As an accounting and advisory firm working exclusively with cannabis companies and startups, we often get asked a lot of tough questions from our clients and prospects – and rightly so. Choosing an accountant can be challenging in general for any business, but when you add cannabis into the mix, it can get downright complicated.
Since cannabis is still classified as a Schedule I drug, and is federally illegal, many CPAs choose not to take on cannabis clients. They tend to be conservative, risk avoidant, and, frankly, don’t want to be involved in the industry because they are afraid of losing their license.
But as the cannabis industry grows and the need for quality accounting services becomes more in demand, that is changing. More CPAs and accountants are stepping out and taking on cannabis clients so there is more choice. The trick is to make sure that who you are working with is legitimate and experienced in the nuances of the cannabis industry.
Given the ever-changing compliance and regulatory landscape, tax limitations due to IRS code 280E, and the urgent need for superior cash management, the CPA you hire must be thoroughly vetted to make sure they are seasoned and a true professional with your company’s best interests at heart.
Questions To Ask a CPA
By far, two of the most common questions we get asked by cannabis business owners are: How long have you been doing this? and What makes you an expert? Consider asking these other questions as well when you are vetting a CPA:
· Do you only work with cannabis clients? If not, what other industries do you serve?
· What is your experience in publicly traded organizations?
· Have you been through an IRS audit?
· Who are your other clients?
· Do you provide consulting as well as accounting services?
· What can I expect from you while we work together?
· How often will you be communicating with me?
· What is your fee structure (i.e., hourly, retainer, flat rate, or subscription-based)?
Undeniably, the biggest question for our smaller clients, such as our mom and pop dispensaries, is regarding pricing. We understand no one really wants to pay for accounting. It’s like going to the dentist. You know you need to go to maintain your health but you’d really rather not.
But, here’s the kicker: you go anyway.
The same is true for accounting. If you want your cannabis company to be in good financial health, you have to commit to the investment. Too many clients wait until they are in some sort of crisis before they contact an accountant. And by then, it becomes an expensive mistake.
It’s not that they are neglectful or don’t care about their company’s finances, it’s just that they haven’t had the time. Cannabis operators, like many business owners, are running in a thousand different directions trying to get a thousand different things done. Accounting becomes low on the priority list until there is an issue and it catapults high on the priority list. Our advice is: let’s get it done from day one and then you’re on autopilot from here on out.
Pro tip: It’s much less expensive to start with an accountant from the get-go, than to hire one to fix poor accounting or bookkeeping. So, take your time and ask your questions. Do your research and make an educated choice about who you bring onboard.
Tips to Help Make the Cannabis Accounting Process Easier
Assess who’s keeping your books. For many of our smaller clients, there is someone internally who is doing the transactional, day-to-day work of invoicing, managing accounts, and paying vendors. This can be tremendously helpful to an outside accountant coming in to help close the books on a monthly, quarterly, and annual basis. It can also create challenges. If this person is not consistent with what they are doing, the financial transactions are not up-to-date, and the general recordkeeping is poor, then this can create friction and slow down the process.
Document, document, document. Shall we say it again? Keep those receipts. Write everything down. We cannot stress how important this is. Cannabis is a cash-heavy industry and every transaction must be documented. In case of an audit, the IRS will not give you that deduction if there is no supporting documentation. Yes, you may know you spent it, but your word becomes irrelevant. Write it down. If we have some sort of record, we can work with it. And while deals can be done over drinks or handshakes in many industries, we’re not there yet in cannabis. Get everything in writing!
Follow your Standard Operating Procedures (SOPs). In the grand scheme of running your business, this is low-hanging fruit. Yet, 90 percent of the time, people ignore these. This is interesting, because in order to obtain an operating license, applicants must submit an SOP. Unfortunately, they are not being followed consistently or seriously. Following your SOP gives your business and your employees a process roadmap. The SOP can be updated and tweaked to keep it relevant. It’s a helpful tool to keep your business on track and accountable. And most people don’t bother with it, which ends up being a recipe for disaster.
Manage that cash well. Cash management stresses out many cannabis business owners. And it’s easy to see why. There’s usually a lot of it to track, there’s theft and mishandling to address, as well as plain old documentation, which can get very tedious. Without a set process in place that works, managing cash can turn into a major headache. Therefore, it’s critical to develop a cash management process that includes identifying the cash terms with your various partners and vendors. Know when cash is going out, when it’s coming in from sales, and feel more confident about your overall cash flow. Design a system that is sustainable for your company. Keep it real. Ultimately, the right system can bring efficiency, compliance, and yes, save you money.
Remember, that not all CPAs are built the same. A legitimate cannabis accountant needs to understand – at their core – the cannabis industry. They need to understand the lack of access to banking and how that impacts all cannabusinesses – whether a grower, dispensary owner, lab or processor. They need to understand the complexities of cash management, from safety, to system, to overseeing employees, to forecast and projections. They also need to be proficient in 280E and minimizing your tax liability, And, finally, especially if you are a cultivator - they should be well-aware of absorption costing. That’s a key concept that a generalist accountant working in a plethora of other industries may not comprehend.
There’s much to consider as you embark on your first accountant. Successful cannabis business owners and entrepreneurs understand that strong accounting practices and systems is an investment in the longevity of their company. The right accountant for a cannabis company is a cannabis accountant.
Indiva Advisors is the Smart Choice
When it comes to choosing a trusted accountant, you can't go wrong with Indiva Advisors, LLP. Our team of experienced CPAs is well-equipped to handle all your financial needs- from taxes to compliance, and more. In addition, we believe that cannabis should be viewed as a smart investment - and that's why we're passionate about helping our clients make the most of their position in the cannabis industry.
Not only do we have years of experience in the cannabis sector, but we also have a reputation for being trustworthy and efficient. We understand the importance of keeping your finances organized and secure, which is why we always make sure to use the latest technology and accounting practices. And our team is always available to answer any questions you may have - so you can rest assured that you're making the best possible decision when you choose Indiva Advisors as your CPA solution.