Both Entrepreneur and Forbes have pointed out there are certain things a growing business should not “skimp out” on. Primarily who you have looking after your finances. The solution suggested most often? Fractional CFO Services.
There are a laundry-list of reasons why it makes sense to outsource accounting for a legal cannabis venture, here are our top five:
The top 5 reasons to outsource your cannabis accounting:
1). Save Time
All that time you spend worrying about cash flow and improving your accounts receivable or payroll can now live with someone else. When you outsource your cannabis accounting, you can focus on what matters most to your business whether it’s business expansion or connecting with customers. Additionally, when you choose our outsourced CFO services, you save yourself the HR headache.
2). Save Money
It’s not just the time-saving factor that saves you money when you outsource your accounting. As a cannabis company you get taxed by the IRS at the gross revenue level. This emphasizes the importance of your clean, accurate books and accounting need to successfully turn a profit. Cannabis companies have a significantly greater likelihood of being audited– most often related to section 280E– with some companies stating it’s a matter of “when we get audited, not if.”
While you can plan for section 280E, it has been effectively laid out as an area that you need to have all your t’s crossed. As a result, it is increasingly important to have things like your cost of goods sold (COGS) categorized appropriately.
3). Get Accurate Cost Accounting in Cannabis
Proper cost accounting will help you plan for section 280E and the likelihood (erm, chance) of an audit. Cannabis businesses aren’t taxed like other businesses in the US. Based on IRS 280E, you can’t deduct any costs other than the cost of your product (Cost of Goods Sold). Therefore, cannabis businesses will be taxed on Gross Profit (Net Income – Cost of Goods), instead of net income as most businesses might expect to get taxed.
Including the correct and allowable items in COGS is one the most important things an accountant can offer your cannabis business. For example, the following cannot be included in COGS for cannabis dispensaries:
- Rent and utilities
- Salaries and contractor fees
- Utilities
- Insurance
- Professional Fees
- Licenses and Fees
Outsourced cannabis accounting can offer accurate unit economics which might explain why your small business is losing money. Plus, this documentation of costs will give you a head start in a possible audit. In cannabis, cost accounting should take into account both fixed and variable costs, as well as direct and indirect costs. For example:
- Direct materials, bill of materials (BOM) and packaging
- Electric bills for inventory areas
- Security
- Maintenance and repair
- Product transportation
With properly managed costs and clean books, business owners and investors can determine product profitability and accurately predict future cash flows. The weekly bookkeeping services will manage all day-to-day cost accounting needs your cannabis company requires.
4). Risk Assessment for Cannabis Accounting
Poorly maintained books and lack of compliance come with negative implications. That’s where a cannabis CFO can be invaluable.
Given the varying regulations across states, you can’t move cash from state-to-state. Our fractional CFOs provide risk assessments for all cash accounting and manual processes. Your outsourced CFO should introduce different systems that are specific to cannabis compliance and state regulations. Bigger banks often don’t take cannabis clients with the risk to unintentionally transfer cash across states. Ideally they are familiar with smaller credit unions.
Additionally, any outsourced cannabis CFO should understand how important it is to have a solid partnership with your cannabis tax accountant.
Related read: CFO vs. Controller: How to know which one you should hire
5). Multiple Cannabis Entities Require Consolidated Financials
Cannabis companies often acquire licenses for limited-license states to avoid saturated markets. But this strategy complicates the business accounting for cannabis companies. For example, one client has 15 entities and needs to have accounting books for each one. Consistency across all their books is essential with each new entity that is added.
With each additional entity and the nuances of each new market, finances will grow more complex. Consolidated financials become increasingly important. We’ve witnessed firsthand what having solid financial reporting can do to open doors with cannabis investors. With outsourced controller services you get monthly financial reports when you need them.
What is the cost of outsourcing your cannabis accounting?
Our outsourced cannabis accounting services begin at $2,000 per month for the base package, $3,500 for our core package and $5,000 for our Core + Awesome Outsourced CFO Services add-on. Learn more about our outsourced accounting pricing.
