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. ...

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...

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...

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...

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...