How social equity applicants can use tax and cash planning to prepare for 280e, improve cash flow, and become more profitable
It is extremely difficult to run a profitable cannabis company. In large part, this is because of 280E, which is a section in the Internal Revenue Tax Code that has been the thorn in the side of the cannabis industry since states legalized (as I’ll further explain below). But 280E alone is not the issue.
Federally legal hemp companies and non-plant touching companies struggle with profitability. The problem is the lack of short- and long-term financial planning.
So what is 280E? How do you create a financial plan when you do not have a finance background? What do these things have to do with each other?
In short, 280E is a section of the IRS tax code that says companies involved with the trade of federally scheduled I & II drugs cannot receive tax deductions and tax credits. If you are running a federally illegal company, you must pay taxes on total gross sales and not total profit. Check out more info on 280E and how to navigate it here
Lack of planning downfalls
If the country shuts down again, how long will the cash you have now last?
Do you know how much cash on hand you expect to have next month?
Do you have the budget to add a new employee? Will you still be profitable each month if you hire them?
Financial planning gives you clarity into these answers. Without it, you risk the following downfalls, which are experienced by many businesses and often lead to closed doors:
- You are always in crisis mode because you are not prepared for when things go south, and unforeseen mishaps occur. Obstacles are inevitable.
- You cannot reach a goal that your company hasn’t set.
- Expenses are not covered timely, from payroll to taxes.
- Adjusting to the market and external business environment becomes a significantly harder challenge.
- It is harder to take advantage of free cash flow (the cash you have available after all operating and financing responsibilities are paid for).
- You miss out on the ability to compare your performance against predetermined measurements to identify areas of strengths or areas that need improvement.
The solution is cash flow forecasting, setting taxes aside, and a proper accounting setup
A weekly or monthly cash flow forecast will drastically increase your ability to foresee negative cash balances before they happen, allowing you to make the necessary adjustments to prevent them. The idea of a weekly cash flow forecast sounds good, but there are important factors to consider in order to make a useful forecast.
The keys to a useful cash flow forecast are:
- Accurate accounting records
- Understanding of current market and business environment
- Analysis of how long it takes for customers to pay invoices (less important for retail dispensaries)
- Accurate recording and consideration of due dates for bills and expenses
- Create weekly, monthly, and annual forecasts
Benefits of a weekly cash flow forecast
We’ve discussed how a cash flow can help prevent negative cash balances, but another major benefit of cash flow forecasting is using it to understand the growth potential for your company. Do you have excess cash each week? Are you making enough profits each month that will allow for another dispensary location, another employee, another grow facility?
A cash flow forecast can save your business and keep it afloat during downtimes. It can also help you thrive and grow. In cannabis, it can help you operate correctly and make sure taxes and all compliance-related expenses always taken care of. It is a key to cash management.
Strategize and set aside taxes daily, weekly at minimum
From setting aside the taxes from each sale to following a year-round strategy, taxes should be a part of cash flow planning. One method to assure taxes are thoughtfully planned for is to obtain a separate vault or bank account strictly for taxes. The goal is to quickly put it away and not touch it to avoid the temptation to spend and rob Peter to pay Paul. You get the idea.
A strategic tax plan can guide you as a roadmap throughout the year. It is best to regularly review your plan throughout the year because situations change. Consider these strategies to draw up ideas:
- Consider setting up a non-cannabis entity
- Consider setting up a cannabis IP entity
- Deduct real estate depreciation & utility expenses
- Understand what COGS are (& deduct them)
The foundation of it all begins with good accounting setup
Accounting is the foundation for cash flow planning as well as tax planning (280e included). A proper setup greatly improves the accuracy and organization of all these different types of information.
Bonus: Pricing and Cost
Improving prices and costs directly impact profitability and ultimately increase the cash in your pocket. Prices shouldn’t change too frequently but should be routinely compared to the cost of each item or service sold. I recommend performing a cost assessment for multiple reasons:
- To understand the profit margins for each product or service
- To keep costs within a specific range. If costs surpass this range, it should draw a red flag causing prices to be reviewed.
- To create and stay under budget
- To get rid of unnecessary and unproductive costs
Cash flow forecasting and planning can be the key to not only keeping your doors open but also reaching every goal you’ve imagined for your company.
Learn more ways to better manage your cash and create a foolproof plan at our blog here.
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