Managing Cannabis Accounting & Finances in Your Cannabis Business

The cannabis industry is both exciting and risky. It's growing at an exponential pace. This rapid growth is fueled by increasing legalization and innovation in products and technology.

However, the industry is also one of the most regulated in the U.S., still considered illegal at the federal level. This means cannabis businesses face significant risks, including the inability to claim bankruptcy, limited access to banking, and constant changes in regulations.

Compliance with state, local, and cannabis-specific regulations is mandatory, and failure to do so can result in heavy penalties. Additionally, high costs and the risk of non-compliance make cash flow management critical for survival.

Managing finances and cannabis accounting in the cannabis sector is no small feat, given the unique challenges posed by regulatory requirements and tax codes such as IRS 280E and the state rules and regulations.

Embracing Cannabis Accounting will help you grow your business and stay compliant. Because, the truth is, running a cannabis business is hard. In fact, 80% of businesses fail within the first five years. For those operating into the cannabis industry, the challenges are even greater due to strict regulations, limited access to banking, and the constant threat of changing laws.

However, understanding and leveraging cannabis accounting can give your cannabis business a competitive edge. Proper cannabis accounting practices are not just about cannabis compliance—they're about making informed decisions that could determine the success or failure of your venture.

This post will explore the critical role of cannabis accounting, the importance of strong internal controls, and how these elements can help cannabis businesses maximize profitability while staying compliant.

Great Cannabis Accounting is a Must to Thrive in the Cannabis Industry

Running a business without accounting is like driving a car without wheels. It’s simply impossible. When you register your cannabis business, you are legally required to maintain accurate books and records. Failing to do so can result in severe penalties, including fines up to $30,000 in some states.

But beyond legal obligations, cannabis accounting provides the data necessary to make informed business decisions.

It helps you understand which products are selling best, when you can afford to hire new staff, and how successful your marketing campaigns are. With the right accounting systems, you can navigate your numbers and steer your business in the right direction.

Understanding Cannabis Taxes - Section IRC 280E

One of the biggest challenges in cannabis accounting is dealing with Section 280E of the Internal Revenue Code. This is looking to go away, but until it does, it needs to be at the forefront of every cannabis accountant.

IRC 280e prohibits businesses that traffic in controlled substances from deducting typical business expenses on their federal taxes, except for the cost of goods sold (COGS).

The impact of 280E is severe. Cannabis businesses cannot deduct costs related to marketing, operations, or payroll, which significantly affects their bottom line. For example, a cannabis business selling brownies cannot deduct the same expenses as a non-cannabis bakery, despite both selling similar products.

Understanding 280E and how it affects your business is crucial. Knowing your numbers and maximizing your allowable deductions can mean the difference between profit and loss.

Optimize Inventory Management in Cannabis Accounting 

Inventory is often the most valuable asset in a cannabis business and when you manage it well, your cash flow will thank you. Inventory for cannabis businesses includes raw materials, work in progress, and finished goods. Proper inventory management is essential not only for operational efficiency but also for compliance with cannabis regulations.

Inventory loss, whether due to theft, spoilage, or other factors, can severely impact your bottom line. Implementing stringent inventory controls and safeguarding your assets is crucial to minimizing shrinkage and maintaining profitability.

You need to account for inventory at every stage of the supply chain, from seed to sale. This includes safeguarding against theft or shrinkage, as any significant inventory loss must be reported to authorities. Moreover, inventory management directly impacts your financial statements, as inventory sold is recorded as COGS, affecting your profit and loss.

Focus on Cash Flow Management and Budgeting for Your Cannabis Business

Many cannabis businesses struggle with managing cash flow, especially given the limitations on banking and financing options. Without proper cash flow management, it’s easy to run out of funds quickly, particularly in a rapidly changing regulatory environment.

It's important to set financial goals, create a budget for your cannabis business, and analyze what's happening in your cannabis business to forecast future financial performance.

Cash flow is always an issue for cannabis businesses, and managing cash flow is critical in the cannabis industry, where cash transactions are common, and access to traditional banking services is limited.

Creating a realistic startup budget, forecasting cash flow, and being prepared for unexpected changes in regulations are also key to maintaining financial stability.

Invest in Accounting Systems & Analyze Your Monthly Financials:

Many business owners don’t fully understand their financial statements or wait to look at their numbers until year end, which can lead to poor decision-making. Having a clear understanding of your balance sheet, income statement, and cash flow statement is essential for assessing the health of your business and making informed decisions.

Use robust accounting and inventory systems that help you get clear insight on what's going on in your business. These systems ensure that all aspects of your operations are accurately recorded and compliant with regulations. 

