While the marijuana industry in the US still comprises a significant proportion of small, independent businesses, there has been a trend towards more mergers, acquisitions, joint ventures and partnerships.
The industry is consolidating fast, but it’s not necessarily professionalizing at the same pace, at least as far as accounting practices go.
Across the country, cannabis industry deals are being delayed or canceled altogether simply because of incomplete or inaccurate financial statements.
This costs time, money and represents missed opportunities.
Keeping on top of your canna-business finances could be the difference between striking a lucrative deal, or being left out in the cold. Here are the key accounting practices every marijuana business should shore up if they want to be in a position to close on deals while they’re hot.
1. Handling Cash
Many financial institutions have federal charters in place that prevent them from accepting cash deposits from cannabis industry revenues.
Do you research and develop a relationship with a bank willing to service a canna-business. State-chartered and community banks are the types of financial institutions most likely to do business with the marijuana industry.
2. Inventory Management
The marijuana industry is highly regulated, from seed-to-sale, and these regulations differ from state to state, and even from municipality to municipality.
To manage this complexity, growers, retailers, and distributors need comprehensive systems in place to account for revenues and expenses, as well as the product itself. Regular inventory counts need to play a part in this.
This is especially crucial for cannabis companies dealing in cash. The end-of-year financial reports depend on accurate data, so every transaction must be accounted for. Not only could an industry deal depend on it, but if data is missing it could be flagged during an audit.
4. Cash Flow and Taxes
Every business needs a plan, and every plan entails forecasts and projections.
For cannabis companies, these need to include the tax restrictions they face for dealing with a federally-prohibited substance under IRC Code Section 280E. This tax code means marijuana businesses cannot deduct normal operating expenses, such as rent and salaries, from their tax bill.
This has a huge bearing on the bottom line of marijuana businesses, but many still fail to factor it in, and so their forecasts and projections end up bearing little resemblance to reality.
Effective accounting practices in this regard will help you develop strategies to maximize deductions from costs of goods sold (COGS) and potentially split your business into two entities in order to minimize the impact of Section 280E.
Striking the balance between being over and under-capitalized is a delicate act for every business, but the risks inherent to canna-businesses accentuate this. You need investors who are not burdened by underwriting requirements to ensure a steady, stable flow of capital.
6. Anti-Money Laundering
As a cash-intensive industry, canna-businesses are required to meet strict anti-money laundering criteria. Some of these include:
- Cash deposit records
- Tracking systems for mass shipments to suppliers
- Customer records
- Record of any ‘red flag’ incidents
Marijuana businesses also have to go the extra mile in conducting background checks on staff, board members and other stakeholders, as well as putting in place extra safeguards against theft.
Different jurisdictions have different security requirements in place too regarding video surveillance, record maintenance etc, and these can change regularly as well. Keeping on top of these requirements and any changes is challenging, but can save you time and money in the long-run if your compliance helps secure a deal.
Recruiting the right accountant with marijuana industry expertise, whether in-house or externally, is essential to the success of your canna-business. Without effective recordkeeping practices in place and sound accounting advice at hand, marijuana businesses are vulnerable to the and complexities that come from operating in a legal gray area.