Whether upstart or experienced, small-scale or large, cannabis operators face a fairly unique set of business and operational challenges, with accounting chief among them. For one, the standby accounting software, Quickbooks, is necessary although not sufficient to smooth 280e accounting, which regulates the deduction of business expenses for alcohol and drug companies. With the various challenges specific to cannabis retail–from traceability and tracking, to vendors who deal in cash, to difficulties around integrating Quickbooks with the other systems and software retailers rely on to keep track of operations–any one-size-fits-all approach fails to address the specific needs of many if not most cannabis companies.
Here we’ll look at the ways in which adopting a set of accounting best practices can contribute to a more streamlined, not to mention compliant, approach to marijuana accounting.
Cannabis Inventory Accounting: Accounts Payable (AP)
Let’s start with the accounts payable process. Here as elsewhere the goal is a streamlined process, generally through digitization, so that creditors are properly paid without delays or errors. For this to happen smoothly, what's called a three-way matching system, where invoices and receipts are cross-referenced to ensure a clean match, can help guard against error as well as any potential suspicions of fraud. Implementing a regular process of review within your cannabis inventory accounting team is also a good idea, as is maintaining clear workflows before bottlenecks in the AP process build up and cause payment delays.
Spend Management in Your Cannabis Accounting
Second to a digitally-managed AP process is expense management, which in the context of marijuana accounting means maintaining an approved vendor list and corporate credit cards routed to a general ledger, like Dixie or Brex. For optimal expense management, think of vendors and their performance like any other part of the business, which is to say, under regular evaluation. Build strong relationships with reliable vendors, with whom you negotiate favorable terms, including discounts on purchases made in bulk. Also, consider procuring a corporate credit card. They can help with a whole host of things, including maintaining accurate and transparent bookkeeping over time for your cannabis business.
Cannabis Inventory Accounting: Accounts Receivable
On the flip side of accounts payable, savvy inventory accounting means a smooth-running accounts receivable process. Accounts receivable refers to the money you’re owed by people and companies in debt to you. All invoices should be well-documented (digitally), terms of payment expectations should be defined (at the outset), and each transaction should be tracked (by three-way match software). Crucial to the last step is investing in software allowing the separate features of the process, the shipments, the invoice records, and the bank account to “talk,” or interface, with each other. Otherwise you run the risk of elaborate cross-referencing errors, which once made are a headache to fix.
280e Accounting: Controls and Compliance
Compliance with cannabis laws and regulations matters for the obvious, legal reasons, as well as for securing funding. The hard part, of course, is keeping track of regulations that themselves have been subject to frequent changes, and that can vary across state and national borders. A good trick of the trade is broadly distributed accountability. If no one person has total oversight, a natural system of checks and balances follows, allowing one person to catch another’s errors. So for instance you might allot your accountant the role of cross-checking 280e compliance, after you’ve implemented up-to-date software with a built-in compliance check. Systems and software with controls built into them are the way of the future in tax accounting for cannabis businesses. That way, the burden of compliance does not fall exclusively on human shoulders.
Monthly Tax Accounting for Cannabis Businesses
Key to data-driven, growth-oriented cannabis retail is reliable monthly reporting. Seek out cannabis accounting software that can catalog across sales, operations, and finance, since without the ability to cross-reference among those key features, you’ll have a mess of related spreadsheets to compile monthly, if not a CPA, or publicly licensed accountant, charging you thousands. Inevitably, the clean-up process becomes a game of telephone, with the numbers slowly skewing the more lines of communication they pass through. Be consistent in your reporting over time, and keep in mind: what you want is a competitive round-up of the numbers. In an industry with a growing number of entrants and players, monthly reporting allows cannabis companies to track the competition, too, ensuring they’re abreast of industry trends.
280e Taxes
Unfortunately for cannabis retailers, the usual tax exemptions don’t apply. Only cost of goods sold, or COGS, can be written off in the usual way (hence the need for careful receipt tracking). By accurately capturing costs year round, ensure that you’re audit-ready come tax season. Another important accounting feature to keep in mind, the cannabis excise tax, refers to any legislated tax on the sale of cannabis at the time of purchase, and is subject to variation across state and other legally relevant borders. Though consumers pay the excise tax, responsibility for collecting it falls on retailers, for whom it should not factor into expected profits.
Inventory Control and Auditing: Ensuring Accurate Data for Financial Clarity
Effective inventory management in the cannabis industry goes beyond mere organization; it’s a critical component of accurate financial reporting. Accountants should establish a consistent line of communication with warehousing teams, collaborating closely to ensure that inventory numbers stay aligned with real-world quantities. Regular reconciliation of physical stock with recorded data is essential to detect any discrepancies and rectify them promptly.
Monthly Audits for Precise Financial Reflection
The end of each month marks an opportune time for accountants to exercise their expertise. By meticulously reviewing inventory records and financial transactions, accountants can make adjustments to inventory valuations and correct any potential inaccuracies. This practice ensures that the reported financial position of the cannabis business remains a true reflection of its operations.
Seamless Integration for Enhanced Efficiency
A well-integrated inventory management system is the backbone of successful cannabis accounting. With Flourish's integrated solutions, your cannabis business can seamlessly link inventory data between various systems, eliminating redundant data entry. This integration significantly reduces the likelihood of errors, guarantees consistent data across platforms, and accelerates the pace of financial reporting.
Operational Transparency for Compliance and Tax Efficiency
To uphold compliance and navigate the intricacies of tax regulations, accountants must have access to transparent, traceable inventory data. This data not only aids in adhering to the ever-evolving cannabis laws but also provides the basis for accurate tax calculations. A comprehensive inventory audit trail, accessible through Flourish's solutions, can be a game-changer in ensuring that your business stays on the right side of regulatory requirements.
Accelerate Growth with Dedicated Cannabis Accounting Software
With the evolving nature of demands facing cannabis retailers, it’s unsurprising that many of them have begun investing in the most up to date cannabis software. To spare yourself the headache of tedious cross-referencing, potential accounting errors, and the like, consider Flourish, a cannabis software company designed to address all of your supply chain needs. Flourish was built by supply chain engineers in tandem with folks inside the industry, including operators, to offer user-friendly software and streamlined, state of the art operations. Flourish sets itself apart by investing $50,000 annually in SOC 2 audits, audits outsourced to a company responsible for checking the compliance of technology-based service organizations, ensuring the integrity of their software, as well as offering expert input on everything from standardizing operating procedures to less than ideal workflows.
If you’re interested in learning more about Flourish, their award winning cannabis software, and how your cannabis company can benefit, follow this link.