Despite the fact that the space is still maturing, the legal marijuana industry has captivated many high-profile cannabis angel investors. Several platforms focused on funding these operations have been on the rise, and as Silicon Valley founders focus their efforts on helping these operations obtain funding, we’ve seen an increase in the number of angel investors willing to take a chance on cannabis.
Even as the marijuana space continues its expansion, acquiring cannabis angel investor funding for cannabusiness startups and established cannacompanies isn’t the easiest task. However, the investors are there if you have a cannabis operation worth funding.
Keep reading to learn more about cannabis angel investors and what to expect on your journey to acquire funding.
What are Cannabis Angel Investors?
Cannabis angel investors are high net worth individuals who are willing to invest in the cannabis industry. These angel investors have access to capital and are well-connected within their network.
Generally, these investors fund cannabis projects that they believe will benefit society via social justice or scientific breakthroughs.
In the past, these angel investors focused on funding tech companies in Silicon Valley. Now, they’re putting their focus towards cannabusinesses and scientific breakthroughs in the cannabis space.
However, it’s important to note that some angel investors have a specific interest in medicinal marijuana projects while others invest solely in recreational weed projects.
Cannabis Angel Investors Vs Venture Capitalists
Although there are many similarities between cannabis angel investors and venture capitalists, there are some distinctions between the two.
For starters, not every cannabis angel investor will follow the path of a traditional venture capitalist. Just because these investors have funded tech startups in Silicon Valley doesn’t mean they’re willing to do it again for cannabis-related projects.
The reason why many startup founders struggle to find these angel investors is because they’re looking for a traditional venture capitalist rather than an angel investor.
In the same way that you would seek out a venture capitalist for your startup, you can also find cannabis angel investors who are willing to fund cannabusinesses as well as scientific breakthroughs in the space.
How do cannabis angel investors find dispensary investment opportunities?
Dispensary investment opportunities aren’t always so easy to find; sometimes, it takes actual legwork to find these opportunities.
It’s important to remember that the cannabis industry is still young, which means there are limited investment opportunities to choose from.
However, as more cannabusinesses continue to launch and states vote on whether or not recreational marijuana should be legal, we can expect a greater number of quality investment opportunities.
In order to find dispensary investment opportunities, cannabis angel investors may join industry networking events and attend cannabis conferences.
Here, they can meet with like-minded cannabusinesses looking for funding as well as other cannabis angel investors who are interested in funding comparable operations.
Are there hemp investors looking to invest in hemp grow operations?
Hemp investors are beginning to take notice of the potential for cannabusinesses that focus on both hemp and marijuana.
With growing support for the legalization of both hemp and cannabis, many investors are looking towards investing in these two cash crops as a means of diversifying their portfolios.
As with any industry, there will always be some risk involved. However, as more states vote on the legalization of both hemp and cannabis, those risks will decrease as time passes. Hemp and hemp products are actually now federally legal with the introduction of the 2018 Hemp Farm Bill.
In addition to diversifying their portfolios, many investors are looking at cannabis as a potential means of providing alternative medicine for consumers.
How to Find Cannabis Angel Investors
If you’re looking for funding to launch your cannabusiness or fund your cutting-edge scientific research in the cannabis space, finding cannabis angel investors should be one of your top priorities.
Networking events, conferences, and other forms of industry networking can help you find those investors.
While there are many benefits to networking within an already established industry, it’s important that you know many cannabis angel investors are seeking out cannabusinesses and projects that will benefit society via social justice or scientific breakthroughs rather than just profits.
It’s important to remember that not every cannabis angel investor will be interested in funding your cannabusiness or scientific breakthrough.
However, as more states continue to vote on the legalization of both hemp and marijuana, we can expect a greater number of quality investment opportunities that attract cannabis angel investors.
What do cannabis angel investors look for in a cannabusiness?
In order to attract the attention of cannabis angel investors, it’s important that your cannabusiness has strong leadership and a strong investor presentation.
In addition to providing information on your business plan and its goals, your presentation should also include projected values as well as what you believe will set it apart from the competition.
It’s also important that you understand what cannabis angel investors are looking for in cannabusiness startups and applicants. This will give you insight into who is the right angel investor for your pitch.
Like any industry, we can expect there to be some risk involved when it comes to investing in new ideas and startups. However, as more states continue to vote on legalization, those risks will decrease.
Cannabis angel investors are interested in cannabusinesses that have strong leadership teams with backgrounds in marketing, branding, finance, etc., have a market for their products or services, are passionate about the business they are trying to get off the ground, and have clear goals and objectives to get there.
If you meet these qualifications, you may be able to attract cannabis angel investors’ interest. But keep in mind, if you’re looking for an investment in your cannacompany, it’s best to do some research on the investors before pitching them. In some cases, while you might acquire the funding you need, you might not find the right investor for your company.
Benefits of Working with Cannabis Angel Investors
Working with cannabis angel investors isn’t always easy for cannabusinesses, especially when it comes to acquiring the funding needed. However, there are many benefits to working with cannabis angel investors in the process of starting your cannabusiness or in acquiring funding for expansion.
One of the key benefits that come to mind is that cannabis angel investors typically offer more money than banks and other lending institutions.
Another benefit is that these angel investors may offer the owners the freedom they need to run their business without too much interference. This can be very beneficial for cannabusinesses seeking funding for expansion because it gives them the ability to grow into new markets without having their growth curbed by outside forces that don’t have the company’s best interests in mind.
This can be especially important for cannabusinesses looking to enter new markets which are still viewed by some as less than reputable. For example, California cannabis businesses are finding it easier to expand into other states despite being on opposite ends of the legalization debate.
There are also tax benefits that cannabis angel investors can provide cannabusinesses beyond the ability to secure funding.
Also, keep in mind, if your angel investor has connections throughout the cannabis industry, this can be beneficial for your operation. For example, if your business makes edibles and the investor already has connections at dispensaries throughout the state, it may be as simple as making a few phone calls and sending a few emails to get your products into the dispensaries.
Downsides of Working with Marijuana Angel Investors
When it comes to working with these angel investors, there are particular benefits and risks associated with such partnerships. While some of the advantages may seem ideal for many cannabusinesses, be mindful of what you’re agreeing to before signing any contracts.
For example, cannabis angel investors may hold a certain percentage of equity in your business and want to be able to influence the decisions you make. However, if there’s a disagreement on how your cannabusiness should be run or what markets you should explore next, it could be the destruction of the working relationship between you and your investor.
Angel investors also typically have a lot of money that they’re willing to invest in your cannabusiness. However, this can lead to problems if you want to acquire additional funding from other investors in the future.
How to Make Your Business Attractive to Cannabis Angel Investors
Angel investors want to see that the cannabusinesses they are investing in will be strong enough to withstand future changes related to cannabis legalization. Keep this in mind when putting together your pitch for funding.
Also, it’s important not to underestimate what you’re asking of these investors. Even if you’re looking for a relatively small amount of money, having an informed plan for how that capital will be used can help you to secure the funding you need.
Angel investors are positioning themselves within the cannabis industry. Some may want to support start-up cannabusinesses while others are looking for established companies to invest in.