Proper systems help you track every stage of your inventory, manage expenses, and provide clear financial reports, which are crucial for both daily operations and long-term planning.

Invest in Cannabis Accountants (In-house and outsourced):

Knowing when to bring in a Financial expert and the right cannabis accountant can be challenging, but it’s crucial for ensuring that your business stays compliant and financially healthy. The complexity of cannabis accounting requires expertise that goes beyond basic bookkeeping.

Given the nature of the cannabis industry, you will have many "cannabis accountants" or team members that where the cannabis accountant hat on your team. So, who is a Cannabis Accountant? A Cannabis Accountant is not just an accountant; they are a strategic partner who oversees the financial operations of a cannabis business. They provide valuable insights into financial planning, cash flow management, and risk mitigation.

A Cannabis Accountant helps businesses understand their financial data, make informed decisions, and develop strategies to achieve long-term financial goals. Their role includes overseeing accounting practices, ensuring compliance with tax regulations, and managing relationships with investors and financial institutions. In the cannabis industry, you'll encounter various types of cannabis accountants, each with specific roles:

• Cannabis Bookkeeper: A cannabis bookkeeper handles different components of your cannabis accounting. You might have someone in house performing some of the admin tasks related to cannabis compliance and invoicing. A cannabis bookkeeper supports your internal team through invoicing, data entry, vendor payments, and overall financial management.

• Cannabis Financial Controller: Oversees the preparation of financial statements and ensures insightful data from these reports.

• Cannabis CFO: Manages the financial actions of the company, including cash flow tracking, financial planning, and analysis of financial strengths and weaknesses.

• Cannabis Certified Public Accountant (CPA): A licensed professional who can perform various roles, from tax specialist to internal auditor.

Understanding these roles is crucial. Each function plays a unique part in your business’s financial health, and it's vital to know who to turn to for specific needs. Whether it’s a CPA with experience in cannabis, a financial controller, or a knowledgeable bookkeeper, having the right people on your team will help you navigate the challenges and set your business up for success.

Maintain Excellent Books and Records Monthly

Keeping meticulous records is not just a best practice; it’s mandatory in the cannabis industry. Accurate books and records help you make informed business decisions, demonstrate compliance with state and federal regulations, and are the first thing an investor will look at when considering whether to fund your business. 

Regularly updating your financial records and conducting internal audits will keep you prepared for any scrutiny from regulators or potential investors.

Remember, cannabis accounting is not just about keeping the books; it’s about using financial insights to drive your business forward. With careful planning, continuous learning, and a commitment to excellence, you can turn the challenges of cannabis accounting into opportunities for growth and success.

Implement Cannabis Accounting Processes and Policies (i.e. Cannabis Internal Controls)

Internal controls are the policies and procedures businesses use to ensure the accuracy and reliability of their financial reporting. In the cannabis industry, where compliance with regulations is critical, robust internal controls are essential.

These controls help prevent errors, detect fraud, and ensure that financial statements accurately reflect the business’s financial position. By implementing strong internal controls, cannabis businesses can maintain compliance with tax laws, build trust with investors, and ensure the integrity of their financial data.

Good internal controls are vital for safeguarding a company’s assets and ensuring compliance with regulatory requirements. Here are some of the common cannabis internal controls.

1. Segregation of Duties: Ensuring that no single individual has control over all aspects of a financial transaction helps prevent fraud and errors. For example, the person handling cash receipts should not be the same person responsible for recording transactions in the accounting system.

2. Regular Audits and Reviews: Conducting regular audits of financial records and internal processes helps identify and address discrepancies, ensuring that financial data is accurate and reliable. A Cannabis CFO oversees these audits, providing an objective assessment of the business’s financial practices.

3. Compliance Monitoring: A Cannabis CFO ensures that the business complies with all relevant laws and regulations, including those related to tax, labor, and environmental standards. This helps avoid costly fines and legal issues that could jeopardize the business’s operations.

The Bottom Line

Success in the cannabis industry requires more than just passion—it requires a solid understanding of cannabis accounting principles, compliance with strict regulations, and a strategic approach to financial management. By investing in the right systems, people, and practices, you can navigate the complexities of this industry and build a sustainable, profitable business.

If you’re a cannabis business looking to optimize your accounting practices and gain strategic financial insights, reach out to our team of experts.

We specialize in cannabis accounting, cannabis bookkeeping, and CFO services. We help cannabis businesses with their cannabis accounting and ultimately, help them reach their financial goals. If you're looking for more financial clarity and control in your cannabis business, then Contact us today for a consultation!