody. But from the brand's

9:48 Perspective, every additional week means their money is still outstanding. And from the regulatory perspective, there are rules around when delinquency has to be reported. So suddenly what used to be a commercial judgment becomes much more complicated

10:08 Because the distributor isn't only asking will this customer eventually pay me. They also have to ask what are we required to do? And that's where the Metrc integration becomes especially important. payment terms, invoice information, delinquency status, and the

10:26 Movement of regulated cannabis are becoming much more connected. If a retailer is already on the COD list, you don't simply make a sales decision to extend them another 30 days because they're a valuable customer. Their credit status matters. And imagine what

10:45 That does internally. Sales wants the order. The retailer needs the inventory. The brand wants to keep its shelf space. AR sees overdue invoices. Compliance sees COD restrictions and distribution has to somehow make all of

11:04 Those realities work together. Then add disputes. A retailer says we already paid this. Accounting says they can't find the payment. The brand says the balance is still outstanding. Maybe there's a credit that hasn't been applied yet. Maybe there's a short shipment. maybe somebody entered

11:22 Something incorrectly. And now resolving that issue isn't just about cleaning up an aging report. It can potentially affect whether that retailer is able to continue purchasing on credit. So accuracy becomes incredibly important because reporting someone who genuinely hasn't paid is one thing. reporting

11:40 Someone because your own accounting isn't reconciled properly is something completely different. And I think that's the distributor's biggest challenge with this entire system. They have to be aggressive enough to protect the brands and collect the money

11:58 They're owed, flexible enough to maintain valuable retailer relationships, accurate enough not to create unnecessary disputes, and disciplined enough to follow the regulatory requirements all at the same time. And that's why I don't think this is a

12:17 Simple collection story. It's a communication story. Sales needs to know what AR knows. AR needs accurate accounting information. Accounting needs to understand what's happening with credits and payments. Compliance needs

12:35 To know when a regulatory action is required. And everybody needs to be looking at the same retailer information because once credit status becomes connected to compliance, a bad handoff between departments can become a much bigger problem than an overdue invoice. So the retailer is asking, "How do I

12:55 Keep operating?" The brand is asking, "Where am I getting paid?" And the distributor is stuck answering perhaps the hardest question of all. How do I protect both relationships while still following the rules? So, after looking at all three sides, I don't think

13:14 There's a villain in this story. Retailers need enough flexibility to actually operate. Brands deserve to get paid for the products they've already delivered, and distributors are stuck trying to protect both relationships while staying compliant. But, I think New York's new system makes one thing very clear. Accounts receivable can no

13:33 Longer be an afterthought because once a payment behavior becomes connected to COD status and compliance, an overdue invoice isn't just an accounting problem anymore. It can affect inventory relationships, cash flow, and potentially the entire supply chain. And maybe that's ultimately the point of

13:53 This system, not to punish retailers and not to give suppliers unlimited power, but to create accountability on every side. Retailers need to pay what they legitimately owe. Suppliers need to report accurately and resolve disputes quickly. And distributors need systems that make sure everybody is

14:12 Working with the same information. Because in a market this interconnected, one company's accounts receivable is another company's accounts payable. And if either side stops working, eventually the whole supply chain feels it.