Imagine running a multimillion-dollar business on the envelope system.
You have a vault or safe at your facility containing one envelope stuffed with bills for payroll, one for rent and another for inventory purchases.
Imagine the person running this envelope system is a 20-something budtender.
Could you rest easy and ignore the strong possibility of theft, fraud and federal money laundering charges associated with mishandling cash?
Doubtful, but cannabis owners don’t really have a choice.
Because cannabis remains federally illegal, most banks won’t touch marijuana-based businesses.
This means cannabis companies must operate only with cash.
To add to the chaos, most customers must pay in cash because it’s illegal to use major credit cards to purchase marijuana products.
These cash-only rules result in various issues, ranging from the accounting team struggling with managing accounts payable to robbery and fraud.
While you can’t solve the cash problems in the industry, you can mitigate the liability by understanding industry challenges and hiring qualified help to navigate them.
Why cash only is such a problem
Cannabis retailers face cash-related difficulties such as vendor tensions, cash divergence, major accounting headaches, payroll issues and more.
Cultivators also experience the increased potential for robberies at grow operations and personal residences of business owners and employees.
Additionally, meeting the IRS’ requirements for large cash deposits is complicated.
You must report every cash receipt of $10,000 or more on Form 8300. If you’re late or inaccurate, you’ll pay penalties. That’s on top of the heap of taxes you’ll pay.
SAFE banking is not the answer any time soon
Some cannabis CEOs and accountants see the SAFE Banking Act as a potential solution.
The Secure and Fair Enforcement (SAFE) Banking Act was crafted to provide more protection to banks willing to serve cannabis companies.
February 2022 marked the sixth attempt at running the SAFE Act through the House. This time, it was attached to the America COMPETES Act, but the U.S. Senate removed the SAFE Act from the measure.
Nonetheless, many people working in cannabis (CEOs and accountants alike) believe that the SAFE Banking Act is the light switch that will effectively turn on banking for all cannabis-related businesses (CRBs).
They believe the act will allow any CRB to run out and secure a bank account with large national banks.
Sadly, this is not the case.
Even if SAFE banking were to eventually become law, there would still be a long period before cannabis companies could open accounts with big banks such as Chase or Wells Fargo.
Also, until cannabis is federally legal, there will still be cash-related issues because of predominantly cash sales in the industry.
The best option is not to hold out for SAFE to pass.
The smart move is to rely on proven cannabis accounting practices provided by a trusted professional.
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A cannabis accountant as a solution
Managing cash controls and cannabis accounting yourself will only lead to overpaying taxes and potentially accruing thousands in penalties.
Hire a trained cannabis accountant who can implement a complete cash-control system, establish cash standard operating procedures (SOPs), perform daily cash count procedures and maintain a daily cash log.
I’ll go a little more in-depth on the primary accounting services an accountant should provide to keep your company profitable and compliant.
Robust cash-control system
A complete cash-control system is essential for cannabis companies to reduce the risk of theft and loss.
A cannabis accountant should implement the following cash controls:
- Daily cash counts.
- Cash logs and appointing someone reliable to review these logs.
- Procedures for missing cash.
- Vault logs.
When possible, an accountant should also help you implement banking with an organization that serves cannabis companies.
Because of inherent banking problems, setting up an account can be a long and complicated process.
You’ll be glad to have an accountant conduct proper reporting and follow-up to complete the process promptly.
Accounts payable in a cash-based company can be a nightmare.
You deal with bookkeeping errors, double payments, missed payments and angry vendors.
The accounting professional you hire should practice due diligence in tracking invoices and all cash payments.
A service provider will also oversee that all cash paid upon delivery is signed off on by proper store personnel and that the transaction is tracked and managed.
Your provider should also flag invoice changes and establish processes to guarantee both the vendor and reseller are notified and agree to the change.
This proactive SOP prevents either party from feeling shorted or hunting for the remaining balance three months later.
Your accountant should also ensure partial payments are not overpaid or ignored and should enact a payment terms process to keep vendors paid on time.
Cannabis-focused insurance coverage
Although almost all companies need insurance, having proper insurance coverage is especially important to prevent risk in a cash-only business.
The problem is that most insurance companies cover cannabis but not all insurance companies cover cash.
Rely on a professional trained in your state’s cannabis regulations and rules to help you choose the best insurance agency.
Most importantly, you’ll want optimum coverage for employees transporting cash to vendors or the taxing authority and the cash-delivery vehicle.
Naomi Granger is founder of the National Association of Cannabis Accounting and Tax Professionals. She can be reached at firstname.lastname@example.org.
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