In addition to growing Alice & Fran LLC into a premier cannabis accounting & finance firm, one of my goals is, and has always been, educating small to medium size business owners on all things (cannabis) accounting & finance. My first two blog posts, Strong Accounting & Finance - Essential for a Successful (Cannabis) Company and Strong Accounting & Finance? Start Here were “long reads” intended to introduce traditional accounting & finance best practices and efficient processes to cannabis business owners. Many executives and founders in the industry are in leadership roles for the first time in their careers. They might not have a deep understanding of the day-to-day accounting function or the importance of financial management to exit strategy, expansion plans and audits.
Cannabis, unlike 99% of other industries, is new and until January 2018 there really wasn’t such a thing as cannabis accountant. There were experienced, talented accountants working with cannabis companies in legal states (medical and recreational) developing processes, creating cannabis-specific chart of accounts and staying up-to-the-minute on legal cases involving the application of 280E. There were, and still are, bookkeepers, accountants and CPA’s working with cannabis companies that don’t have the correct skills, the latest information or the right tools to keep their employers/clients compliant, audit ready and on a path to success.
This spring the hubs and I took a short working vacation, or a “workcation”, to Portland, Oregon to attend the Cultivation Classic and explore all things green: vegan food, cannabis businesses and outdoor green space. It was my first visit to the city and I was excited to see if it was as funky and surreal as Portlandia made it seem. Yep, it really is. The Cultivation Classic was a fantastic event and all expectations were exceeded in regards to food, dispensaries and lush, green scenery.
🌱 Traditional non-cannabis businesses, particularly small businesses, can successfully operate with a good monthly bookkeeping service and a knowledgeable CPA. Cannabis businesses cannot. Why? IRC 280E. Local/State/Federal compliance. Lack of access to banking. That’s why it’s so concerning that many (most?) Cannabis CEO's continue to try to “get by” with a monthly bookkeeping service and a CPA firm at year-end for annual tax filings. The issue with this approach? It’s what’s missing. Everything in between!
My home state, Massachusetts! Also known as the Commonwealth of Massachusetts, the “Cradle of Liberty”, Taxachusetts and home of the m@sshole. MA was a powerful influence in the commercial and cultural development of the United States and a place of many firsts: legally recognizing same-sex marriage, inventing volleyball, creating institutions of higher learning (Harvard) and the first to restrict/criminalize cannabis (“Indian Hemp”) at the state level in 1911.
First and foremost, having an A-team of the best professionals you can find in place is essential. The right fit is both cultural and skills -based. Every organization needs a Cannabis Attorney, Accountant and CPA to work with the executive team on compliance, regulations, tax planning, 280E and entity selection. One does not replace the other; few CPA’s do monthly accounting/reporting and an attorney should be the primary adviser on entity selection. Surround yourself with people who share your vision, have the right experience, and have the training and tools to get the job done correctly.
The California EDD (Employment Development Department) offers free training and seminars on all things employee related. They recently offered a two and a half hour seminar “Cannabis Industry State Payroll Tax” seminar in Downtown LA. The morning was enlightening, there was some great discussion among the attendees and instructor and I left with a folder full of materials on payroll tax, e-filing and misconceptions around independent contractors.
The cannabis industry is not new. What is new is that cannabis is legal, in some form, in 47 states. The ever changing, highly regulated, complex industry that has emerged with legalization is new. Business is still being conducted in cash and the black market continues to thrive. Otherwise, cannabis businesses are the same as any other organization; hiring employees, purchasing insurance, leasing property and equipment, generating revenue, incurring expenses, paying taxes, etc. Like other businesses, cannabis CEO’s are obligated to be fiscally responsible and to have a thorough understanding of the financial health of their grow/farm/processing facility/dispensary/delivery service.
Washington, similar to Alaska, took a long and winding road to cannabis decriminalization & legalization. From criminalization in 1923 to the 1979 recognition of the medical necessity defense by the WA Court of Appeals in State v. Diana, the state made stop and go progress but lawmakers, advocates and residents persevered until MMJ was decriminalized in 1998 and crossed the legalization finish line on December 6, 2012.
