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...

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...

“Yeah, we have a budget around here somewhere….”

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. A budget or proforma (used interchangeably here) is what nerds like me like to call a “working document”. That’s because we work on it all the time. Over the past many years, I started a number of new businesses. The very first step, after the concept of the business was determined, was to create a proforma. A proforma is basically a budget that projects what you expect your business to do in detailed financial terms. I always prepared proformas showing month by month activity and usually projected out 5 years. That document was hugely important to getting the business off the ground because it was the primary piece of information presented to potential investors and to bankers from whom we were seeking financing. The use of the budget didn’t stop after our business was open and operating. I tweaked it constantly throughout the project development phase and well into the first few years of operations. Until the business was clearly on track to meet or exceed the budget, I compared our actual financial results to the budget, to determine where we were on track and where things were not working out as we expected. It helped us...

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...

The Story of Your Cannabis Business

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. Oregon legalized recreational marijuana sales on October 1, 2015. Some of you had customers lined up out the door and around the corner. It was very exciting and it felt like you were finally on the road to long term profitability. But how did you really do? Do you know?   Are you confident that the information you have is reliable? One of the major reasons businesses fail is poor management, and that goes to financial management as well. If cannabis financial management is not in your area of expertise, don’t wait, get help. Hire your own bookkeeper, engage an outside firm or find someone who can at least help you with the basics. Lastly learn how to read and understand your financial statements. Learn how...