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Not to steer too far from cannabis accounting, let’s talk about assets. Assets are generally thought of as land, buildings, equipment, inventory, usually something you purchased or leased. Assets make a huge contribution to the success of your canna business and without them, you wouldn’t be in business. So what’s your most valuable asset? It’s likely your staff.
Accounting for inventory in any business is tricky and the cannabis business is no exception. For producers, processors and retailers like yourselves, it is the main driver of profitability.
I once had a client who owned a cookie business. She had a large market and her cookies were in high demand. Her sales were climbing, yet she was making less and less. When we delved into the calculation of her costs, everything seemed in good order. She had accounted for labor, materials, supplies, space, equipment, all of the “ingredients” to making her cookies. Each cookie cost $.79 and she sold them for $1.50, around a 47% gross profit. But as I investigated more, I discovered that she packaged the cookies in twos, so in fact the cost of her cookies was double what she thought, at $1.58. Selling them at $1.50 had her losing $.08 right off the bat and as her sales increased, so did her losses.
Likely when you started out with your cannabis business, or were contemplating a start, you prepared some kind of budget or projection, something that you thought would tell you if your idea was feasible. Maybe you didn’t prepare it yourself but had a consultant or friend do it. The budget looked good, and off you went to get started in entrepreneurship. Life got crazy, and you never pulled the budget out again.
There aren’t too many businesses out there (at least legal ones) that deal almost exclusively in cash. Even lottery tickets, once strictly cash, can now be purchased in some states with debit or credit cards. And yet we in the cannabis business are forced to work in cash only because federal laws prevent credit card companies from servicing cannabis clients, regardless of legality in the operating state.
Cash sounds better, we like cash. Everyone likes cash but as a marijuana accountant, I invite you to consider the differences when it comes to the basis for reporting your financial operations.
Nerds like me spent many years studying the difference between cash and accrual based financial statements. We spent a lot more time on accrual because it is more complicated than cash. And yes, here it comes, I am going to recommend that you use accrual, not because it’s more complicated but because it paints a truer picture of your financial results. Remember that financial story I mentioned in previous blogs? Accrual based accounting tells a more accurate story.
Your financial information tells the story of your cannabis business but unless that information is both timely and accurate, the story is fiction. Many of you are so occupied with the daily operations of your business that you don’t or can’t spend the time needed to be sure your financial data is up to date and accurate. And for many of you, understanding the ins and outs of financial information is not a strong suit, so you avoid the “hard” thing to do. What you may not realize is that your financial information is the only true indicator of the success or failure of your business. You can ignore it for a little while but it will catch up with you. Better to see what is happening, when it is happening, than be surprised by what appears to be a “sudden” downturn later on.
Marcena Sorrels, the owner and founder of 420 Financial Strategies is a CPA with a long history of management in financial, regulatory and human resources arenas. She has been the top executive in a number of healthcare companies which are highly regulated. She recently completed a tenure with a company in which she was the CFO (chief financial officer) and a partner. That company sold for more than $37 million.
Marcena has a knack for presenting and explaining financial information in such a way that even the most novice of business owners and managers will understand. She delights in helping cannabusinesses achieve their long terms goals.