Everyone is excited to share what their role is in the industry, and to hear about what you’re doing in the space. It’s in this way that I have discovered some amazing brands and met fellow cannabiz owners that have impressed and inspired me, through their quality products/services, passion for the industry and commitment to persevering in cannabis despite the on-going legal and social acceptance hurdles.
It’s official as of June 25, 2019! Illinois is the 11th state to legalize adult-use (recreational) marijuana via the passage of the Cannabis Regulation & Tax Act (CRTA) on May 31, 2019. It is the first state to legalize commercial adult-use marijuana through its Legislature, versus a ballot measure.
Last Sunday I did a live Instagram story with Sibohan Danger Darwish of @grow.sisters A series known as #HighNoonSunday We talked about 280E (of course), a bit about my background and why cannabis CEO’s/Founders/Farmers need accounting & finance help along this crazy path to legalization and normalization. In advance of our discussion I was asked to send along some notes; Who You Are, 3 to 5 things about Alice & Fran and how to reach me. I realized this is probably the most succinct, yet comprehensive, overview of the firm and myself and that it would make a wonderful blog post.
Who You Are -
Erin Rulli, founder of Alice & Fran, a cannabis exclusive accounting & finance firm. Massachusetts transplant currently living in Los Angeles, very much enjoying the SoCal lifestyle and having access to so many beautiful places within a short drive. I'm a dog mama, animal rights advocate and total nerd. My hubs and I met in college, we'll be married 20 years in June and are celebrating by attending our first Meadowlands weekend. I abstained from cannabis for 19 years, college to July 2017 when I got my medical license to try to manage some work related anxiety. Between adopting a more active lifestyle, going vegan and incorporating cannabis into my life I feel better now than I did in my 30's!
3 - 5 things about A&F
1. Firm is named after my grandmothers, two women who were completely different but both had a huge impact on my life. I don't believe Fran ever used cannabis but it's a known family "secret" that Alice smoked a bit during her battle with cancer. I like to think they'd get a kick out of my cannabiz being a named after them. Given that I've put their names on my "brand" I'm 100% committed to operating on the principals of being responsive, accessible and reliable with expert knowledge on proper cannabis accounting.
2. I have 15 years of progressive finance and accounting experience in the legal, hospitality and food manufacturing industries, I've completed the Accounting For Cannabis program through DOPE CFO (first/most well known/comprehensive course) and have a 200+ person network of cannabis industry trained CPA's, MBA's, bookkeepers, accountants, EA's and CFO's to support my clients. If I can't do it I know someone who can!
3. Corporate-to-Cannabis story, like many others, but I didn't make the move to cash in on the "green rush". I was tired of corporate life; the long hours doing busy work, the ridiculous politics, the rigid schedule and limited vacation time. I want my career to have more meaning to me and a positive impact for business owners that I work one-on-one with, not nameless shareholders and remote executives. Drawn to cannabis first and foremost to bring corporate-level finance to small to midsize businesses without the corporate BS. My way of getting back at "the system". Second reason is that women are well represented and respected in cannabis, I think this could be our industry. Finally, the community aspect is amazing. Really amazing. People are willing to help each other, to share, collaborate, etc.
4. Legalization has been more of a challenge than a blessing for many farmers/retail owners/manufacturers, we all know dozens of stories, and one of the biggest obstacles to success (aside from licensing) is IRC 280, the IRS code that prevents plant touching businesses from taking standard business deductions. The only deduction you can take is cost of goods sold and in order to take the maximum allowed you need to have consistent monthly accrual accounting and quarterly cost accounting. Cultivators and manufacturers are better positioned but there are a few strategies for dispensaries. I talk to people every few days who need these services but "can't afford them". You have to. You have to find the funds. If you don't you're risking paying higher taxes, paying IRS penalties and back taxes and reducing your exit value. Most of us are very aware of the situation and will work with you on price. People balk at my fees, but you're getting your own personal virtual controller/part-time CFO for a FRACTION of what you'd pay a direct hire. You can't make do with a $200/month bookkeeper and a CPA at year-end. You're missing everything in between (that monthly accrual accounting, monthly reporting, cash flow forecast, budget, etc.) and you just can't build a solid, profitable business this way.
