Common Mistakes Cannabis Organizations Make In Setting Up Their Finance and Accounting

Editor’s note: This editorial was contributed by Michael Gould, an accounting and finance placement executive at Higher Growth Search.

At the heart of any successful business is a strong accounting and finance team to ensure the money side of the enterprise stands up to regulatory scrutiny and puts the company in the best position to be profitable. That certainly holds true for cannabis businesses, where the importance is accentuated by the industry’s unique and evolving challenges those companies face.

There remains a stunning lack of financial transparency in cannabis due to its federal illegality and compliance costs. Access to basic financial services such as business bank accounts remains difficult because many institutions want nothing to do with cannabis accounts that can’t be FDIC insured. Cannabis operators are therefore forced to handle large amounts of cash, which drastically increases the chance of accounting errors or outright fraud. Similarly, those same banking concerns make it difficult for cannabis companies to borrow money. Restrictive tax laws and the higher probability of an audit only add to the challenges.

I routinely come across owners, managers, and supervisors who appear to treat the financial side of the business as an afterthought as they rush to get their plants to harvest or product out the door. This focused outlook creates numerous vulnerabilities, from improper tax filings and reporting to payroll issues. Ignoring such problems doesn’t make them go away.

As a result, cannabis accountants often find themselves in an uncertain environment where it is extremely difficult to know standard costs like overhead and day-to-day expenditures due to lack of policies, neglected journal entries and reporting. There is no process of making sure that everything is in alignment and there are unknown compliance costs due to cannabis industry changes, lack of owner foresight and unexpected compliance fees. Luckily, there are accountants that thrive in cleaning up messy financials and reconciling the general ledger and bank accounts so your P&L is an accurate reflection of your business. Where do you find them?

Hiring Properly

One of the most common mistakes cannabis organizations make is hiring the wrong people. As the restrictions and potential pitfalls noted above indicate, the need for quality employees with cannabis industry savvy and regulatory knowledge cannot be overstated when it comes to finance. The industry struggles because many businesses rely on unqualified staff to handle their accounting and finance duties. This is often because the owners themselves don’t completely understand the financial regulatory complexities that will impact their accounting team.

It can also be very difficult to find qualified people who can properly handle the financial aspects of a cannabis business. Intense—and fluid—state regulations make it tough on accountants who must keep up with changing laws and unique restrictions. Smaller operators may focus on staying out of regulatory hot water by only caring about their tax obligations. However, 280E tax compliance is better addressed on a daily basis with knowledgeable staff, than having a CPA firm make sense of it during a busy tax season. It’s important to recognize that hiring a dedicated fiduciary is a part of maintaining stability and setting up for successful expansion.

Undervaluing the Right People

Another mistake I see across the industry is that when cannabis companies do find the right individuals to fill finance roles, those individuals are undervalued. Often they are not paid fairly or compensated well because management does not understand the complexities of cannabis accounting, which require a high level of skill and knowledge to remain in compliance.

Also, cannabis accountants or financial experts also do not always receive the necessary tools—such as advanced accounting software—to do the job well. They tend to be overworked and operate at a disadvantage to traditional industry accountants because popular accounting systems like Quickbooks do not offer seed-to-sale product tracking nor the ability to track the various taxes involved. Most legal states also require separate tracking software that can be difficult to use and does not interact well with separate cannabis or accounting software.

How Operators Can Set Up For Success

Even if a business is not set up properly for transparent financial oversight, it is possible to right the ship and change course. Owners must understand the need to forge a strong foundation, regardless of how long they have been in business. They should clearly identify what skills and experience they need to hire for, write a good job description and understand what is considered fair compensation for the role. Owners can then proceed to a rapid recruiting and hiring schedule. Working with a recruiting and staffing partner with industry expertise can often expedite the process. Competition for top candidates is fierce, so if a strong candidate is identified, they should be hired and not lost to a competitor due to a slow process or the urge to shop around for someone who might be better.

Owners and operators should carefully communicate the goals of their company and how they are structuring or restructuring the business. Why would a candidate want to work for you? Communicate the company mission statement on job postings, and share company goals in interviews and with anyone assisting with the recruiting process. Strong and honest communication can go a long way toward attracting the right candidates to cannabis roles. Target professionals from industries like wine and consumer packaged goods to bring their understanding of how a solid business structure, policies, and procedures can transfer to the cannabis industry.

Financial professionals work best in organized environments, or in environments where leadership gives them the autonomy to get organized by identifying and creating policies and procedures that increase reporting accuracy and reduce material weaknesses. The cannabis industry is rapidly growing, and it’s exciting to see the “cash counters” of the past being replaced with talented accounting and finance professionals that provide the necessary financial data for strategic business decisions.