So you’ve always wanted to be an auditor, right? Well, here’s your chance.
We’ve discussed how the IRS is more prone to audit cannabis businesses than it does businesses in other industries. We’ve discussed how the IRS wants to see documentation of receipts and disbursements that you are reporting on your income tax returns. I’ve shown you my recommendations for tracking cash receipts and cash disbursements, but it’s not very meaningful if you don’t go through the process of reconciling the reporting with the actual cash in your safe. That’s what I want to go through here. These are my recommendations for auditing your cash, which equates to reconciling your bank statement (if you had a bank account).
This stuff is pretty dry which is probably why you decided to go into the cannabis business and not become an auditor. As boring as this may seem, it’s essential that you do this reconciliation often, I recommend at least once a week. Pick a time that works for your schedule and stick to it. It’s a very easy thing to avoid and very easy to get away from you. The longer the time between reconciliations, the harder it will be to reconcile. The form below will take you through the process but in simple terms the process looks like this:
Starting cash (the cash counted in the safe at the last reconciliation)
Plus cash receipts from sales and other sources
Minus cash disbursements from paying vendors and other purchases
Equals ending cash (what ending cash should be)
Compare the above ending cash calculation to the actual cash counted in your safe. The difference is either positive or negative. If the actual counted cash in your safe is more than what your reconciliation says it should be, that is considered cash over. If the actual cash in your safe is less than what your reconciliation says it should be, that is considered cash under.
People tend to think that cash over is better than cash under but actually both are problematic. If the cash in your safe does not match what your reconciliation says it should be, it means you have some problems in your processes and you need to figure out where they are.
Cash reconciliation problems can be due to many things from giving incorrect change, to not tracking a disbursement that was made. That’s the reason to do the reconciliation often at first. It will help you identify where your processes are lacking so you can tighten things up where needed.
Finally, I recommend that you store a copy of the reconciliation, along with a copy of each sales report on the reconciliation, and a copy of each disbursement on the reconciliation, together in a package. As always, this can be a paper file or electronic, the point is that they are together. Later on, if an auditor knocks at your door and asks to see records, you can provide all of the data together in an organized fashion. This package will substitute for the bank reconciliation that typical businesses would have handy.
Working in a strictly cash environment is tricky and requires close attention to detail. Don’t let these processes be a “when I get to it” kind of thing. Make it a priority to track cash coming in and going out, and reconcile often. It will save you (and your accountant) lots of headaches down the road.