These investors are usually looking for cannabusinesses with an existing customer base or products that have already been tested on a limited scale.
Working together, cannabis angel investors can be an attractive alternative for many cannabusiness owners who are seeking funds outside of banks and traditional lending institutions. With this understanding, ganjapreneurs should first do their best to research any potential investor before asking them for money or giving up equity in their company.
4 Signs You Have Found Good Cannabis Angel Investors
Although cannabis angel investors come in all shapes and sizes, there are a few signs that you’ve found some high-net-worth individuals who want to help your cannabusiness grow. These are the four most important traits of an ideal investor:
1. They Know What You & Your Company Need
Angel investors are usually experienced business people with multiple successes under their belt. They also typically have the ability to spot cannabusinesses that could benefit from their involvement and financial support.
Naturally, they want to make sure you share this same vision for your cannabusiness. Your goal is to present yourself as an individual or company that can utilize its funds in a way that advances the goals of the investor.
2. They Want Your Cannabusiness to Thrive
Although some cannabis angel investors simply want to invest in your business because of the promise it holds for future returns, others may be looking at how you can improve upon an existing product or service within the industry.
In either case, it’s important that you’re able to clearly communicate what your cannabusiness can offer in return for the funding that’s being provided.
3. They’ve Made Similar Investments Before
Obviously, it’s beneficial when you’re working with an angel investor who has actively made investments in cannabusinesses similar to yours in the past. This familiarity with how you operate will help them to feel more secure about their decision to invest in your business.
4. They Trust You
Finally, many cannabis angel investors are looking for people or companies they can trust. As such, make sure that they have a clear understanding of where you stand on important issues and why they should consider partnering with you rather than another individual or company within the same industry.
In addition to establishing yourself as a trustworthy person, it’s important that you’re able to demonstrate a high level of professionalism as well as an understanding of how their money will be spent.
How Can Cannabis Angel Investors Help Your Business?
The best cannabis angel investors can provide cannabusinesses with a combination of funding, guidance, and industry connections. As such, there are several ways they can help your business in particular:
Angel investors can provide vital capital for cannabusinesses at the beginning stages. This initial injection of capital is often necessary in order to get these businesses off the ground. Once cannabusinesses are up and running, many angel investors will continue to support the companies they invest in by providing recurring funds or simply helping them grow via strategic advice.
Cannabis angel investors usually have a good deal of experience in the industry and know what it takes to get a cannabusiness up and running. They also understand the ins and outs of various business models which can help them to provide valuable advice regarding how your cannabusiness should grow over time.
Angel investors within the cannabis space typically have existing relationships with bankers, lawyers, and other cannabusiness professionals who are essential when it comes to helping these companies make important decisions when necessary. The right connections can also be extremely beneficial for opening up new markets when you’re ready to sell your product or service outside of your home state.
Tips to Maintain a Positive Relationship with Cannabis Angel Investors
You’ll always want to keep your cannabis angel investors apprised of the latest developments within your cannabusiness. As such, make sure to communicate regularly with them regarding important information which could affect their investment in you or your business.
This includes providing detailed financial reports on a regular basis as well as keeping them up-to-date on how you’re spending their money and what type of progress has been made toward long-term goals.
On top of this, it’s important that you’re able to provide your angel investors with an idea of when they can expect to see returns on their investments. Even if these returns aren’t immediate, having this information available will demonstrate your ability to run a successful business and be very likely to gain additional investments from these individuals in the future.
If you’re confident that your company will be able to establish long-term success within the cannabis industry, then it’s beneficial to find the right investors who share this vision. Then, it’s time to help them to see what type of impact they can have on your business throughout its lifecycle.
Angel investors typically don’t want a large amount of control over how you run your business. However, establishing a good relationship with them still requires good communication and transparency. This is how you’ll ensure both parties can be confident about their decision to partner up for the mutual benefit.
Closing on Cannabis Angel Investors
As you begin to seek out and develop relationships with cannabis angel investors, make sure that you’re realistic about what type of returns they can expect to get on their investments.
Many investors are happy to receive a portion of the profits made by the cannabusinesses they invest in. But others will prefer to remain silent partners who simply want to see these businesses succeed.
However, it’s important that the investors don’t feel like they’re getting ripped off or taken advantage of. If this is how they feel, it could result in them withdrawing from your operation.
If you’re looking for help preparing your company for an investment acquisition, contact us now to speak with one of our experts. We’re ready to organize your books and provide the right insights to ensure your operation appeals to investors.
Accounting for cannabis inventory is essential for dispensary owners and retailers alike. This, of course, involves an effective and efficient POS system that offers costing methods for appropriate inventory valuation and management.
But what does accounting for cannabis inventory entail, exactly?
In this post, we discuss the 280E loophole, inventory valuation for a compliant inventory system, and cost of goods sold optimization.
What is the 280E Loophole?
If you’re in the cannabis industry, you’ve likely heard about the 280E loophole. 280E excludes normal business expense deductions from federal taxes for companies operating in the cannabis space.
So, what’s the issue here?
Well, this exclusion limits profits and makes accounting for cannabis inventory more complex than other operations.
With limited access to deductions and credits, some cannabis businesses must deal with an effective tax rate of as much as 80%. It’s easy to see why so many cannabusiness operators are looking for a 280E loophole. But equally important to keep in mind is that many of the Section 280E strategies you might hear about online are as risky as they are aggressive.
Costly infractions can come as a result of incorrectly allocating expenses into cost of goods sold and putting costs to non-plant lines of the operation. Some cannacompanies find themselves wrapped up in litigation over these practices, especially if they do not have a cannabis CPA handling their books on their behalf.
Managing Tax Liability & Attracting Investment
At Northstar, we optimize our clients’ tax positions with a firm understanding of tax laws. This involves improving inventory accounting and finance functions.
We establish consistent methodologies, detailed reports, and documentation to ensure our clients are always ready for an audit. Current cannabis accounting practices lead our efforts.
Through this approach, we address the 280E loophole while establishing a solid foundation to support long-term growth. Without this organization and expert accounting practices, tax liability remains high and it’s challenging for cannacompanies to attract investment.
280E Cost of Goods Sold FAQ
Business operators, including cannabis business operators, subject to Section 280E must check Sec. 471 to understand how to properly capitalize inventory and valuation methods, as well as how to allocate expenses and their impact on cost of goods sold. But you might have more questions.
Here’s a list of the most common questions we get asked about 280E cost of goods sold:
What is deductible under 280E?
Under 280E, taxpayers are not allowed to make deductions for a trade or business in which the operations are involved in the trafficking of controlled substances. Since cannabis is still federally prohibited, the IRS does not want to see business deductions that are related to this federally illegal activity.
Can dispensaries deduct expenses?
Section 280E of the Internal Revenue Code does not allow dispensaries to deduct expenses. This is because these operations sell a federally illegal controlled substance. Thus, any expenses that come about in the production, distribution, and sale of cannabis are non-deductible.
Does 280E apply to growers?
Every business involved in touching medical or recreational marijuana and its products throughout the supply chain are subject to 280E. This, of course, includes marijuana growers. While these operations might be operating in a state that has legalized medical or recreational cannabis available, 280E still applies to growers and other cannabis-related businesses because of the definition in place.
