CEO’s GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT

11 ways to make sure you’re getting the

accounting that you need

1 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT

INTRO Cannabis CFO’s Need

Trained Accountants

With razor-thin profit margins and all kinds of tax and capital

issues to deal with, accounting operations for cannabis companies

are more tricky than normal. Navigating through the laws,

requirements, and technicalities can make or break your cannabis

business if you aren’t familiar with state and federal rules.

Inexperienced accounting professionals, who aren’t familiar with

the specific needs of cannabis companies, treat these businesses

like every other company and are getting these business owners

into hot water as a result of not knowing how to correctly do

cannabis accounting. Our goal is to empower cannabis CEO’s,

investors, and executives with some basic information so that you

can hire the right professional and know exactly what to expect

from your accounting team.

Here is a handy guide that CEO’s

should follow when evaluating

current accounting efforts or when

looking to hire their World Class

Accounting team. After all, proper

accounting practices are not

optional for this industry, and are a

requirement to maintain licensing

and remain compliant. Make sure

your accountant, bookkeeper, or

CPA is meeting the minimum

standards as follows:

Getting

Ready for

the Green Rush...

2 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT

ONE Accounting Policies,

Procedures, and Controls

Make sure you have written documentation that lists all

accounting policies, accounting procedures (who does what and

when), and internal controls and corporate governance (this

protects your financials and assets).

This is crucial because when purchases are made or equipment

is repaired you want to make sure that these costs are accounted

for and documented properly and consistently. When your

business is audited, you’ll want to have these

procedures handy if questions come up about how, for

example, you calculated depreciation or inventory.

3 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT

TWO Cash Controls

and Procedures

Document internal procedures for

how employees or day-to-day cash

handlers are to deal with cash

(especially for retailers). Having

systems in place to manage the daily

cash count, deposits, cash payments

(ie. petty cash), and reconciliations

with the POS system will be crucial

especially if you have multiple

locations and if your business is

vertically integrated. Also, have a plan

for how you will deal with large sums

of cash. Regular deposits will help

keep your employees safe and

minimize theft. Be sure that someone

on your accounting team is

reconciling your bank statements and

sales and all cash is accounted

for daily.

Cannabis CEOs, executives, managers, and investors are liable for

following the rules in order to maintain their licensing. It requires that

security systems must be in place to monitor where cash is kept,

where transactions are being processed and where

inventory is being held. If there is ever a question as to whether a

cannabis business is not paying proper taxes or is

skimming cash to avoid reporting, state and local authorities may

question your cash handling practices and review your

footage to determine whether you were negligent.

Recently, CEO Matt Price was punished for using the cash in his

business as a personal piggy bank. See: Cannabliss. While this is

an extreme case and while theft is a possibility for

cannabis businesses, negligence may not be a good enough

defense if state or federal authorities know the numbers don’t add

up. Do yourself a favor and put cash controls and procedures in

place to help protect your business and your employees.

3 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT

Cannabis businesses must also deal with the banking issues.

Since cannabis transactions are heavily burdened with cash,

your accounting team should be able to help you figure out

how to navigate those waters and find cannabis friendly

services that will help with payroll, merchant services, and

even pay taxes, so that you can effectively run the essential

parts of your business.

Lastly, the IRS may start targeting your company’s cash handling

and reporting policies. They will verify that you have accounted

for cash transactions over $10,000 by checking to see if you

properly filed the IRS Form 8300, Reporting Cash Payment Over

$10,000 Received in Trade or Business. This form accurately

discloses to the IRS and the Financial Crimes Enforcement

Network (FinCEN) cash transactions over $10k. This form is

used to combat money laundering. Any violation to this

requirement could fine businesses up to a $25,000 penalty per

missing form and the IRS could go back and audit previous

years. The penalty for not filing this form could lead to millions for

large cultivators.

3 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT

THREE Inventory Procedures

Not to beat a dead horse, but the same reasons and rules apply to

inventory as cash. In fact, each state has their own “track and trace”

software where inventory counts and transfers must be reported,

which is why having internal controls and procedures is a must.

Also, if you intend to claim any deductions, proper cost

accounting requires accurate inventory accounting.

Be sure to implement monthly

counts of inventory (handwritten

evidence is best) and reconcile with

Seed to Sale (ie Metrc), POS

system, and accounting software.

GAAP (Generally Accepted

Accounting Principles) is required for

extract/edibles/cultivation (ie. cost

accounting) if you want to maximize

deductions under IRC 471-11. Your

accounting team should understand

the seed to sale process from start

to finish in order to help you

maximize your deductions.

Each month, you should be working

with your accounting team to so they

can correctly allocate cost between

Inventory and Cost of Goods Sold.

You should have a system and an

organized method to submit product

information, percentage completion,

and estimated yields,

and other operating information that you will need to supply

the accountant every month so they can do the proper cost

allocations. There should be a streamlined process in place to

ensure that you are maximizing your deductions.

Without correct cost and absorption accounting, you will not

know important information such as, how much it costs for you

to grow a pound of cannabis, so make sure you have a trained

cannabis accountant on your team.

FOUR Fixed Assets

Your accounting team should be keeping accurate general

ledgers and subledgers including detailed roll-forwards so that

you have the information that you need in order to properly run

the business and manage capital.

