Staying straight with a cash business – Part 3 – Cash Reconciliation

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) cash reconciliation form Compare the above ending cash calculation to the actual cash...

Staying straight with a cash business – Part II – Cash Disbursements

In the previous blog, I discussed how you would document the receipt of cash due to sales.  Follow those recommendations and you will have the coverage you need if the IRS comes knocking at your door.  What that article did not discuss is how to document cash going out.  That’s what I want to discuss here. Cash can go out of your facility, your farm, your lab, your bakery, for all kinds of reasons.  You have regular monthly bills to pay such as rent, utilities, supplies, sales tax etc.  For many of these, you will get a receipt when you pay the bill such as when you buy supplies at a retail store.  Likewise, when you make an appointment to pay your sales tax in cash, or go by the electric company to pay that bill in cash, you will receive a receipt showing what you paid.  Your landlord may give you his banking information, and ask you to make a deposit to his account for the rent each month.  You should receive a receipt for that transaction as well, on which you can notate that it was for payment of rent for a given month.  These are fairly straight-forward; you will use these receipts to reconcile the cash in your safe. For those items where you are not automatically given a receipt, you need to create one.  Create a vendor invoice and be sure it has the following information on it (I’ve created this form for you to download below): Your company name, address, basic contact information The date The vendor’s name, address, contact information Who you are...

Payroll Taxes – Don’t Mess Around

I have seen more clients get in trouble with their business and the IRS because they did not pay their payroll taxes on time.  It’s a tricky thing, because you do have some leeway in the timeliness of your payments, and so often business owners and managers make the decision to forego paying the taxes right away, thinking that they will catch up later.  Then later never comes and before they know it, the IRS is after them.  So what’s the best approach with payroll taxes? First let’s talk about the difference between an employee and an independent contractor.  Again, I have heard lots of folks say “we’ll just pay him contract”, then they don’t have to worry about payroll taxes.  It’s true, independent contractors are responsible for paying their own payroll taxes.  Just be sure this person meets the definition of independent contractor.  If the person working for you does not fit the definition, they are an employee and as such you are required to pay payroll taxes on their behalf. So here’s the distinction between an employee and independent contractor: Employee – You control the job (what, where, when and how) and provide the employee with the tools and supplies to do the work. Independent contractor – The contractor controls the job (what, where, when and how) and provides his own tools and supplies (or may charge you for supplies as part of his contract). Let’s look at some examples: You hire your friend’s brother to install lighting in your grow space.  He tells you when he can do it, brings his own tools, but charges you...

The general ledger – one of my favs

A general ledger is the complete record of a company’s financial transactions over its lifetime.  It is a report that can be generated over any period of time, and contains a wealth of information. The general ledger is my go-to place when I have questions about my company or need further understanding about a particular transaction. For very large companies, general ledgers are made up of numerous sub ledgers and you have to dig very deep to get to the individual transaction.  In smaller companies, like most of yours, the majority of the transactions occurring in your business will be captured individually in your general ledger.  It’s a ton of detail but if you know how to dig into it, you can find all kinds of valuable information.  The general ledger is organized into a list of categories called accounts.  Each account holds the transactions specific to that category.  Transactions are entered into the general ledger with the amount, a reference number (such as an invoice number or check number), a description (usually optional) and date the transaction occurred.  That date drives the period in which the transaction gets reported.  For example, sales that occur on April 20, 2016, get entered into the general ledger with a transaction date of 4/20/16 and will show up on the income statement in the month of April 2016. Essential to a good general ledger is the description that accompanies each transaction.  Not all software will require a description, but a good accountant will enter one that is detailed enough that the person reading the general ledger knows what happened in the transaction. ...

Documentation – the what, why and how

Being in business means keeping up with a lot of varied information.  Oftentimes business owners are confused as to what they should keep, for how long and how to store it.  This short blurb should take the mystery away and give you a few simple rules to follow.  The What – here is a list of items that should be kept and for how long Contracts – Contracts, licenses, signed agreements, corporate and partnership documents, corporate meeting minutes, should be kept indefinitely. Expired contracts that are not relevant to the business any longer, such as a lease from a previous location, can be shredded after 4 years. Transaction documentation – Documentation of transactions that occur on your financial records, including sales receipts, deposit slips, checks, bank statements, vendor invoices, purchase orders, mileage logs, petty cash records, payroll records, all of these should be kept for a minimum of 4 years. Income tax returns – both federal and state, should be kept indefinitely. Financial statements – including general ledger, balance sheet and profit and loss statements, should be kept indefinitely. The Why Contracts and other agreements should be kept as long as they remain in effect. You never know when you might have to support the way something was handled, or refer back to determine how something should be handled. Transactions that support your financial statements and tax returns are kept for at least 4 years because of the potential for an IRS audit. The IRS can audit tax returns up to three years after the date you filed the return.  At audit, you will be required to produce supporting...

Capitalization and Depreciation

I have to say that I find this topic quite boring.  Coming from an accounting nerd, you know it must be dull!  However, it is something you should understand to run your cannabusiness properly and to understand your financial statements.  So let’s push forward and get this one out of the way. You may have heard the term depreciation, and perhaps some of you are familiar with what it means to capitalize something, but let’s discuss the details, because it affects your net income in a way many of you may not realize. To get started, let’s assume that you have purchased a video surveillance system that cost you $2,000.  It includes a computer, software and 8 cameras.  The system was paid for and installed in the month of May and you expect it to last you for three to five years before it will need to be replaced.  Your first inclination would be to expense this item on your income statement just as you do other expenses in the month, like rent and utilities.  If done this way, your income statement for May will show an expense of $2,000.  But this purchase will have a benefit well beyond the month you paid for it, so instead of putting it on the income statement, we will put it on the balance sheet as a fixed asset. Fixed assets are those items that have a long term life, meaning they don’t get “used up” quickly but deliver benefit for more than a year.  Equipment, computers, software, furniture and improvements to your facility fit into this category of asset.  When we...