Since Internal Revenue Service code section 280E keeps cannabis businesses from taking deductions, depreciation falls under it, as well. For instance, if retail cannabis operations were allowed to deduct depreciation, they’d be able to deduct the depreciation of cash registers, leasehold improvements, shelving and display cases, and other assets.
Accounting for Cannabis Inventory Valuation
For cannabis retail, inventory would be classified into primary, secondary, and tertiary categories. Here’s how this works:
Primary – Products bought to sell in the same form they were purchased. This includes cannabis buds, extractions, and seeds, along with other products.
Secondary – Secondary products would include the products prepared on-site. This can be anything from edibles to pre-rolled joints and concentrates.
Tertiary – Tertiary products would include anything one might use to administer medicinal or recreational cannabis. This could be lighters, THC extraction equipment, pipes, rolling papers, and more.
During inventory valuation accounting for cannabis inventory, we methodically determine the total cost value of all products in stock at any point during the business’s accounting period.
By assigning a dollar value to the goods in stock, we know what a portion of the company’s current assets is worth. This comes in handy when handling financial statements for the operation and encourages better decisions when considering the available funds.
Inventory sold gives the business more cash flow. This allows the company to replenish goods and maintain appropriate stock.
From there, we add the value of all sold inventory and all associated direct costs to get the cost of goods sold. Then, COGS subtracted from the total revenue offers the gross margin.
We track inventory metrics like gross margin because this offers a clearer assessment of the company revenue and how much is available to cover operational costs. This also allows us to explore strategies to increase company revenue as we work to maximize profits.
Inventory Costing Methods for Cannabis Businesses
Unfortunately, there’s no single inventory costing method that will work for every cannabis business. We must identify which solution will work best for the company.
Cloud-based inventory management systems leave a lot to consider. However, with cannabis inventory typically having an expiration date, these three methods usually work best:
FIFO Method (First-in, First-out)
LIFO Method (Last-in, First-out)
WAC Method (Weighted Average Cost)
The first-in, first-out method of inventory valuation considers the items that were first put into inventory as those which will be sold first. Most of the time, we observe this inventory management technique being used in the food industry and other perishable goods sectors.
Through this technique, businesses sell the goods purchased first before selling the newest stock. Thus, this method ensures remaining stock will have the most recently purchased or made goods, which are then accounted for at their purchase cost and give us an idea of the current value of the operation’s inventory.
With this costing method, perishable cannabis goods remain fresh, allowing these operations to minimize waste resulting from spoilage. This also allows cannabis business operators to easily comply with state and local laws that regulate efficient seed-to-sale tracking and rendering of unsold products after expiry unrecognizable.
Since the cannabis industry is impacted by price volatility and the existence of its black market, the FIFO accounting method also gives small operations the ability to report lower COGS and higher net or gross margin by selling order (lower-priced products first followed by higher-priced products found in inventory). But for scaled operations that have higher-volume transactions, FIFO makes accounting for cannabis inventory challenging, which means the business may be better off using a simpler alternative method.
The LIFO method (last-in, first-out) opposes FIFO’s methodology. This involves selling the most recently bought goods first and allowing older goods to stay in inventory for longer. With this method, you increase storage costs, spoilage risks, and the overall cost of goods sold.
However, using the LIFO method of accounting while checking for cannabis inventory has its advantages. It’s good for those looking to reduce their taxes by reporting higher COGS and lower profit margins. This also comes in handy for businesses with a high inventory turnover, looking to avoid higher costs of efficient inventory management, and wastage.
But cannabis businesses rarely use this solution. Since cannabis products are usually quite perishable and can expire before being sold, the LIFO method results in more wastage and losses.
The WAC method (weighted average cost) is the most straightforward method for inventory costing. This method calculates the average value of all inventory in stock. It does not matter when the items were purchased or will be sold. To calculate the weighted average cost per unit, it’s only a matter of determining the total costs of goods in inventory and dividing that number by the total number of units.
High-volume sales and volatile prices make this one of the quickest and most efficient solutions for cannabis. This facilitates inventory management in instances where multiple strains or cannabis flower batches are combined to make edibles or concentrates due to the difficulty of calculating individual item costs. While using the WAV inventory valuation method, it’s crucial to consider seed-to-sale tracking to maintain compliance.
Cost of Goods Sold Optimization
The first thing we recommend for our clients is to consider setting up Inventory Control Standard Operating Procedures (SOPs). Initially, this will involve checking to ensure there’s enough inventory in stock to satisfy the demand. However, it’s crucial to avoid tying up too much money in your stock.
The following are the SOPs we like to put in place for our clients:
Purchasing Cannabis Inventory SOPs
Every week, the person in charge of purchasing must check each product to determine which ones are low in stock. Then, they order a month of supplies. Checking important inventory indicators should be included in this process to determine which products to order. If the products are aging or expiring, they should not be purchased. Or, those product purchases should be lessened significantly to minimize waste.
Consider the following for products that must be purchased each month:
Lead time – Lead time shows how long it takes to receive the items in stock from the time the purchase order is placed.
Safety – Safety described the absolute minimum number of days of stock for a specific product you’d like to have on hand.
Projected monthly sales 30 – You’ll take your current inventory and multiply it by 30, then divide that number by your projected monthly sales. If this number does not equal or exceed the sum of lead time and safety, you’ll need to place a new order.
Purchase budget – Your purchase budget equals ending inventory (safety x projected monthly sales/30) + projected monthly sales – current stock on hand
Receiving Cannabis Inventory SOPs
For receiving inventory, you’ll need to:
Ensure that the amount and final price of the inventory being received matches the purchase order, stock receipt, and bill.
Account for the stock and check the documentation to determine that the amount received is properly documented.
Check the quality of each item to ensure they’re ready to be sold.
Cannabis Storage & Control SOPs
Cannabis product storage is essential for this space. These products must be stored safely and with the right temperatures to ensure freshness. This is where a regular cycle account comes in handy.
Each type of product should have an established cycle count. This establishes whether you’re experiencing a loss in inventory.
Poor inventory management policies typically contribute to inventory losses. For example, if your inventory is lost, stolen, or expiring constantly.
For cannabis storage and control purposes, you’ll have a team member perform a blind count of all inventory. Each product’s stock should be documented.
Inspections of the products is equally crucial. This involves checking to see which products will expire the soonest. These products should be the first to sell. Any products that are expired should be tossed and marked as a loss. Discrepancies should be reconciled and documented as a loss using the online inventory system in place.
Cycle counts should happen weekly. A KPI should also be in place to ensure inventory discrepancy remains less than 1%.
Security is equally important for cannabusinesses. Most of the time, security and cameras are enough to prevent theft. But if an operation needs to take additional precautions, having all staff sign a theft policy outlining what happens to people who steal can also discourage theft. Give your team the right to anonymously report theft, as well.
Cannabis Inventory Aging SOPs
We recommend doing an analysis of cannabis inventory aging weekly. A lot of the time, cannabis business operators will find part of their inventory is aged beyond 60 days. This means cash is tied up in inventory, and this isn’t reflected in the Profit/Loss statement but is in the Balance Sheet.
