Materiality

You may think that cannabis accountants sit around making up new terminology to complicate life or make ourselves look smarter. Well, it’s partially true I suppose, but we are way behind those in the tech business and social media! So what is this word materiality and why should you care? Here’s what and why. Materiality can be described as the degree of financial importance that is assigned to a transaction or a piece of information. The more material something is, the more important it is. Conversely, immaterial means that something is less important, of such little importance that it’s not necessary to mention it or report it. Materiality is often expressed in numeric terms but not always. For example, the basis of accounting you choose for your business is important in understanding your financial statements. A person reading your financials needs to know what basis you have chosen for reporting. It is material to them to know. Specific strains that you grow on your farm might not be a material item to report on your financials (although it could be, depending on your audience). If I am judging financial performance, strains are not that important to me but could be if one shows to be much more profitable than another. Determining materiality in numeric terms is usually a little easier than determining it for a piece of information. Materiality in numbers can vary all over the board in amount. A large, publicly traded company, might have a materiality factor that is many millions of dollars.   Your company, assuming you are not working with multi millions or billions (yet), is...

Accounting for Inventory in Cannabis Industry

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. Now that may seem like a novice mistake for some of you. But you can see how a small mistake in calculating the cost of your inventory, could lead to disaster. So what’s the secret to accounting for inventory in the marijuana industry?   A complete understanding of everything that goes into creating the product that you sell. It’s different for each category of sales. A producer has to consider the cost of land or space where they grow plus seeds, water, nutrients, labor to maintain and harvest, packaging for sale. Can they include the cost to maintain an office where orders are taken and bookkeeping is done? Probably not. What about...

Holy moly, that’s a lot of cash!!!

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. To add to the difficulty, especially in Oregon where recreational marijuana sales just became legal, most banks are refusing to accept canna customers because cannabis sales are still federally illegal, and/or because of the extensive regulatory compliance required of banks with large deposits of cash. Cash deposits add to the workload of banks in a number of ways, and while new customers are a priority for banks, canna customers may be perceived to be more trouble than they are worth. Because of these two components, many of you may find yourselves with large amounts of cash to store and manage. You may also be forced to operate using actual cash to pay your bills and staff. From a marijuana accountant’s perspective, paying bills and staff in cash is never recommended because it doesn’t provide the trail (support) of the transaction that writing a check does. But again, you are stuck and given that you are stuck I recommend you do the following: Do not store cash with inventory Provide two safes to store cash, one for daily operating (like the tills at your budtenders stations) and one for cash reserves that you will use to pay bills and payroll Always have two...

Basis for Accounting – Cash or Accrual?

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. First let’s talk about what we mean by basis for accounting. Your basis for accounting is the premise upon which you report your financial activity. Simply put, it the set of rules that govern the preparation of your financial statements. There are other bases of accounting besides these two, such as modified cash, modified accrual and income tax basis, but cash and accrual are the basics. Cash basis of accounting is reporting sales when they are collected, and reporting expenses when they are paid. For most of you in the cannabis business, your income statement under the cash basis would report all of your sales (because you collect all your sales when the sale is made) but report only the expenses you actually paid in the given month. Accrual basis of accounting is often called the matching principle, because it matches and reports revenues AND the expenses attributable to those revenues on the same financial statement. It’s easier to...