The cannabis industry is the fastest-growing industry in the United States, and it’s experiencing a period of rapid change and development as the sector continues to define itself. During this pivotal time, many companies find themselves plagued with myriad complex financial struggles, stemming from a “perfect storm” of problems unique to the cannabis space: the complexity of accounting within each vertical (including farming, manufacturing and retail); a distinct lack of qualified bookkeepers and certified accountants serving the cannabis niche; and a host of banking issues, compliance concerns and tax limitations. There is a considerable void in the space where financial expertise is desperately needed.
In order to navigate the tricky waters of tight regulation in an industry that is still federally illegal, cannabis companies must hold themselves to a higher standard, borrowing from other sectors to implement a set of best practices that will keep their businesses afloat while establishing credibility on a broader scale.
Here the top three financial problems that cannabis businesses most commonly encounter.
Mistake #1
Not hiring employees with the right skill set: One prominent issue the cannabis industry currently faces is that many companies simply haven’t hired people with the adequate knowledge and expertise to keep them in compliance with the nuances of stringent state and federal tax rules.
Instead, many cannabis businesses employ bookkeepers who often lack accounting degrees and are not experienced in accrual, GAAP (generally accepted accounting principles) or cannabis cost accounting. This hiring practice, over time, can lead to a number of obstacles — including not being able to maximize allowable tax deductions.
In other cases, cannabis CEOs take on these crucial activities themselves. For many executives, carrying out the financial responsibilities of the business comes at all too high a cost, taking away valuable time that could be better utilized expanding the business, while simultaneously allowing important details to slip through the cracks due to a lack of specialized knowledge.
There is a gaping hole in the industry for qualified finance professionals, but this will change as more accountants discover the value of shifting into the cannabis space and are educated on its nuances and technicalities. Business owners and executives must remember that the people they hire play an outsized role in their company’s performance — and in fact, it can make or break a business. Be certain to check your prospective hire’s qualifications and ensure their knowledge and experience are in line with the depth and breadth of duties they will be performing.
Mistake #2
Not maintaining a constant state of audit-readiness: To avoid total loss in the competitive and crowded cannabis space, CEOs must strategically run their business to minimize any risk of being shut down. Unfortunately, too many of them fail to recognize how fundamental compliance is to running a successful cannabis business. Remaining fully in line with city, county, state, IRS, Food and Drug Administration, Occupational Safety and Health Administration (OSHA) and Environmental Protection Agency regulations and being prepared for an audit at any moment are key to surviving in the nation’s most tightly regulated industry.
Organization lies at the root of any healthy company, and this is especially true within the carefully-watched cannabis industry, in which there are countless complexities to maneuver across a variety of different verticals — from cultivation to retail — as well as many different layers of regulation. As such, companies must be certain that they remain in operational and financial compliance. Thorough end-of-the-month reports, scorecards and metrics must be generated.
Additionally, it is best for companies to have a “perpetual data room,” meaning financials, accounting records and support, organizational documents, leases, contracts and payroll records are not only audit-ready, but are also investor-ready, board-ready and CEO-ready — at all times. This allows businesses to circumvent tricky regulatory issues and avoid falling victim to hefty penalties or a revoked license in the ever-growing graveyard of failed cannabis startups.
Mistake #3
Neglecting the bigger picture: Although its products may be top of the line, a company’s risk of going under starkly increases without top-of-the-line accounting, tax, finance, compliance, risk management, legal and other necessary practices to match.
Comprehensive accounting policies and procedures are imperative to protect the business from any problems that might steer it off course. This involves building an internal controls document that serves as the company’s standard operating procedure for every major accounting cycle, as well as creating a tailored chart of accounts.
To be successful, cannabis companies should have: a finance department that provides complete, accurate and timely financial statements that comply with GAAP; a robust internal control system including proper segregation of duties and safeguarding of critical assets; detailed accounting policies and procedures; electronic storage of all documents and appropriate hard backup source documents, such as invoices and sales receipts; and key performance indicators, as well as timely cash and tax forecasts.
In an ideal situation, a company would also have an experienced chief financial officer who aids in designing the systems, reviews the accounting work, handles financials and forecasts, participates in strategic decisions and acts as a liaison with legal, tax, accounting, audit, IRS, acquirers and other third parties. Additionally, cannabis business owners should bear in mind the importance of using proper software that is tailored to the company’s unique size and niche. Overall, this leads to better access to capital, stronger reporting, more favorable investor relations, higher valuations at exit and fewer headaches overall.
Navigating a Convoluted Space
The lack of world-class accounting underscores nearly every cannabis company’s financial woes. State law and IRS law clearly lay out that cannabis companies must conduct accounting correctly; failure to do so will result in large fines, penalties and loss of license.
By paying close attention to the mistakes others have made and focusing an active effort on avoiding them through best practices, businesses can learn to better navigate the convoluted financial category of the cannabis space and ultimately build a thriving business during this exciting time of unprecedented growth.
Andrew Hunzicker is the co-founder of DOPE CFO. He is a certified public accountant with broad experience providing executive leadership and business counsel to a variety of companies, including those in the retail, manufacturing, energy, medical and tech industries. He has built up a national cannabis accounting/bookkeeping training program to help students in more than 25 states. He was runner-up for Portland Business Journal’s CFO of the Year in 2017, making him the first cannabis industry chief financial officer to ever be nominated. He is an expert in cannabis startups, CFO services, turnaround and high-growth strategies, capital sourcing, mergers, exits and wealth protection.