An inventory aging report will help to diagnose inventory issues. If the products are 60 days or older or close to their expiration date, they should be discounted to speed up the sales. If products aren’t selling fast enough, they should be removed from the inventory and the next order should request less.
Here’s a list of strategies we recommend for eliminating aging inventory:
Offer discounts on aging inventory – This strategy should involve gradually discounting products to ensure they’re not a complete loss. For instance, products one month old can have a 20% discount and products 2 months old can have a 40% discount. The discounts should be more enticing as the products grow nearer to their expiration dates.
Adjust the location of aging products – Repositioning your aging products to ensure more visibility can help them get sold before they expire. Try having them in a few different places throughout the operation. Many businesses will put these items at the register for an easy grab.
Plan a sales event – Planning a flash sale event can help move aging products rapidly. These sales encourage quick sales through urgency, which can result in customers buying products that they might not have thought of trying in the past.
Discount aging products – This strategy works, but it’s important to discount gradually.
Offer items for free – Free cannabis products encourage customers to buy products, too. So, while you might be giving your products away for free, some customers will outright purchase other products during their visit. Keep in mind, this will not work in states that don’t allow businesses to give away cannabis products.
Closing on Accounting for Cannabis Inventory
Inventory accounting is a crucial part of managing any cannabis operation. The right tools and technologies should be used to ensure you’re having accurate estimations on all inventory levels, as well as aging reports that signify what’s been sold and the money made from the sales.
At Northstar, we’ll help your operation succeed while accounting for cannabis inventory. Contact us now to learn how we’ll scale your operation’s profits with proper inventory management SOPs and practices paired with financial services.
Looking for cannabiz accounting advice to expand your share of the legal cannabis industry? You’re not alone!
As the cannabis market matures, cannabusinesses are looking for ways to streamline their accounting processes, stay on top of changing regulations, and plan for the future. This is where our cannabis CPAs provide value.
In this article, we’ll touch upon some of the most common accounting issues these operations face and provide some cannabis industry-specific accounting advice for 2022 and beyond. You’ll also learn how we scale cannabis companies with data-driven insights.
Keep reading for the insight you need to grow your operation in this budding space.
Looking for a reliable cannabis CPA experienced in this growing industry? Northstar is ready to lead the way!
Contact us now to speak with one of our expert CPAs about how we can scale your cannabis company with the right financial services.
The Challenge for Cannabis Businesses
It’s all too common that businesses in this budding space receive breaking news from the local regulatory authority. Without the right accounting experts handling everything from calculating cost of goods sold (COGS) to setting up payroll, it can be difficult to stay compliant and keep these businesses afloat.
280E makes deductions complicated, which, in the case of such trade as cannabis, these operations can use all of the tax cuts they can get. The coronavirus pandemic has not made these businesses’ financial activities any easier, despite the fact that these companies were deemed “essential,” raking in millions in taxes for some states.
The cost of doing business in the cannabis space is limited access to banking, higher taxes for such trade than comparable operations in other industries, and a federal government that refuses to allow tax breaks for these companies. And let’s not forget about the ever-changing regulatory guidance from local and state authorities.
But Do Generalized Accountants Work for Cannabusinesses?
We strongly advise against working with accountants and other tax professionals who do not specialize in serving the cannabis industry. While these accountants may know the tax requirements to provide guidance for some operations, they usually lack the knowledge cannabis-focused accountants and CPAs have.
Simple GAAP guidance and general tax and banking knowledge is not enough to handle compliance liability; this is a big issue, and as many of our clients have experienced, it’s a challenge to account for all aspects of a scaled marijuana company come tax season.
General accountants and CPAs can work with the basics of accounting. But cannabis, at least in this country, is a more demanding field.
The formerly illegal drug is now allowed in most states. But it’s still illegal federally. This means paying taxes and remaining compliant is especially challenging, especially when operating a primarily – sometimes totally – cash business.
Constantly updating one’s knowledge about the industry’s ever-changing regulations is crucial for accountants interested in helping ganjapreneurs.
Whether a startup or large company employing hundreds (or thousands) of people, a fractional cannabis CFO or specialized firm full of expert accountants is vital to your organization.
Other Cannabis-Specific Accounting Issues to Consider
The Controlled Substances Act (CSA) still places cannabis in the same Schedule I classification it held since 1970, despite overwhelming public support for decriminalization. This is an obstacle to cannabusinesses looking for loans and bank accounts.
But it doesn’t stop them from growing their businesses. In fact, a majority of states have legalized medical marijuana, with many also allowing residents to grow their own cannabis for medicinal or recreational use.
Recreational marijuana has been legalized in nine states as well, leading some industry analysts to predict annual U.S. sales will reach $844.28 million by 2026.
That’s a pretty strong incentive for some cannabusinesses to bend the CSA rules. But it also creates challenges when it comes to bookkeeping and accounting.
For one, cannacompanies have to track two separate types of income – those from federally-legal activities and those from state-legal activities. They also have to keep careful track of expenses related to each type of income.
Then there are the ever-changing regulations to keep in mind. The U.S. Tax Code is constantly being updated, providing updates to cannabusinesses in ever-changing regulations. And this is just one example of how the underlying rules change often.
Let’s not forget about the product labeling requirements, which are more stringent than those for food labeling. Security is also a significant issue in the cannabis industry.
Moving Towards Legalization
Moves toward legalization have made the cannabis market quite lucrative for entrepreneurs in 2022 and beyond. But it’s also created a series of accounting challenges faced only by these operations, such as:
Accounting for two types of income
Keeping track of expenses related to each type of income
Tracking costs and profits by state and federally legal activities
Navigating ever-changing legislation at both the federal and state level
To address these challenges, cannabusinesses need a reliable cannabis CPA firm they can trust to provide sound advice on navigating these new waters. The process starts at the beginning of each endeavor, with proper structuring leading the way. But even with the best planning, surprises will undoubtedly arise.
That’s why it’s important to have a CPA who is up-to-date on the latest changes in the cannabis industry. This is how cannabusinesses stay compliant with all applicable regulations.
Accounting Tips Exclusively for the Cannabis Industry
The first step to scaling a cannabusiness is hiring the right accounting team. While it’s possible to handle all financial aspects during the initial phases of a startup, without the right tools and knowledge to grow the operation, it’s incredibly challenging to maintain compliance once the business begins to scale rapidly.
A cannabusiness may have made it through all of the early hurdles. But challenges will definitely arise down the road. This is why it’s so difficult for entrepreneurs to do this type of accounting by themselves. That’s where an experienced team steps in to provide reliable advice on how to get around any potential snafus.
The cannabis industry is unique and ever-changing. That’s why it’s important to have a team of experts who are familiar with the ins and outs of the business. This is the only way to ensure your company remains compliant and profitable in the years to come.
Here’s a list of some valuable insights only CPAs with experience in this space can provide:
Keep Track of Your Expenses
As a cannabis company, it’s important to keep track of your expenses. This is how you’ll stay compliant with all IRS regulations.
