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...

Staying straight with a cash business – Part I – Cash Receipts

This will be a three-part blog, intended to help you manage your business in the absence of a bank account.  Here’s what you know (or need to know): The IRS is targeting the marijuana industry, auditing these businesses as much as eight times as often as other businesses. The IRS is a stickler for documentation.  They want support for every transaction you report on your tax return. In most instances, the IRS looks to the company bank account to see transactions going in and out. You don’t have a bank account. This is the situation for most all cannabis businesses.  They know the IRS will be looking for documentation but they don’t have a bank account so the IRS can’t look at the bank statements to see business transactions.  So what do you do?  The answer is you take extra steps to assure that all of your transactions are documented, even when they occur in cash. Let’s start with cash receipts.  If you are a dispensary, this is relatively easy, because you have a point of sale system that will tell you how much cash you should have at the end of each day.  Many of the POS systems will also track the amount of cash in each till and how much should be in the cash safe (assuming proper setup).  Dispensaries should run their end of day reports, which will indicate how much excess cash should be in each till.  You should leave a standard starting balance in each till ($200 for example) and count the cash over that amount.  The total of your count should match the...

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...

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...

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...