ceo’s guide to managing your cannabis accounting … · 2020-03-08 · your accountant,...
TRANSCRIPT
CEO’s GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT
11 ways to make sure you’re getting the
accounting that you need
1 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT
INTRO Cannabis CFO’s Need
Trained Accountants
With razor-thin profit margins and all kinds of tax and capital
issues to deal with, accounting operations for cannabis companies
are more tricky than normal. Navigating through the laws,
requirements, and technicalities can make or break your cannabis
business if you aren’t familiar with state and federal rules.
Inexperienced accounting professionals, who aren’t familiar with
the specific needs of cannabis companies, treat these businesses
like every other company and are getting these business owners
into hot water as a result of not knowing how to correctly do
cannabis accounting. Our goal is to empower cannabis CEO’s,
investors, and executives with some basic information so that you
can hire the right professional and know exactly what to expect
from your accounting team.
Here is a handy guide that CEO’s
should follow when evaluating
current accounting efforts or when
looking to hire their World Class
Accounting team. After all, proper
accounting practices are not
optional for this industry, and are a
requirement to maintain licensing
and remain compliant. Make sure
your accountant, bookkeeper, or
CPA is meeting the minimum
standards as follows:
Getting
Ready for
the Green Rush...
2 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT
ONE Accounting Policies,
Procedures, and Controls
Make sure you have written documentation that lists all
accounting policies, accounting procedures (who does what and
when), and internal controls and corporate governance (this
protects your financials and assets).
This is crucial because when purchases are made or equipment
is repaired you want to make sure that these costs are accounted
for and documented properly and consistently. When your
business is audited, you’ll want to have these
procedures handy if questions come up about how, for
example, you calculated depreciation or inventory.
3 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT
TWO Cash Controls
and Procedures
Document internal procedures for
how employees or day-to-day cash
handlers are to deal with cash
(especially for retailers). Having
systems in place to manage the daily
cash count, deposits, cash payments
(ie. petty cash), and reconciliations
with the POS system will be crucial
especially if you have multiple
locations and if your business is
vertically integrated. Also, have a plan
for how you will deal with large sums
of cash. Regular deposits will help
keep your employees safe and
minimize theft. Be sure that someone
on your accounting team is
reconciling your bank statements and
sales and all cash is accounted
for daily.
Cannabis CEOs, executives, managers, and investors are liable for
following the rules in order to maintain their licensing. It requires that
security systems must be in place to monitor where cash is kept,
where transactions are being processed and where
inventory is being held. If there is ever a question as to whether a
cannabis business is not paying proper taxes or is
skimming cash to avoid reporting, state and local authorities may
question your cash handling practices and review your
footage to determine whether you were negligent.
Recently, CEO Matt Price was punished for using the cash in his
business as a personal piggy bank. See: Cannabliss. While this is
an extreme case and while theft is a possibility for
cannabis businesses, negligence may not be a good enough
defense if state or federal authorities know the numbers don’t add
up. Do yourself a favor and put cash controls and procedures in
place to help protect your business and your employees.
3 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT
Cannabis businesses must also deal with the banking issues.
Since cannabis transactions are heavily burdened with cash,
your accounting team should be able to help you figure out
how to navigate those waters and find cannabis friendly
services that will help with payroll, merchant services, and
even pay taxes, so that you can effectively run the essential
parts of your business.
Lastly, the IRS may start targeting your company’s cash handling
and reporting policies. They will verify that you have accounted
for cash transactions over $10,000 by checking to see if you
properly filed the IRS Form 8300, Reporting Cash Payment Over
$10,000 Received in Trade or Business. This form accurately
discloses to the IRS and the Financial Crimes Enforcement
Network (FinCEN) cash transactions over $10k. This form is
used to combat money laundering. Any violation to this
requirement could fine businesses up to a $25,000 penalty per
missing form and the IRS could go back and audit previous
years. The penalty for not filing this form could lead to millions for
large cultivators.
3 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT
THREE Inventory Procedures
Not to beat a dead horse, but the same reasons and rules apply to
inventory as cash. In fact, each state has their own “track and trace”
software where inventory counts and transfers must be reported,
which is why having internal controls and procedures is a must.
Also, if you intend to claim any deductions, proper cost
accounting requires accurate inventory accounting.
Be sure to implement monthly
counts of inventory (handwritten
evidence is best) and reconcile with
Seed to Sale (ie Metrc), POS
system, and accounting software.
GAAP (Generally Accepted
Accounting Principles) is required for
extract/edibles/cultivation (ie. cost
accounting) if you want to maximize
deductions under IRC 471-11. Your
accounting team should understand
the seed to sale process from start
to finish in order to help you
maximize your deductions.
Each month, you should be working
with your accounting team to so they
can correctly allocate cost between
Inventory and Cost of Goods Sold.
You should have a system and an
organized method to submit product
information, percentage completion,
and estimated yields,
and other operating information that you will need to supply
the accountant every month so they can do the proper cost
allocations. There should be a streamlined process in place to
ensure that you are maximizing your deductions.
Without correct cost and absorption accounting, you will not
know important information such as, how much it costs for you
to grow a pound of cannabis, so make sure you have a trained
cannabis accountant on your team.
FOUR Fixed Assets
Your accounting team should be keeping accurate general
ledgers and subledgers including detailed roll-forwards so that
you have the information that you need in order to properly run
the business and manage capital.
