Part I: Best practices for accounting, tracking and point-of-sale software
From your business experiences prior to marijuana, you are likely familiar with a variety of accounting systems. For example, Freshbooks, Sage 50 (formerly known as Peachtree) and QuickBooks are very popular with startup to mid-sized businesses with limited products, production and/or locations.
Larger companies, including the biggest national and international corporations, have likely implemented a full enterprise resource planning (ERP) package, which is not only the accounting system, but also runs most of the systems used in the business including manufacturing, sales, purchasing, fixed asset tracking, budgeting and human resources. If your marijuana business is already generating sales, you are likely using an accounting system geared toward smaller businesses such as QuickBooks.
This article assumes you are currently using, or plan to use QuickBooks as your marijuana business accounting system, but the topics covered are also generally applicable to other accounting systems.
Pro Tip #1: Utilize QuickBooks as the general ledger only for sales, cost of sales and inventory.
An important accounting concept to understand is the difference between the general ledger and sub-ledger. Think of the general ledger as a subtotal of the details in the sub-ledger. For example, if you have six different products in your dispensary, the sub-ledger will contain a complete listing of all six products and the quantity and cost of each. At the bottom of the sub-ledger there is a grand total of the cost of all the inventory in the dispensary (or cultivation facility). It is only the grand total that is shown in the general ledger, as follows:
Due to the fact that you are likely using a separate product tracking system, do not attempt to recreate the sub-ledger details of sales, cost of sales and inventory in QuickBooks. The systems discussed here are adequate to track these details for you. However, with that said, DO use QuickBooks as the sub-ledger detail for accounts payable and all cash transactions.
In other words, it is best practice to enter all vendor invoices into QuickBooks upon receipt, regardless of whether the invoice is paid via cash, check or credit card. This practice allows you as the owner to know the outstanding payables at any time. In addition, it is vital that all receipts and uses of cash are recorded in the cash ledger within QuickBooks.
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.
Pro Tip #2: Utilize QuickBooks Class functionality within a single QuickBooks file and use separate QuickBooks files for each legal entity.
There are likely multiple entities, each with multiple locations and/or departments involved in your dispensary operations (such as the state-licensed entities, management and/or staffing companies, real estate entities, etc.). Each legal entity plays an important role in the operations, reporting and compliance of your dispensary, and therefore a complete accounting record of each entity is required.
Your tax preparer and auditor will ask for these records each year, and if they’re not complete and/or accurate, you will incur higher professional fees to correct or even create them.
First, create a separate class for each physical location (dispensaries and cultivation facilities) within the QuickBooks file of each licensed marijuana entity. You may even have sub-classes within the dispensary and/or cultivation classes representing different departments within these locations. Apply this practice to the other legal entity QuickBooks files, at any level you many want to allocate and capture costs. Your accounting system likely has a variety of standard reports by class (or department) that will be helpful in analyzing which locations and departments are profitable. However, remember this tip is only as good as the practice behind it. Therefore, every transaction entered into the accounting system should be classified accordingly. QuickBooks includes helpful standard reports you can run any time to check the diligence of your accounting team. Periodically, ask your staff accountant for the “balance sheet by class” and “profit and loss by class” reports. Look for any balances in the “unclassified” column. If your accounting team is following this tip, there will be no “unclassified” columns on the reports. If there are, remind your team that every transaction needs to be classified properly.
Next, ensure your accounting team has set up separate QuickBooks files for each legal entity. If you want to be able to prepare combined financials using the accounting software, you will need to use QuickBooks Enterprise instead of QuickBooks Pro or QuickBooks Online. This is very important for tax, audit and company valuation purposes. Each legal entity needs to stand alone, exactly as if each were a totally separate and independent company.
DO NOT fall into the temptation to account for your legally separate entities as one, regardless of the level of common ownership between them. Accounting and tax rules are very strict as to the relationships between companies under common control. In addition, you will be miles ahead of the competition if you are able to provide complete and accurate financial information for any and all legal entities at the click of a button by following the tips in this article.
Pro Tip #3: Use the same chart of accounts in each QuickBooks file.
When setting up your first QuickBooks file, create a master chart of accounts in a worksheet outside of the system. Consult with your accountant to properly tailor it to fit the needs of your business. Upload the master chart of accounts into each QuickBooks file you create. It is fine to have certain accounts that are only applicable to one QuickBooks file. The reason for a standard chart of accounts across all QuickBooks files will become evident as you consolidate financial reports from your separate QuickBooks files. As your business grows, you will likely need to add accounts to one or more QuickBooks files. When you do, add the new accounts to the other QuickBooks files with the same account number and description.
Point of Sale and Product Tracking Systems
As a dispensary operator, you may be required to follow product tracking protocols as defined by your respective state. Certain states even mandate which system is to be used to accomplish this. Other states, including Arizona, allow dispensary owners the choice of systems. In Arizona, you likely use MJ Freeway or BioTrack. Both systems meet the requirements of the state and include various functionalities applicable to dispensary and cultivation activities.
Pro Tip #4: Keep the details of sales, cost of sales and inventory in the point-of-sale system.
Utilize the point-of-sale system for your sales, cost of sales and inventory sub-ledgers. At the end of each month, add the grand totals of sales, cost of sales and change in inventory in the point-of-sale system to the respective QuickBooks general ledger accounts. There are various ways to accomplish this within QuickBooks, and your accountant can recommend a procedure that works best for you. However, avoid general journal entries and accomplish this using the designed QuickBooks functionalities such as creating sales receipts and transferring costs between cost of sales and inventory, because auditors are required to dig into general journal entries recorded during the year and subsequent to year-end. Limiting the use of general journal entries to actual corrections will save you time and aggravation during an audit.
Also, be sure to save a printed and/or electronic copy of the month-end sales, cost of sales and inventory balances outside of the point-of-sale system. These are important details that support the balances in your general ledger and will be needed at audit and tax time.
DO NOT rely on your marijuana business’ point-of-sale system to save these details for you. These systems are relatively new and can experience periods of instability.
This article is the first of a three-part series on accounting tips for marijuana businesses. In the February 2019 issue of Marijuana Venture, Part II will cover related-party transactions and third-party contracts; Part III will address cash handling and cost of goods sold in March 2019.
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 auditor training, 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.