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.