Your accounting team should be doing a detailed Month End

report that reconciles every balance sheet account. Fixed assets

need a detailed roll forward that shows beginning of period

balances, plus additions, less disposals and ending balance. The

same is needed for depreciation.

If a cannabis

business is

operating without

keeping good

records, the IRS can

deny deductions for

business expenses.

6 CFO’s GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT

FIVE Liabilities

Accounting professionals should be

providing a detailed tie out of each

debt account (AP, accrued liabilities,

debt, etc.) showing additions,

payments, and ending balance

reconciled to your general ledger.

Make sure that these reports are

complete and include all invoices,

debts, and payables.

Having your liabilities (accounts

payables, debt, etc) properly

documented, will help CEOs and

operators manage their business and

ensure your financials are complete

and accurate.

SIX Equity/Ownership

Investors expect to make a return on their investment. As the CEO,

you have a responsible to your investors. Make sure that you

receive detailed reporting based on your ownership and equity

arrangements.

The CFO should maintain a “perpetual data room” that

contains all financials, accounting records, tax returns, legal

documents, leases, insurance, and board files.

SEVEN Sales

This goes without saying… you can’t run a business without

knowing how much you sell. The IRS wants to know about every

transaction that goes in and out of your business.

Each month, your accounting team should reconcile the POS

system, state Seed to Sale system, deposits, merchant service

reports, cash counts, and accounting software. The valuation of

your company is based mostly on revenues earned in the

cannabis business, so make sure that your accounting is accurate,

or you will lose value at exit.

8 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT

EIGHT Cost of Goods Sold (COGS)

According to IRC 280E, COGS is the

only legal deduction. It’s an offset

to income. There are accounting

professionals that will try to encourage

you to try and “beat” the system or

interpret 280E in other ways, but the tax

courts have spoken.The IRS is aware of

most of the “tricks” being utilized. It’s not

worth paying the penalties if you are

wrong. There are ways to accurately

apply IRC 280E and still minimize your

tax burden. Make sure your accountant

is doing this right or you will incur a

huge liability.

See “Inventory” above and make sure

cost accounting is accurate! This will

protect you in the event of an audit and

help to minimize taxes. (HINT: 90%

of cannabis companies are doing this

WRONG and are exposing themselves

to massive risk).

Having experienced cannabis accounting professional

support will assist you in making sure that your deductions are

within the guidelines set by the IRS so that you don’t end up

like the other cannabis companies who failed to beat the IRS in

court. See: Harborside.

9 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT

NINE Payroll, Rent, Other Significant Expense

Accounts

Each cannabis vertical must correctly

allocate expenses in order to

minimize their tax liability. Have your

accounting team scrutinize these

reports regularly and handle the finer

details of these accounts so that your

business is compliant.

Your accounting professional should

be able to help you find a payroll

company that is cannabis

friendly, provides accurate reporting,

and makes sure that these

costs/expenses are allocated properly.

Any other sizeable accounts need to

be reviewed on a monthly basis by

your accounting team.

TEN Internal Audit/Review Process

Checks and balances need to be in place to make sure that data is

consistent. Proper segregation of duties is important and make

sure that employees that have access to assets (ie cash and

inventory) have no access to the accounting records.

Internal reviews are a great practice. Having independent parties

review the data with internal auditing deters costly issues like

embezzlement or fraud. Hopefully, with these systems in place,

you will be able to catch errors before they are submitted to the

state.

Make sure that ALL data entry into the state Seed to Sale system

(ie Metrc), accounting system, and the POS system is performed by

someone that does not have access or custody of cash or inventory

and is reviewed by at least one person.

ELEVEN Cash Forecasting

Ask your accounting team to “Show me the money!”

Once your “Historical” reports and accounting are implemented, your accountant can build a monthly report that will help you strategically navigate short- and long-term cash flow objectives. This should be a one page, simple to understand report and include all three key financial elements: balance sheet changes, profit and loss statement, and statement of cash flows.

11 CEOS GUIDE TO MANAGING YOUR CANNABIS ACCOUNTING DEPARTMENT

NEXT STEPS for Cannabis CFOs After Assessing

Accounting Issues

If you find that after reviewing your accounting procedures,

policies, and controls are not compliant, you consider the

following options:

Option One: Keep doing what you’re doing and hope your accountants are

doing things right. This really isn’t a great option as it’s only a

matter of time before the IRS will peek into your accounting

practices. We have links to a number of those cases in this

guide. It is only a matter of time before the state or federal

agencies inquire and penalize you for your negligence.

Penalties can and do often include major fines, license

suspension and revocation, and even jail time.

Option Two: If you or someone on your accounting team would like to get

up to speed and want to be trained on cannabis accounting,

our team can design a training program based on your

specific accounting needs.

Option Three: Need to hire an experienced and trained cannabis accounting

team? CAC Group accounting professionals have the tools,

systems, and processes in place to do cannabis accounting

correctly. This is NOT an area of your company that you want to

ignore. We implement a Proprietary Chart of Accounts, Month End

System, Perpetual Data Room, Cost Accounting

procedures/workpapers, and cash forecasting methodology are just

a few of the tools that make sure you are audit, lender, investor, and

exit ready AT ANY TIME - ALL THE TIME!

World-Class

accounting systems

build world-class

businesses.

Want to learn

more about how we can help your

business? Visit us at

CACGroupllc.com. Click the “Get

Started” link. Fill out the form and we

will contact you immediately to

schedule your free Strategy Session.