Accounting Tips: Positioning Your Company For Success

Part III: Cash handling and recording and documenting cost of goods sold

Owning and operating a state-licensed marijuana business deserves a greater commitment to business quality and oversight than mainstream businesses, due to the legal and social climate inherent in this relatively new industry.

Implementing the accounting and compliance tips and guidance in this series will improve the transaction initiation, processing and financial reporting of your marijuana business. After reviewing and discussing this guidance with your accounting and legal advisers, think critically as to whether or not you have the staff who possess the skill sets and experience adequate to meet the stringent requirements of a business such as this.

Executive Summary

Marijuana business owners are aware of the opportunities in the industry, as well as the complexities of dealing with partners, investors, regulators and auditors. This three-part series features nine tips from an experienced accounting professional who has devoted hundreds of hours studying this industry. These pro tips are designed to save time and money and position your company for success.

#1. Use your primary accounting system as the general ledger only for sales, cost of sales and inventory.

#2. Use your primary accounting system’s department classification functionality within a single accounting file and use separate files for each legal entity. DO NOT commingle a management company or other entities with your dispensary.

#3. Use the same chart of accounts in each company’s accounting file. This will make it easier to prepare and confirm financial information.

#4. Keep the details of sales, cost of sales and inventory in the tracking and point-of-sale systems and archive monthly.

#5. Document the services and transactions between all your dispensary-related entities.

#6. Follow all intercompany contracts and pay/record the intercompany bills monthly.

#7. Ensure all inventory is on your balance sheet at the end of each reporting period.

#8. Create a separate cash general ledger account for each safe.

#9. Develop and document a process to determine total cost of goods sold and follow it strictly.

The devil is truly in the details, which you have likely already discovered, for better or worse, during your latest audit or responding to business valuation and/or tax compliance requests.

Cash Handling

The movement of cash in and out of a dispensary is rapid. Consider the following example of a $20 bill moving through your dispensary:

Patient 1 pays for product à bill placed in register drawer à bill swept into dispensary safe à bill taken out of safe to fund dispensary ATM à bill withdrawn from ATM by Patient 2 and used to pay for product à bill placed in register drawer à bill swept into dispensary safe à bill taken out of safe and given to vendor to pay for new dispensary inventory.

As a dispensary owner, have you ever asked yourself what happened to all the cash? The example above is a real scenario that plays out multiple times a day in your dispensary. How should all of this movement of cash be captured and reported?

Pro Tip #8: Create a separate cash general ledger account within QuickBooks for each safe.

It is not necessary to capture the exact movement of all cash through your dispensary as illustrated in the example above. However, daily summaries and general ledger balance adjustments should be recorded at least monthly.

Maintain a hand-written daily cash log for each cash safe. Each time money is added to or taken from a safe, document the source of each addition (for example, dispensary sales) and the business purpose of each withdrawal (such as inventory purchase, staff lunch, professional fees, etc.). Cash logs should be reviewed regularly by operations management and verified by a member of the accounting team at least monthly by physically counting the cash in the safes.

Management should also conduct unscheduled surprise counts to help keep their team honest.

After cash is counted and corresponding cash logs verified and corrected, the activity on the cash logs is entered into its respective general ledger account within QuickBooks. This can be done in summary by netting together similar transactions, or line-by-line from the cash logs if you prefer.

If you have a self-funded ATM in your dispensary (as in the example above), a separate ATM hand-written cash log is not required, but a separate ATM cash general ledger account within QuickBooks is. When cash is taken out of the safe and placed into the ATM, it is recorded on the dispensary safe cash log as a transfer to the ATM. Accounting will then know to transfer cash from the safe to the ATM within QuickBooks, thereby eliminating the need for an ATM cash log.

A best practice is to never fund the ATM or pay vendors directly from the cash register drawers. When cash is taken from the register drawers, it should only go directly to the dispensary safe. That way, you don’t need to maintain cash logs for each register as this should already be handled by your point-of-sale system.

 

Cost of Goods Sold

The last topic of important consideration for dispensary owners and managers is cost of goods sold, as it is the only federally tax-deductible expense for a marijuana business.

 

Pro Tip #9: Develop and document a process to determine cost of goods sold and follow that process strictly.

Cost of goods sold (COGS) is generally the purchased raw materials and goods for resale, direct labor and overhead attributable to the manufacturing and product preparation process.

For a marijuana business, this includes virtually all of the costs incurred at the cultivation and production locations, and the costs of inventory and product preparation incurred at retail. In addition, many of the costs billed by the management company for general management of the business should be allocated to COGS if they relate to the general manufacturing and/or product preparation activities.

Dispensary owners and managers should have a clearly defined process to determine all COGS. This can take several forms and should be worked through with your accounting consultant and your accounting team. Start with the period costs clearly attributable to the manufacturing and inventory procurement process and ensure these are all included in final COGS. Next, comb through the remaining period costs and expense accounts and consider the nature of the activities accumulated in each account. Many times, it is possible to quantify in terms of percent of hours incurred or number of people involved, and then allocate cost accordingly between manufacturing and selling, general and administrative. A best practice would be to have a clear and defensible reason for all additional costs allocated to COGS. This documentation will be requested by the auditors and tax preparers.

DO NOT fall into the temptation of haphazardly moving costs from general operating expenses to COGS simply to meet an arbitrary gross margin goal. Placing costs among the line items on the final income statement consistent with the nature of the underlying activities is fair and reasonable. Good documentation of the support will save a lot of aggravation in the future.

 

John Terry is a certified public accountant in Arizona who spent the first 14 years of his career as an auditor with “Big 4” type firms. In those roles, he had multiple national responsibilities in the areas of learning and education, technical accounting and audit methodology. He also served as the first corporate controller for a national media company during its $3.5-billion-plus market cap NYSE IPO. Since late 2016, he has consulted with several marijuana-related businesses and served as the interim controller for one of the largest multi-state dispensary operators in the U.S. He can be reached at John.Terry@MarijuanaVenture.com.

 

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