Keeping accurate financial records is essential for any business, but it is extra important for those who operate in the cannabis industry. Because selling cannabis is still illegal on a federal level, cannabusinesses must be careful to avoid mistakes in their bookkeeping.
Keeping accurate financial records can save your business money, help you avoid legal troubles, and put you on a path of steady growth. But proper bookkeeping is time-consuming, and it can be easy to make mistakes. It's helpful to understand what some of the biggest stumbling blocks are for cannabis bookkeeping, so you can learn to avoid these problems.
With two out of three Americans supporting federal marijuana legalization, this industry will continue to boom for the foreseeable future. Read on to learn more about how to avoid common cannabis bookkeeping mistakes so you can keep moving forward.
The State of Cannabusiness in 2021
The cannabis industry is expected to be valued at $100 billion by 2030, so to say that the industry is on a trajectory of growth is an understatement. But there are still a handful of US states where the sale and possession of cannabis are illegal, even for medical purposes, and it is still illegal on a federal level.
However, all that is expected to change quite soon, with some experts predicting big changes within the next year or two.
There is legislation in the works to drop the Schedule I label from cannabis products, which could help to protect businesses that work in the cannabis industry. Schedule I drugs are drugs that have no reported medical value and have a high potential for abuse, but public opinion about marijuana is changing and more is being learned about its use as a medicine.
The Struggles of Cannabis Bookkeeping
With the industry constantly in flux, it can be tricky to keep up with all the legal aspects of running a cannabis business. Businesses that operate in states where cannabis is legal still must pay federal tax, which means that many legitimate businesses have trouble finding the right resources to help them meet bookkeeping needs. Let's take a look at some of the biggest struggles that cannabis businesses face when it comes to bookkeeping.
Finding banks that will allow cannabis companies to open accounts is not easy. Because cannabis falls into a legal gray area, banks are afraid to form partnerships with businesses that operate in this sector. This means that cannabis businesses are facing serious roadblocks right from the start, as a business can't operate without a bank account.
It's important to take the time to find a cannabis-specific partner, though the requirements and application procedures may be rigorous. You must provide quarterly statements, though being able to provide monthly statements improves your standing. Be sure to account for any inconsistencies in your books to avoid having your account closed without warning.
Because of conflicting state and federal laws, much of the cannabis industry operates cash-only. This makes it tough for a business to accurately track cash flow, so it's absolutely essential to have the proper systems in place. It's important to remember that cannabis is still federally illegal so each piece of your inventory must be accounted for, no matter what.
Staying organized is the most important step, so look for software and partners that can help you track your cash flow and streamline your inventory management.
To keep your books accurate, regular cash and inventory counts should be taken on the last day of each month. Keep track of key performance indicators like which edible products or strains are moving the fastest, which products are sitting the longest, and how long items are sitting on your shelves. When you have all this data in front of you, you can make smarter business decisions.
There is a section of the US tax code, 280E, that relates to filing taxes when selling drugs that are federally illegal. This means that it can be difficult to claim any deductions on many of the things that normal businesses can.
Cannabis businesses end up paying higher taxes on the products they sell because of this section of the tax code. However, a cannabis-specific PEO will help you understand what you can deduct, including COGS (costs of goods sold).
This means you can deduct expenses related to the production of the goods you sell. But to know exactly what you can and cannot deduct, it's important to consult a tax expert who understands the ins and outs of this section of the tax code.
Payroll is one of the most common areas where bookkeeping errors occur. Employees might be inputting their hours incorrectly, or putting in too many or too few hours. This is why it's so important to have automated payroll processing. This can help to ensure that the hours that your employees are inputting coincide with the other payroll information in your account.
When operating a cannabis business, organization is key. Keeping all your financials straight can make or break your growth as a business. But what happens when you're careful about all the issues mentioned above and you're still experiencing problems with your books?
It's time to partner with a PEO that understands the struggles that cannabis businesses face. Working with partners who understand the industry and have experience working in it will provide you with a better experience and help you achieve the growth you're looking for.
At Teamployer, we are here to help you with your back-office needs so you can grow faster, reduce financial risks, and save money where it counts. Contact us to learn more about the services we offer.