Make sure to track all of your business-related expenses, including rent, payroll, and advertising. This information will be vital while handling your taxes.
Even though the Controlled Substances Act makes it challenging – especially for cash-based cannabis operations – to write off expenses, a skilled cannabis CPA will know how to properly structure your operation to guarantee the least liability.
As mentioned earlier, cannabusinesses have to track two types of income – those from federally-legal activities and state-legal activities. Keeping these incomes separate is critical to staying compliant with the IRS.
It’s also important to remember that state-legal income is subject to both federal and state taxes. This can be a complex process, but an experienced cannabis CPA will have the know-how to make sure you’re paying all the necessary taxes.
Be Mindful of Inventory
Inventory is another area that needs to be closely monitored in order to stay compliant with IRS regulations. Security cameras, locks, sign-in sheets, and other cautionary measures are a must at this stage in the process.
There’s a challenge unique to cannabis entrepreneurs when it comes to inventory: what happens when you have a surplus of dried flower? Should you count the excess as inventory until the next crop is ready, or can you write that off immediately?
Inventory tracking is just one of the questions cannabis CPAs are equipped to answer.
Make sure to track the value of your inventory and its average cost per unit. This information will be valuable in calculating your profits and losses at the end of the year.
A cannabis CPA can help you develop a system for tracking inventory that will satisfy the requirements of the IRS. As regulations continue to change, they’ll also be equipped to adjust your system accordingly.
As companies grow, they tend to accumulate more inventory. But it’s important to remember that handling this excess inventory is a taxable event.
Keep It Legal
One of the best ways to remain compliant with IRS regulations is to keep it legal. There are a few different ways you can go about doing this.
For example, if your business is cash-based, you need to make sure that all of your income is properly reported and taxed. The same holds true for any expenses made on behalf of the company; they must be properly tracked and recorded as such.
This means double-entry bookkeeping is a must for cash-based operations. An experienced marijuana CPA will know how to tackle this process and any other necessary tasks on your behalf.
Be Mindful of Your Employees
That might sound counterintuitive, but it’s true. Employees come with their own set of challenges that should always be at the top of their mind.
While you want to make sure every employee is properly trained in security measures, you also need to make sure they’re not claiming more than their fair share on taxes. This means keeping track of all wages, deductions, and other necessary information.
You’ll also need to make sure employees are properly classified for tax purposes. The IRS has a very strict set of guidelines that determine how your workers should be classified – from employees to independent contractors to volunteers, there’s a list of requirements for each category.
It’s important not only to keep track of all of this information but to use it when filing your taxes. A marijuana CPA will know how to handle all of these special cases and can help you stay compliant with the government.
Stay Up-to-Date on Regulations
The cannabis industry is constantly changing, and it’s important to stay up-to-date on the latest state and local regulations and federal law. This can be a daunting task. But our team of marijuana subject matter expert CPAs is here to help you navigate the ever-changing landscape.
Local laws and regulations across state lines are essential considerations for every move our clients make. Regardless of whether it’s a cash business or has cannabis banking services in place, understanding the legal way to operate in this complex landscape can be the difference between a profitable taxable year and getting hit with costly infractions.
Our accounting, tax, and advisory services ensure our clients are compliant with all regulatory demands. We stay up to date on the taxes and bills our clients have, as well as the deductions we can use to minimize liability and maximize profitability.
When you’re ready to expand your business, we’re here to help with licensing acquisition and consulting. We’ll work with you to structure your organization in the most tax-efficient way possible to guarantee the deductions your organization may not obtain elsewhere.
Maintain Accurate Records for Tax Time
At the end of the year, it’s important to calculate your profits and losses in order to file accurate tax returns. This requires a thorough examination of all income and expenses throughout the entire year.
By keeping accurate records from the beginning, you’ll save time and money during tax filing season. An experienced marijuana CPA will help you do just that.
As the cannabis industry grows, it’s important to stay compliant with IRS regulations. This means keeping track of all income and expenses, as well as classifying employees correctly for tax purposes. An experienced marijuana CPA can help you with all of this and more.
Since the cannabis industry is still considered illegal by the federal government, cannabusinesses face a unique accounting challenge that could put them at risk for serious penalties if they fail to meet compliance standards. This includes paying taxes, which are higher than most other industries.
To help navigate these complexities, it’s important to work with a cannabis-experienced CPA who can provide sound advice on how to stay compliant with both state and federal regulations.
At Northstar, we understand the challenges of accounting for a cannabis business. We provide reliable and accurate services to help our clients keep their cannabis company operations compliant.
Incorporate Cloud-Based Software
Cloud-based software provides convenience and efficiency. But keep in mind, the available software is not robust enough to handle the full spectrum of a cannabis business’s compliance demands without input and organization from a cannabis financial professional.
This is why we recommend a multi-pronged solution for our clients. We combine software with excel sheets as part of our process to ensure our clients are well-organized and that all calculations are vetted by our subject matter experts.
The cannabis industry is constantly changing, especially when it comes to taxation and regulation.
Staying on top of local laws, as well as how they change across state lines, can make the difference between a profitable business year and costly infractions. Cloud-based software can offer some solutions to ganjapreneurs. But ultimately, an experienced cannabis accounting and tax professional is still needed to ensure full compliance with IRS regulations.
However, by using cloud-based software, a cannabis business can eliminate the time and resources required to maintain servers and IT professionals. Company employees will also appreciate immediate access to their pay information – no more waiting until payday!
The cloud also makes it easy to integrate with other programs your cannabis business may use, such as QuickBooks and payroll management software.
When it comes time to expand your operations, we’re here to help with licensing and consulting. We’ll work with you to structure your organization in the most tax-efficient way possible.
Northstar has extensive experience providing accurate and reliable bookkeeping and payroll services for cannabis companies. We provide our clients with the tools and expertise they need to stay compliant with federal and state regulations while saving time and money.
Make Sure Your CPA Already Successfully Works with Cannabis Clients
The CPA firm cannabis companies choose to work with should fully understand the nuances involved in accounting for the cannabis space.
While a whole bunch of CPAs may have experience working with companies in this industry, cannabis business owners need a firm with extensive experience working with clients involved in all aspects of the legal marijuana industry. This includes dispensaries, cultivation operations, edibles manufacturers, ancillary services, vaporizer companies, and more.
Simply put, you want someone who lives and breathes the cannabis industry. This person, or firm, should possess knowledge of the law and how it relates to cannabis and taxes, as well as local licensing rules and insight.
As more states legalize, accounting and tax services are becoming increasingly necessary. The cash business operations are making the transition from illegal to legitimate. And a CPA that understands the law and possesses knowledge about how to get banking services while scaling these companies with local tax laws in mind is invaluable.
Join the National Cannabis Industry Association (NCIA)
The National Cannabis Industry Association (NCIA) is the largest and most influential cannabis trade association in the United States.
What Does Membership Entail?
Membership in NCIA provides access to exclusive content, events, and resources like legislative analysis, market data, and best practices from successful cannabis companies.
As a business owner in the ganja space, it’s important to arm yourself with the best information and resources possible. Joining NCIA is a great way to do just that.