Your accounting team should be doing a detailed Month End
report that reconciles every balance sheet account. Fixed assets
need a detailed roll forward that shows beginning of period
balances, plus additions, less disposals and ending balance. The
same is needed for depreciation.
If a cannabis
business is
operating without
keeping good
records, the IRS can
deny deductions for
business expenses.
6 CFO’s GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT
FIVE Liabilities
Accounting professionals should be
providing a detailed tie out of each
debt account (AP, accrued liabilities,
debt, etc.) showing additions,
payments, and ending balance
reconciled to your general ledger.
Make sure that these reports are
complete and include all invoices,
debts, and payables.
Having your liabilities (accounts
payables, debt, etc) properly
documented, will help CEOs and
operators manage their business and
ensure your financials are complete
and accurate.
SIX Equity/Ownership
Investors expect to make a return on their investment. As the CEO,
you have a responsible to your investors. Make sure that you
receive detailed reporting based on your ownership and equity
arrangements.
The CFO should maintain a “perpetual data room” that
contains all financials, accounting records, tax returns, legal
documents, leases, insurance, and board files.
SEVEN Sales
This goes without saying… you can’t run a business without
knowing how much you sell. The IRS wants to know about every
transaction that goes in and out of your business.
Each month, your accounting team should reconcile the POS
system, state Seed to Sale system, deposits, merchant service
reports, cash counts, and accounting software. The valuation of
your company is based mostly on revenues earned in the
cannabis business, so make sure that your accounting is accurate,
or you will lose value at exit.
8 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT
EIGHT Cost of Goods Sold (COGS)
According to IRC 280E, COGS is the
only legal deduction. It’s an offset
to income. There are accounting
professionals that will try to encourage
you to try and “beat” the system or
interpret 280E in other ways, but the tax
courts have spoken.The IRS is aware of
most of the “tricks” being utilized. It’s not
worth paying the penalties if you are
wrong. There are ways to accurately
apply IRC 280E and still minimize your
tax burden. Make sure your accountant
is doing this right or you will incur a
huge liability.
See “Inventory” above and make sure
cost accounting is accurate! This will
protect you in the event of an audit and
help to minimize taxes. (HINT: 90%
of cannabis companies are doing this
WRONG and are exposing themselves
to massive risk).
Having experienced cannabis accounting professional
support will assist you in making sure that your deductions are
within the guidelines set by the IRS so that you don’t end up
like the other cannabis companies who failed to beat the IRS in
court. See: Harborside.
9 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT
NINE Payroll, Rent, Other Significant Expense
Accounts
Each cannabis vertical must correctly
allocate expenses in order to
minimize their tax liability. Have your
accounting team scrutinize these
reports regularly and handle the finer
details of these accounts so that your
business is compliant.
Your accounting professional should
be able to help you find a payroll
company that is cannabis
friendly, provides accurate reporting,
and makes sure that these
costs/expenses are allocated properly.
Any other sizeable accounts need to
be reviewed on a monthly basis by
your accounting team.
TEN Internal Audit/Review Process
Checks and balances need to be in place to make sure that data is
consistent. Proper segregation of duties is important and make
sure that employees that have access to assets (ie cash and
inventory) have no access to the accounting records.
Internal reviews are a great practice. Having independent parties
review the data with internal auditing deters costly issues like
embezzlement or fraud. Hopefully, with these systems in place,
you will be able to catch errors before they are submitted to the
state.
Make sure that ALL data entry into the state Seed to Sale system
(ie Metrc), accounting system, and the POS system is performed by
someone that does not have access or custody of cash or inventory
and is reviewed by at least one person.
ELEVEN Cash Forecasting
Ask your accounting team to “Show me the money!”
Once your “Historical” reports and accounting are implemented, your accountant can build a monthly report that will help you strategically navigate short- and long-term cash flow objectives. This should be a one page, simple to understand report and include all three key financial elements: balance sheet changes, profit and loss statement, and statement of cash flows.
11 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT
NEXT STEPS for Cannabis CFOs After Assessing
Accounting Issues
If you find that after reviewing your accounting procedures,
policies, and controls are not compliant, you consider the
following options:
Option One: Keep doing what you’re doing and hope your accountants are
doing things right. This really isn’t a great option as it’s only a
matter of time before the IRS will peek into your accounting
practices. We have links to a number of those cases in this
guide. It is only a matter of time before the state or federal
agencies inquire and penalize you for your negligence.
Penalties can and do often include major fines, license
suspension and revocation, and even jail time.
Option Two: If you or someone on your accounting team would like to get
up to speed and want to be trained on cannabis accounting,
our team can design a training program based on your
specific accounting needs.
Option Three: Need to hire an experienced and trained cannabis accounting
team? CAC Group accounting professionals have the tools,
systems, and processes in place to do cannabis accounting
correctly. This is NOT an area of your company that you want to
ignore. We implement a Proprietary Chart of Accounts, Month End
System, Perpetual Data Room, Cost Accounting
procedures/workpapers, and cash forecasting methodology are just
a few of the tools that make sure you are audit, lender, investor, and
exit ready AT ANY TIME - ALL THE TIME!
World-Class
accounting systems
build world-class
businesses.
Want to learn
more about how we can help your
business? Visit us at
CACGroupllc.com. Click the “Get
Started” link. Fill out the form and we
will contact you immediately to
schedule your free Strategy Session.