Challenges In Accounting In The Cannabis Industry: How Outsourced Accounting Can Help
During an era of widespread legalization, there has never been a better time to get into the cannabis industry. Even in the midst of a global pandemic, cannabis has proven itself to be a shockingly stable and lucrative industry.
Over the past decade, massive strides have been made in the legalization of growing and selling cannabis. Medical usage is now legal in over 35 states, and the use and sale of recreational cannabis is now legal in 19 states and Washington, D.C.
But, like with any highly-regulated industry, there are complex and unexpected challenges that must be dealt with in order to find success. From changes in regulation to difficulties with banking, here is everything you need to know about accounting in the cannabis industry.
Accounting Issues In The Cannabis Industry
Cannabis growers and distributors face a number of financial hurdles when it comes to starting and operating their businesses. From the stigma surrounding cannabis businesses to legal and regulatory changes, let’s take a deeper look at six of the most common issues your business may face.
1. Operating With Cash
Because of the inconsistencies between federal and state cannabis legalization, many companies may struggle to find a federally regulated bank that will allow them to open a business account. While several acts (including the SAFE Banking Act which is currently being reviewed by legislators) have been introduced, none have been passed as of September 2021.
While some state-operated banks and credit unions offer accounts to cannabis businesses, the reporting and regulation involved has forced an estimated 70% of businesses to opt for all-cash operations. For many companies, this leads to a less accurate understanding of their financial status (in comparison to accrual accounting) and an inability to achieve financial stability and growth long-term.
2. Security, Theft, And Fraud
With cash-based accounting in the cannabis industry comes a slew of other financial and logistical issues. In a financial world focused on digital security, cash-based operations open themselves up to a higher chance of theft, fraud, and lost or misallocated funds.
Businesses also need to improve their physical security in any area where large amounts of cash are stored or handled. And, even when using digital accounting software, operating with cash can increase the overall likelihood of accounting errors.
3. Payroll & Hiring
Running a cash-based cannabis business can also cause difficulty hiring and managing payroll, as cash is not a convenient option for many employees. Some may even feel unsafe or uncomfortable carrying a large amount of money until they are able to deposit it.
Furthermore, you’ll need to spend time each pay period counting out your payroll by hand, making change, and double-checking every amount – a significantly longer process than printing checks or opting for direct deposit.
4. Increased Chance Of Auditing
The IRS has targeted cannabis businesses for auditing over the past few years because of the increased amount of unpaid taxes they statistically owe. An audit can be a devastating blow to any company, as it is incredibly time-consuming to gather and review all of your financial documents from the year, including receipts, invoices, and more.
An audit can put a business behind financially, even if the results show that their original tax assessment was correct. Since cannabis businesses are at an increased risk of auditing, it is crucial to maintain accurate, detailed financial records so you’re prepared if and when the time comes. When it comes to accounting in the cannabis industry, you can never be too thorough or too prepared.
5. Reporting Issues
Financial reporting can be especially difficult for cannabis businesses for a number of reasons, including:
- Fluctuations in market price throughout the reporting period
- State differences in fair value
- How harvest dates fall within the reporting period
- Ongoing regulatory changes
- The value/yield of cannabis yet to be harvested
Inaccurate reports can lead to irresponsible business decisions and uninformed investors. In order to get value out of financial reporting, your accountant must have specific expertise and understanding of your cannabis business and the industry as a whole.
6. Limited Valuation & Investment Potential
In addition to day-to-day accounting frustrations, the rules and regulations surrounding cannabis businesses can also limit their long-term success and growth. For one, investing in such a young industry is seen as too risky for many investors. You’ll need to provide thorough documentation and long-term reporting to show the profits and continued stability of your business.
Even if you are lucky enough to find an interested investor, you may struggle to get an accurate valuation for your business. Just like with financial reporting, fluctuating market prices and regulatory changes can make it difficult to know exactly what your business is worth.
Outsourced Accounting For Cannabis Businesses
It can be difficult to find and hire a trusted, experienced in-house accountant for your cannabis business. This is one of the many reasons for the growth in popularity of outsourced accounting in the cannabis industry. Here are the four major reasons that cannabis growers, dispensaries, and related businesses opt for outsourced accounting.
1. Work With A Specialist You Trust
The cannabis industry is still in its infancy, which means that very few CPAs have the experience and expertise to successfully meet your financial needs. At the start of the cannabis boom, we immediately recognized the need for outsourced accounting in such a rapidly growing industry. Since then, we have partnered with dozens of cannabis businesses to simplify and innovate their bookkeeping processes.
2. Save Your Business Time & Money
The cannabis industry is constantly fluctuating, meaning that paying for an in-house accountant will cost you, even when there is no work to be done. When you opt to partner with an outsourced accounting firm, you only pay for the hours you need. Get the support you need when business is booming without paying for unused hours when activity is slow.
3. Get Access To Advanced Financial Tech
Many companies use outdated financial tech because it appears to be working, but don’t realize the software (and savings) they’re missing out on.
In addition to saving you money hourly, outsourced accounting firms have access to the latest and greatest financial software, programs, and tools to help automate your company’s needs. And, you won’t waste time internally trying to research and learn the best programs for your business.
4. Reduce Fraud And Misallocation
Having a trusted, third-party accountant complete your accounting in the cannabis industry is one of the best ways to identify and reduce fraud and financial mismanagement. Because these accounting experts look at financial statements every day, they’re more likely to identify inconsistencies and errors earlier and avoid disaster for your business.