Upon becoming a part of the NCIA, cannabusiness operators have access to resources that can help them stay compliant with state and federal regulations. This includes an extensive library of cannabis-related legislation and case law, as well as quarterly updates on changes to regulations.
Cannabis industry professionals are also encouraged to partner with local and state lobbying efforts that affect their business. This, of course, includes those operating accounting and tax services for cannabusinesses.
Attend Networking Events & Conferences
More and more cannabis business expos and networking events are taking place throughout the United States. These are great for learning from other industry professionals, building relationships with potential clients or suppliers, finding new employees, and ensuring the company is current with industry changes.
Many events also include workshops and seminars from industry experts covering everything from growing techniques to the latest regulations. Some larger conferences even have accounting and tax planning professionals giving presentations on how cannacompanies can remain compliant with their state’s and federal-level laws while saving money.
Use Tech to Automate Processes, Reduce Costs, & Streamline Compliance Procedures
Technology can help reduce accounting and tax-related costs for cannabis companies. As touched upon before, cloud-based software, for example, can be used to automate processes and increase productivity.
This technology can also enhance company compliance procedures, removing human error from many tasks. And, as cannabusinesses become more established, they will likely need to devote more time to compliance-related tasks.
Technology can help reduce accounting and tax-related costs for cannabis companies. For instance, some tech can be used to automate processes and increase productivity within a company.
This technology can also enhance company compliance procedures, removing human error from many tasks. And, as cannabusinesses become more established, they will likely need to devote more time to compliance-related tasks.
Technology can help reduce accounting and tax-related costs for cannabis companies. For instance, some tech can be used to automate processes and increase productivity within a company.
High-quality surveillance systems provide documentary evidence of every cannabis product transaction happening within the facility. In turn, this provides needed protection should legal issues arise while fulfilling regulatory demands.
Sensitive areas within these businesses, such as grow facilities or processing labs where cannabis products are made, should be monitored and recorded 24/7.
One use case example would be a design and construction firm for the cannabis industry. This business model could implement a cloud-based construction management software to help them become more efficient and streamlined.
By incorporating this, it would save the operation time and money that would normally be wasted on paperwork while allowing them to focus on their projects.
What Else Should Cannabis Business Operators Know?
As cannabis CPAs ourselves, we speak with many new cannabis entrepreneurs breaking into the industry. These individuals have worked hard to obtain the right licenses, but when it comes down to running their operations, they need assistance.
Does a Business Plan Mean Success?
Having a written business plan doesn’t mean one has everything they need to implement it. In the same way, it is possible to have a legitimate cannabis business at one point but not know how to run it without breaking laws.
This is where professional accounting and tax services can help immensely. We give our clients the knowledge and tools they need to ensure they succeed in their venture while complying with state and federal statutes related to the happy herb.
Cannabis business operators need services to keep their businesses running with compliance leading the way. This is the way to keep their money clean and emphasize
Northstar: Scaling Cannabis Businesses with Data
So, as you can see, there are many things to think about when starting or operating a cannabis-related business. But with the right team of professionals in your corner, the sky is the limit!
The cannabis industry is growing rapidly and with it the need for qualified accounting and tax professionals. As cannabis moves from the black market to the mainstream, businesses will require advisors who understand both the legal landscape and the complex financial issues associated with this new economy.
As the cannabis industry continues to develop, it’s important for business owners to work with a CPA that understands the complexities of laws and regulations specific to the cannabis industry. By doing so, they know their businesses are operating legally and in the most cost-effective way possible.
Quality Cannabis CPA Services from Northstar
Northstar provides the cannabis industry accounting services that ensure these businesses will thrive in 2022 and beyond. We simplify tax season and provide a streamlined approach using data-driven insights that help our clients make sound decisions for their businesses.
Our experience and expertise guide cannabis businesses through the complex accounting challenges in the cannabis industry. Contact us today to speak with one of our cannabis CPAs about how we’ll scale your cannabis company.
If you’re here, you’re wondering, “What are liabilities in accounting?” Simply put, liabilities in accounting are the organization’s financial obligations.
But what does this mean exactly?
Companies have liabilities that are outlined in their balance sheet. These include but aren’t limited to the money a business owes to suppliers, loans owed, wages payable, and more.
Basically speaking, liability in financial accounting is a company’s financial responsibility. Most of the time, small businesses may have liabilities like money owed to suppliers to consider. But other liabilities exist, of course.
How Are Liabilities Listed on a Balance Sheet?
A company’s balance sheet should contain its liabilities. This is a common financial statement that’s generated by a professional or using financial accounting software. We in the industry refer to this as “payables.”
Every business has liabilities – except for those that operate strictly with cash. The operations using cash must pay with and accept it, whether it’s physical cash or via the company’s business checking account.
As you look at your company’s balance sheet, you’ll notice your assets and owners’ equity. Liabilities in accounting equals the value of assets minus owners’ equity. Your assets always will equal your liabilities plus owners’ equity, just as your owners’ equity will always equal assets less liabilities.
Accounts Payable Liabilities
Accounts payable is a liability because this is the amount of money that’s owed by your business. It should be listed under the current liabilities on your company’s balance sheet.
This can include a loan you made to the business to get it started, a loan you received from a creditor, a product you took on credit, etc. All of these should be listed on your balance sheet.
Your balance sheet or financial statements should include accounts payable. All current liabilities are relevant, including long-term liabilities and contingent liabilities. Even though contingent liabilities aren’t considered a current liability, they’re equally important to consider.
Using Financial Statements to Uncover Liabilities
Looking at your financial statements, you should have no trouble viewing your current liabilities. Whether short or long-term liabilities, they should be listed, including interest payable.
Here’s a list of items you should consider liabilities:
Accounts payable (any money owed to suppliers)
Income tax payable
Sales tax payable
Customer deposits or pre-payments for goods or services not provided yet
Contracts, like a cell phone contract that can’t be canceled without penalty
Taxes on investments
Accrued liabilities (such as interest owed that hasn’t been billed by the lender yet)
How to Minimize Current Liabilities
Minimizing current liabilities is essential for organizations, especially when considering your operation’s financial place. Tracking every aspect of your business’s net worth will ensure you know whether your operation is getting ahead or falling behind.
But how can you minimize current liabilities?
By tracking your financials, you’ll know your business’s net worth. If it’s in the positive, this is ideal. The equation is simple; your operation’s net worth is equal to your most liquid assets minus your liabilities.
Review your business’s spending to learn more about its financials. Make sure to pay down any debts as this will lessen your current liabilities and free up more money every month.
The key here is to decrease unnecessary spending and review where your capital is going. By focusing on your company’s debt, you’re avoiding adding to its debt balances monthly. Then, it’s all about decreasing current debt on your balance sheet and avoiding long-term liabilities when possible.
Organizing Debts & Decreasing Long Term Debt
The snowball method works well for getting a company out of debt. You’ll organize your debts and accrued liabilities from the smallest balance to the largest, paying the minimum on all debt besides the smallest.
For the smallest contingent liability, you’ll pay as much as possible. After paying it off, you’ll do the same for the next smallest debt.
By doing this, you’ll remain motivated as you make some progress. You’ll minimize your liability accounts and current liability this way as you continue to increase your accounts receivable and other current assets.