5. You can't beat 280E. Anyone who tells you differently is wrong. You have to do the accounting correctly, minimize expenses where possible, build your brand, gain market share and be well positioned for expansion, exit, partnership when cannabis goes federally legal. At that point cannabis will be a "regular" regulated business like alcohol or tobacco and you'll have to compete on price, brand, market share, location, quality just like everyone else. You need to be ready! Your books and records need to be ready! Whether it's me (which I hope it is!) or another firm, please get someone on-board.
Warning: Potentially unpopular opinion to follow, proceed with appropriate amounts of caution & good humor.
I’ve recently had several conversations with experienced, successful marketing professionals who have repeatedly stressed the importance of authenticity. I’d like to say that being transparent and authentic has always been my strategy, but that’s not entirely true. It’s just my personality. A former COO I worked with for many years once called me “honest to a fault”. This is certainly not a humble brag; my authentic self is not everyone’s cup of tea. I’m told it doesn’t matter, I’ll win some people, I’ll lose others. So, here goes nothing…
I don’t like Facebook. I never have. Why? I find the site itself confusing and slow. I believe it erases necessary societal boundaries, fosters FOMO and provides a platform to antagonize your friends, family, colleagues, etc. with your polarizing political/dietary/social views. Yes, I know it brings people together, lets relationships flourish across vast distances and has millions of fans. I signed up for an account in the early 2000’s, got caught up in the drama and promptly deleted my account. This March, while setting up my social media channels for Alice & Fran I decided I would be at a disadvantage if I didn’t have a FB page. I created a personal page with an additional business page for A&F. I immediately got tons of friend requests which I responded to via email, telling friends and family “No, I’m not on FB now. Just setting up a page for my business”. Eye rolls and sighs were the most common reply.
I met these responses the same way I always do, by saying “join me on (the) Insta! Instagram is owned by FB and is also known for rejecting sponsored posts and shutting down accounts, but has been claimed by the industry as “the” platform and seems to be a more cannabis friendly app. I prefer Instagram for the same reasons I don’t like FB; it’s primarily visual, concise, easy-to-use and relatively drama free. There’s fewer users, less political commentary and overall feels more “friendly” to me. Regrettably, I sometimes find I must stray into FB land to join industry groups, find information or something I’m reading mentions the social media behemoth and I can’t help myself.
Today I came across this article on Marijuana Moment, “Facebook Uses Marijuana And Broccoli To Show Off Its AI Tech”. I know FB, like Google and Instagram , ban cannabis advertising and will shut down accounts they feel are posting “policy violating content” so I was curious as to why FB was using two of my favorite things to make a point about AI. Turns out the crazy smart people that work at FB have used their skills to build a tool that can differentiate between cannabis flower and tempura broccoli. Yep. Good to know there aren’t other things on FB that could be policy violating or offensive such as antisemitism, misogyny, animal abuse, child pornography, etc. Oh wait, those things get posted too. Probably a bit more controversial to address those topics at an annual developers conference. Cannabis was, IMO, the low hanging fruit and most entertaining/engaging policy violation.
The article says “most” attendees could tell the difference. That’s concerning within itself, no? Pages and posts being censored or taken down, potentially, by people who don’t even know what cannabis looks like. Many noncommercial cannabis business, aka ancillary business, have been impacted as well, just being associated with the plant means no sponsored posts, constant worry about having all the time, money and effort invested in your social media suspended or taken away in an instant. Or, I have heard, the incredible frustration of waiting to resolve the issue and having your account restored.
Cannabis businesses are at a distinct disadvantage at the moment, not being able to use the most established, popular and cost effective advertising platforms. We use Instagram (carefully), LinkedIn, networking events, conferences, mailings and cannabis industry specific sites (Leafly, Leafwire, DCN, MJBiz, Ganjapreneur, etc.) to sell our products and services, to find fellow industry professionals and try to build one of the fastest growing industries in the world. It’s ridiculous. A similar situation is happening in the cannabis accounting space. QuickBooks Online has shut down services for cannabis and cannabis related businesses. They have no official policy on cannabis and what they tell you regarding your account depends on who you get on the phone. They’ve also recently raised their prices. What’s happening? We’re all looking at AccountingSuite and Xero as QB replacements. I wonder (hope) that there’s something brewing in the social media sphere that might be cannabis friendly and as robust as FB. We could move en mass to this new platform and leave FB with their broccoli vs. weed dilemma.. My thought is that cannabis has been around long before Facebook and will be around long after Facebook has gone the way of MySpace.
