What’s in your management toolbox?

For many, understanding financial statements is like putting together a puzzle with no picture.  It’s daunting, or nonsensical, or only vaguely has meaning.  How do you make your financial statements into a tool for managing your cannabusiness?  It takes an investment in expertise to create the tool, and an investment of your time to learn how to use it. Having worked in healthcare for many years, I had numerous opportunities to present financial information to physicians.  Most physicians had never seen a financial statement before they went into practice, and usually their eyes glazed over when we started our review.  They wanted information badly, because they knew there was a direct correlation between the information on the page and how much money they made.  They also knew that the financial success of the practice was directly related to their individual productivity, but again, they couldn’t see the connection.  It was my job to illustrate the connections in a way that was simple and clear without requiring a lot of their time to grasp.  I had to provide the picture and show them how the pieces of the puzzle fit together. So how did I do it?  Basically I put together a “money” flow chart.   I started with their productivity, say the number of surgeries they performed, which then led to how much income they brought into the practice.  From there I showed them the expenses that reduced their income in the practice, resulting in a net income that they could count on to take home to their family.  I categorized expenses in such a way as they could see...

Surprise! The IRS Trick (there is no treat)

By now most, if not all of you, are aware of IRS Code Section 280E that prohibits the deduction of expenses for any business that is trafficking in controlled substances.   If you aren’t aware of this law, you need to be, but more importantly, you need to plan your cash flow (there’s that term again) to be prepared for higher than expected federal income taxes. Currently, marijuana is considered a Schedule I drug per the Controlled Substances Act and as such is treated as a federally illegal drug.  Income from the sale of illegal drugs is taxable for federal income tax purposes but expenses related to the sale of illegal drugs are not deductible.  This is Section 280E in a nutshell.  You must pay tax on the income of your cannabusiness and your associated expenses are not deductible from that income. There is one tiny glimmer of light in this dark IRS tunnel and that is that expenses associated with cost of goods sold i.e. your inventory costs, are deductible.  Perhaps now you understand why I have devoted so many words in my blogs to the subject of inventory.  Since currently it is the only deduction available to you for federal income tax, it’s hugely important.  I’ve touched on what can be included in inventory/cost of goods sold in previous blogs, that’s not the focus here.  The focus in this writing is to help you plan for the tax liability you will ultimately face. So far this doesn’t sound that bad.  But here’s what happens.  Your income statement may indicate that your company has made $130,000 for the year,...

When is enough inventory, enough?

What is the smart way to determine how much and what variety of inventory I should have on hand?  It’s an important question.  Whether you are a grower, processor or dispensary, inventory is an investment for your cannabusiness.  And like any investment, it’s important to consider how much you will invest and for how long. How is inventory an investment?  For starters, it costs you cash.  You are either paying for seeds, soil, pots, water, and electricity if you’re a grower; cannabis and other supplies if you’re a processor; or flower, tinctures, edibles, and all kinds of paraphernalia if you’re a dispensary.  In addition, you’re paying labor to grow, process and prepare inventory for sale.  Lastly, you’re paying rent or some kind of storage costs until you can get it out to your consumer.  Inventory (or cost of goods sold) will likely be the highest cost you have on your income statement, and may very well be the highest valued asset you have on your balance sheet. One differentiating factor with inventory investment as compared to other types of investments is that it generally doesn’t increase in value the longer you hold it.  In fact, it may reduce in value as time goes by, particularly if it has a shelf life associated with it.  Hopefully you’re not going to have products sitting in inventory for months on end, but it’s definitely something to consider when you start making decisions about when and how much to buy or produce. Acccounting nerds like me have a solution for this and like most things in our world, it requires a measurement.  In...

And a balance sheet is for….what???

Very commonly, inexperienced business owners spend their time focusing on the income statement for their business.  After all, what really matters is that you’re making money right?  Certainly making a profit is important and spending ample time to understand your income statement is crucial to your cannabusiness success. But I recommend that you also spend some time reviewing your balance sheet.  Here’s why. A balance sheet is a picture of your business at a moment in time.  Whereas an income statement tells you what has happened with the profitability of your company over a period of time (a month, several months, or years), a balance sheet reports the overall health of your company in a very different way.  It shows accumulated earnings (net income) over time (like an income statement) but it also shows what you own and what you owe.  The difference between what you own and what you owe is the equity your company has.  A positive equity, in general, represents strong financial health.  More importantly, negative equity can mean that a company is over its head and may be destined for financial trouble. Balance sheets are divided into three sections:  assets, liabilities and equity.  Each of these sections is divided further into subsections but for this discussion, let’s keep it simple with just the three.  The easy way to remember what these sections are is as follows:                Assets – things I own                Liabilities – things I owe                Equity – the difference between assets and liabilities Expressed as a formula:     Assets – Liabilities = Equity Assets, things you own, are items like cash...

Cash flow planning is tough for most

Cash flow planning is one of the hardest and most neglected tasks for most businesses.  And yet it is also one of the most essential requirements for your cannabusiness’s success.  How many businesses do you know that failed because their bills got ahead of them and they ran out of cash?   There are many and you don’t want to be one of them. Here’s what often happens.  A company (let’s say a dispensary) gets started, maybe with some seed money.  If they are doing it right, they have already developed a budget of start-up costs and have been monitoring that budget as they spend, to be sure they don’t run out of resources before they open.  The dispensary opens and very quickly there is a flood of cash sitting in a bank account or in a vault.  Owners and managers may make decisions based on the cash they have available at a given moment in time, without thinking ahead to future cash needs.  Perhaps they make distributions to owners, or they buy more equipment.  Maybe they invest in an expanded variety of inventory.  There’s nothing wrong with these decisions as long as you have planned for future expenses. So how do you do it?  How do you plan for cash needs several months down the road?  It sort of goes back to that budget I mentioned in a previous blog but you are budgeting cash instead of net income.  You’re also doing it in smaller timeline increments, that is weekly, instead of monthly.  Common methodology in business is to do a 13-week cash flow projection.  What’s magic about 13...

Your staff – possibly your most valuable asset

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. How can staff members be our most valuable asset? Everyone is replaceable right? Well, everyone is replaceable but at what cost? How much time and money do you spend on hiring? Running ads, reviewing resumes, interviewing, running background checks are all costly. Then when you get them on board, how much time do you spend training to where they can actually be productive? In theory, it shouldn’t be too difficult to find people who want to work in the cannabis industry. It’s exciting and new for both staff and customers, people want to be a part of it. No doubt many people want in because they are counting on perks in the form of discounted or free inventory. Be very careful with this; for one thing it may be illegal (I’m not an attorney) and for another, you are giving away profits. So that your time and money is not wasted hiring people who won’t be successful in your operations, do a good job of vetting all potential hires. Take time to interview them privately and be cognizant of what you can and cannot ask. Check references. Once you’ve made your decision and your person is on board, be sure they are trained properly and support them as they progress through...