You have accrued liabilities that have been growing over time. But there are ways to restructure your liabilities and get your accounting equation into the positive.
Your company’s liabilities include all of the money owed to other people, including but not limited to your vendors. However, keep in mind, just because you restructure your liabilities doesn’t mean you’ve reduced how much you owe. But it can ensure you have more cash on hand, increase your disposable include, and/or lessen how much debt you need to obtain working capital.
Here are some methods to restructure your liabilities and reduce your debt:
Change to longer or scheduled payment terms with your suppliers
Replace your existing loans
Defer tax liabilities
For replacing existing loans, you have a few options. You could find a bank loan with a lower interest rate, or you may opt to replace unsecured loans with secured ones to lessen the interest rate.
Short-term loans are also considered a financial obligation. But a short-term loan for a small business can enhance the short-term financial health of the operation.
Replacing loans with guaranteed loans can also reduce your interest rate. But you also have the option to make repayments over a longer period of time, consolidate your loans, and use shareholder funds to reduce your debt.
Just as you can restructure your liabilities, you can also restructure your assets. You could, for example, sell some of your fixed assets to lessen the long-term liability on your balance sheet.
You could also convert some of your necessary assets into liabilities. For instance, sell them to a finance company and lease them back.
Factoring invoices is also a good method for reducing the asset value of the invoice while raising cash. And you also might have the option to use investments or cash to pay back your loans.
Raising More Capital
Raising more capital is also an option to handle accrued liabilities and other long-term debt. While short-term liabilities and long-term debt may be off-putting to some, you may have the option to find more investors.
In some cases, issuing more shares to current investors may be the best solution to short-term debt and long-term debt. You may also have the option to borrow money from a lending institution or use accounts receivable factoring.
When it comes to considering your current liability and long-term debt in accounting, there are a few key things to remember. First, liabilities are all of the money that your company owes to other people. This includes debts, accrued expenses, and other short-term liabilities.
You may be able to check your asset list to determine whether you can convert them into more valuable assets. For instance, if your company owns the land its building is on, you may have the option to build offices or houses on that land.
If all else fails, you could always exit the business. This could involve selling your operation, going into receivership, or selling off your assets and utilizing the proceeds to handle all long-term liabilities and each current liability listed on your balance sheet.
FAQ for Liabilities in Accounting
What are examples of liabilities?
Some common liabilities include notes payable, accounts payable, accrued expenses, and income taxes payable.
What is the best way to reduce liabilities?
There are a few different ways to reduce liabilities. One is to restructure them, which can include changing the terms of your agreements with creditors or renegotiating loans. You could also raise more capital or sell assets.
What is the purpose of liabilities?
Liabilities are important because they show how much money your company owes to other people. This can include debts, accrued expenses, and other short-term liabilities. As a business owner, it’s important to keep track of these numbers and make sure you’re doing everything possible to keep them under control.
What are the different types of liabilities?
Some common forms of liability include notes payable, accounts payable, accrued expenses, and income tax payable. You may also hear these referred to as accounts payable.
Who creates a balance sheet?
A company’s accountant is responsible for creating a company’s balance sheet at the end of the fiscal year. However, as a business owner, you should be aware of how it works and what it includes so you can make informed business decisions.
What is the difference between liabilities and equity?
Liabilities are considered to be money that your company owes to other people —including debts, accrued expenses, and other short-term liabilities. Equity, on the other hand, is the money that your company is worth. This includes the total value of all of your assets minus all of your liabilities.
What is the difference between a long-term liability and a short-term liability?
Short-term liabilities are those that need to be paid within one year. Long-term liabilities are those that need to be paid over a period of more than one year.
What is the difference between a liability and a debt?
Debt is a specific type of liability. A debt is an amount of money that is owed to another person or entity.
What is the difference between assets and liabilities?
Liabilities are considered to be money that your company owes to other people. Assets are considered to be anything of value that your company owns, including cash, equipment, inventory, accounts receivable, and property.
What is meant by liabilities in accounting?
When a company refers to its liabilities in accounting, it means all of the money it owes to other people. This includes debts, accrued expenses, and other liabilities.
What are the four types of liabilities?
The four types of liabilities are notes payable, accounts payable, accrued expenses, and income taxes payable.
What is the primary focus of a balance sheet?
The primary focus of a balance sheet is to show a company’s financial position at a given moment in time. This includes detailing the company’s assets, liabilities, and equity.
Closing on Liabilities in Accounting
As a business owner, it’s important to understand the difference between assets and liabilities, because these numbers can affect your business’s debt load. The economic benefits your operation experiences could vastly differ depending on your liabilities.
If you would like to learn more about how liabilities work in accounting for cannabis growers and other cannabusinesses, feel free to contact us at Northstar. We implement generally accepted accounting principles while thinking outside of the box to create custom-tailored financial solutions for your business.
The cost to start a grow operation can be quite high. But it ultimately depends on what you’re willing to invest.
Minimally speaking, the cost to start a grow operation that will turn a massive profit will usually range in the hundreds of thousands of dollars. However, if you’re looking to build out a grow room on a shoestring budget, it’ll ultimately come down to how many square feet you’ll have in your grow operation.
You’ll need to think about all of the variables involved to accurately determine your cannabis grow operation startup costs. In this post, we’ll cover all of the considerations to give you a good idea of the average startup costs associated with indoor grow rooms and outdoor grows.
Interesting in scaling your grow operation? Northstar is ready to help!
Contact us now to speak with one of our experts about how our financial services will grow your operations in this budding space.
Growing in the Legal Cannabis Industry
So, how much does it cost to grow cannabis in the legal space? Well, if you want to grow marijuana legally, you’ll need all the equipment, real estate, and cultivation license.
First, let’s cover the licensing fees for a legal cannabis grow.
Application & Licensing Fees for Cannabis Cultivation
A legal cannabis grow operation needs to worry about the application and licensing fees first and foremost. These costs vary from state to state.
For instance, if you were to get a cultivation license in California for a 22,000 square foot canopy grow operation, you’d have to pay $4,945 for the application fee. You’d also need to pay the annual fee of $44,517.
Other states have their own specifications. But it’s important to remember that while you might save money growing cannabis illegally, it’s best to legitimize your operation.
Average Startup Cost Considerations in Cannabis
Think about how much cannabis you plan to grow. Then, consider whether you’ll use a grow room or focus on large-scale cultivation outdoors.
These operating costs will vastly differ from one another.
Here’s a list of average startup cost considerations for startup businesses growing cannabis.
The big question: how many square foot is your operation?
If you’re a master grower, you probably already know the cost per square foot for growing indoors is significantly more expensive than the average cost to grow weed outdoors. But for the new growers, this is still an important consideration.
If you plan to grow a few plants in your closet, this doesn’t apply to you. However, if you plan to use an industrial space, the price per square foot will rise.
The number of square feet in your operation really becomes costly if you’re planning to rent the space. For example, it could cost nearly $20 per square foot just to rent the space.
This is because landlords tend to charge more than four times as much for anyone looking to participate in the green rush. Regardless of whether you focus on outdoor grows or plan to get into a larger facility for an indoor grow, the ideal environment isn’t going to come cheap.