What does that mean? What’s involved? Who’s involved? How do I make it happen? Below I outline what I believe are the four basics components of any accounting & finance “department”; reduced to its simplest form for small to midsize organizations (farms, grows, dispensaries, delivery services, extractors, edibles manufacturers, etc.).
A source of frustration throughout my career is the perception that Accounting & Finance functions are simply "overhead". It's true, if you don't build a great finance team you won't get the same value had you invested in, and developed, the right professionals in the right roles. It has been my experience that most organizations view HR, Marketing, IT and Legal as a "given", simply the cost of doing business. Finance, beyond payroll and a staff accountant or two, is not a priority; many departments operate without the proper resources to add value and/or act as strategic business advisors to the executive team.
Unfortunately, I'm not seeing much difference in the cannabis industry. "How can I spend money if I'm not making money?" "How can I justify another non-deductible expense (to my partner, to my investors)?" "My CPA takes care of me at the end of the year." "I really don't think it's that complicated." are the messages being conveyed by both well-funded and cash strapped cannabis CEO's. Somehow the funds for brand management, social media strategy, POS systems, loyalty programs, legal advice, graphic designers, equipment and promos are being found, and they should be! There's no financial management to be done if there are no sales. No one, including myself, is disputing this, it’s reality.
Another reality? Operating within the current regulatory environment (hello, federally illegal!) is uniquely challenging and complex from an accounting perspective. Want to maximize cost of goods sold (COGS) under IRC 280E? Of course you do! It’s the only deduction cannabis businesses can take. You need to have GAAP financials prepared correctly and consistently throughout the year, not just at year end. The cost accounting needs to be done, at a minimum, quarterly. And all of this needs to be supported by detailed, well-organized documentation; every receipt, invoice, lease agreement, allocation method, floor plan and (this is key) tied out monthly financial reporting.
Traditional CPA firms have largely decided to await federal legalization before servicing cannabis businesses
CPA firms generally don’t provide monthly reporting or do cost accounting
·Bookkeepers, and many accountants, don’t do cost accounting, it’s complex and difficult to do correctly without a cannabis specific chart of accounts
QuickBooks, Xero and other accounting software does not have the functionality necessary to do cost accounting
Beyond 280E, Cannabis Founders/CEO’s/Farmers need help with tax planning, again throughout the year not just at year end, an accurate, timely set of monthly financial reports, an annual budget and mid-year forecast, variance/price/trend analysis and a proactive, professional finance business partner to support compliance, special projects and negotiations with potential investors and other contractors. This type of financial support adds value. It is what successful, fiscally responsible organizations have in place. Cannabis should be no different.
What type of value?
An annual budgeting process combined with a basic scenario analysis will dictate what capital can be purchased in the coming year, how many new hires can be brought in and when, what level of revenue you need to hit your profit goals and where there might be opportunities to reduce or defer expenses.
A rolling cash forecast lets you know when you’ll need outside funding to cover operations and when to stockpile reserves for quarterly estimated tax payments.
A cloud-based perpetual data room with all of your legal, HR, insurance, license and financial documents that is always up-to-date and easily accessible puts investors at ease and communicates to auditors that you are transparent and compliant. Businesses with “messy” books and records can expect 10% less at acquisition. No one wants to inherit problems, particularly those that involve the IRS.
The value of your time, and that of your leadership team, being focused on building your brand, growing market share and working towards the future, whether that’s an exit or expansion, versus worrying about “the numbers”.
This type of value, much like a compelling brand story, knockout logo or sound legal advice is not cheap. But it is almost always cheaper than IRS penalties or higher taxes paid over time due to missed COGS deductions. Marketing, IT, Sales and Accounting, doesn’t matter what it is, you get what you pay for.
The next time you get a call or see an email from me or one of my colleagues urging you to work with a Cannabis Accountant, please take a moment to consider it. We’re as excited to be in the industry as you are! We’re as passionate about your financial health as you are. We’re not the year-end CPA, we’re the year-round, part-time CFO. We price based on value not by the hour. It allows us to be accessible and responsive, to jump in when you need us rather than asking you to schedule an appointment and charging you for every 15 minute call.