The cannabis industry is, without any doubt, one of the most rapidly growing ones in the world.
According to a CNN report, cannabis sales hit $20 billion in 2020 and are expected to top $26 billion in 2021. This shows that cannabis selling is unstoppable, even by a pandemic.
However, financing a cannabis business is not easy. Because the federal government considers marijuana an illegal drug, the cannabis industry didn’t have access to federal stimulus funding like the Paycheck Protection Program, as other industries did during the pandemic. This is not just a problem that operators find during Covid19; it is expected. Because of the latter, understanding what marijuana accounting is and how it works is necessary for any industry vendor.
Why Is Marijuana Accounting Important
The most usual problem that a marijuana retailer will find when looking for marijuana accounting is the lack of access to regular banking channels such as loans. Since federally regulated banks do not want to get involved in funding operations of customers who sell an illegal drug on the federal level, it is a problem that has plagued the cannabis business since the beginning.
But why is having access to marijuana accounting so important? Because any marijuana business needs a cannabis accountant trained in keeping sound books and records. Someone capable of facing the regular audits, litigation, legal fees, and back taxes that any business involves.
For your marijuana operations to work, you will need every number in the bool to be supported and adequately recorded. Organized books reduce risk and result in cost savings during any audit.
As mentioned before, cannabis remains a Schedule I drug, making banking a challenge. Running a cash-only business is not only complicated but risky.
The good news, and something your accountant should walk you through, is that banks will take cannabis businesses’ money.
However, most banks with cannabis businesses have lengthy application processes, including documentation like financial statements, which can only be kept correctly by an accountant. Why? Because banks look at the quarter in total, they look at each month leading into the quarter, so monthly financial records must be in place. If a bank sees a big fluctuation month-over-month, it will flag you and your business.
Since many cannabis businesses don’t have proper banking services, they become cash-only businesses. A sound accounting system can help this problem because, until marijuana operations have full access to banking services, they will have to be extremely careful to pass every audit and pay taxes correctly.
The reality is that the mess of state, local, and municipal licensing rules that govern the cannabis industry make it a beautiful compliance opportunity for both Certified Public Accountants (CPAs).
Another big hurdle is the fact that every state. The locality and municipality have their ruling regarding cannabis legality and selling. That’s why vendors and their accountants must know which rules apply to them.
Another challenge facing cannabis that directly impacts accountants serving the industry is the relative youth of the software systems built for the cannabis operations and problems with staffing. Business owners get Generally Accepted Accounting Principles (GAAP) guidance and Big Four industry guides in most niches. There is none of that in the cannabis industry.
If you’re a marijuana business owner, you have to think about these things. Having proper accounting in place helps you visualize your business long-term. What investors and buyers are looking for are businesses that: Maintain their books and records clean, have a reputable brand and market share; Comply with Section 280E of the IRS tax code, and that can grow.
Since securing funding is already difficult for cannabis companies, you must ensure you have everything in place and show up for it.
The truth is that cannabis business owners should consider their long-term goals for valuations and their short-term goals for bringing new lenders and investors into the picture.
Find the Right Cannabis Accountant
With all the federal and state regulations, accounting for cannabis is very complicated.
If there is one sentence in the tax code, accountants have to understand that to help a cannabis business is Section 280E, a ruling with significant accounting implications. To account for 280E expenses correctly, the person handling the books for a cannabis company must understand: Cost accounting; Accrual accounting; Absorption accounting, and Generally accepted GAAP.
Cannabis business owners will find it very hard to find a generalist accountant who understands many of these concepts, mainly because understanding GAAP and cost-based accounting is not required for most small- to medium-sized businesses.
GAAP is required for publicly traded companies overseen by the U.S. Securities and Exchange Commission, requiring a different skillset beyond everyday small business accounting. That’s why it is crucial that you include an accountant in your budget from inception.
Maintaining meticulous records will help ensure you can keep your license, funding, and banking. It will also keep you out of hot water with the IRS and attract investors, buyers, and partners.