If you’re not using solar power or growing outdoors, you’re probably wondering what grow lights cost. Growing indoors means you’ll have less reliance on outdoor variables. However, you’ll need more equipment to enhance the environment.
So, how much does it cost to set up LED lights for a larger scale indoor grow?
LED lights are the most expensive option at first. However, they save money for your commercial grow. And this means you’ll get to keep more revenue or allocate it towards other business expenses.
The average cost, minimally speaking, it around $1,800. But this is just part of the cost to start a small operation with minimal plants.
Then, you’ll need to factor in the cost of electricity. But there’s more to it than that.
Grow room air circulation is essential for humidity control. But how much does it cost to get more fans running and humidity control systems in place?
More fans and more ventilation are needed if you have more plants in your grow room. This is how you maintain an ideal growing environment for your cannabis grow.
For a commercial grow, you’ll likely need to spend at least $100 on each fan. And if your commercial grow is massive, you’ll need quite a few fans and a ventilation system.
All of this costs money, of course. And for a decent size commercial grow, you should expect to spend at least $1,000 on the basic equipment you’ll need to produce air circulation that nurtures each plant.
Your grow room will need electricity. But what should you expect to spend on it?
That’s like asking how much does it cost for your electric bill each money without knowing the size of your house and how often you run your air conditioner. This will vary from grow room to grow room.
So, how much money should you expect to pay monthly for your power bill? It depends on what you’re running and the equipment efficiency.
If you have a grow room large enough to generate significant profits, your power bill will probably be $1,500 or more.
Water is essential for cannabis cultivation business success. Some growers even choose to use it as their growing medium as an alternative to soil.
But this is something for master growers.
If you’re just starting your marijuana cultivation business, you’re probably only using water to nurture your plants and flush the soil before harvest.
Most of the time, you’ll spend the same amount on the water as you do on electricity. With this in mind, you’ll likely spend at least $1,000 per month on your water bill if you have a sizable business.
Think about the growing medium you plan to use. If you want to cultivate premium marijuana plants, you can’t go wrong with organic soil. Organic living soil, to be exact.
Organic living soil has all of the nutrients your marijuana plants want and need. And this is something you can’t usually get from hydroponics systems.
However, organic soil isn’t perfect for every type of commercial grow operation. If you plan to use a hydroponics system or some other growing medium like coco coir, you’ll pay less for your initial setup and ongoing costs.
The medium you choose will affect your initial and ongoing costs. So, these can vary depending on your situation.
Consider Rockwool, hydroponics, organic growing soil, and other options. They all range in price, but you can expect to spend between $15 and $30 per plant on the medium.
Keeping marijuana plants healthy involves giving them the right nutrition. This is true, regardless of the medium you use for your grow.
The most common type of commercial cannabis fertilizer is a premixed blend that contains various nutrients, vitamins, and other chemicals your plants need to stay strong and resist disease.
Fertilizer costs will vary depending on the brand you choose and how often you plan to fertilize your grow. But, depending on how many plants you’re cultivating, you should expect to spend around $1,000 or more per harvest.
Feminized seeds take the guesswork out of growing marijuana. Rather than risking growing male cannabis plants, you’ll know you have female plants growing.
This is essential to avoid wasting resources on growing male cannabis plants.
Most of the time, you can expect to spend between $30 and $60 on each pack. But ultimately, the cost for feminized seeds is related to the strains you plan on growing.
Indoor Grow Room Costs
An indoor commercial grow produces throughout the year. However, this requires expensive equipment, so expect an indoor operation to cost more money.
Even with this being the case, an indoor marijuana grow has the potential to generate between one and twelve harvests annually. But the initial expenses could exceed what you’re willing to spend on your new cannabis grow operation.
Here’s what you can expect to spend on large scale indoor grows:
Warehouse rental – $50,000+
Build out, improvements – $50,000+
Growing equipment – $100,000+
Lighting system – $100,000+
Alarm & Security System – $25,000+
Licensing & legal fees – $55,000+
Direct costs (first months before profit) – $200,000+
Administrative expenses – $50,000+
Other expenses – $100,000+
Total = $730,000+
Concluding on Grow Operation Costs
Your grow operation will cost more than just seeds and nutrients. You’ll find yourself spending on electricity, water, and other supplies to get your grow started.
You can cut down some of your expenses, but ultimately, you’ll need to account for everything you spend on. This is something that can be handled with financial services.
Looking to scale your grow? Northstar is ready to help.
Contact us now for insight into how our financial services will expand your grow in this budding space.
If you liked this post, here are a few others you might enjoy, too!
Operating a cannabis dispensary? Thinking about dipping your toes in the cannabis industry as a dispensary owner?
In this post, we cover everything you should know about operating a successful cannabis dispensary from a financial perspective.
Looking for expert assistance managing your legal cannabis business’s financials? Northstar is ready to increase your dispensary’s profitability!
Contact us now to learn more about how we’ll enhance your weed profits with the right financial services.
What is the Average Dispensary Profit Margin?
Whether you’re operating in medical or recreational marijuana, your average profit margin is important. Besides the cost of opening a dispensary, other expenses exist – and these will impact your profit margin.
Medical and recreational marijuana cannabis dispensaries usually operate with an average net profit margin between 15 and 21 percent after accounting for taxes. However, equally important to note is that this percentage varies in accordance with state or provincial regulations.
The cannabis dispensaries distributing medical marijuana and recreational cannabis usually have the best net profit margin. However, creative recreational dispensaries can dominate the dispensary space, too.
After your initial investment to open your doors, you’re ready to operate. But ongoing expenses can affect profitability.
Here’s a list of the expenses likely to affect your operating profit margin:
Cannabis Real Estate
Besides the initial licensing fees for cannabis businesses, dispensaries should expect to spend at least $100,000 annually in rent. But if you find real estate for cannabis that requires renovations, this could increase the initial cost to $50,000 or more.
However, if the cannabis dispensaries locations are purchased outright, dispensary owners mainly have to worry about property taxes impacting their net profit margin. For additional insight, make sure to check out our post on buying commercial cannabis property.
Cannabis Industry Banking Fees
Part of your estimated annual revenue will go towards banking fees. It costs money to have your own growing business, but the cost of banking is higher in this grey-area space.
Since cannabis is still technically federally illegal in the US, many banks still refuse to work with dispensaries. However, it’s still possible to work with credit unions and private marijuana banks in some regions. Even with this being the case, some of these organizations will charge holding fees as high as $2,000 per month.
Cannabis businesses need electronics to operate successfully. Each square foot of space could be holding thousands or even tens of thousands of dollars worth of inventory. So, you’ll need a security system and a fully compliant POS system to manage your inventory.
Advertising budgets in cannabis vary, of course. But, depending on your location, you may need to invest more than a quarter of your annual revenues in an advertising budget to compete.
Attorney on Retainer
While a dispensary makes money, these earnings don’t always come without risk. This is why it’s a good idea to have an attorney on retainer.
Dispensaries are especially vulnerable to lawsuits. Thus, having an attorney ready for a worst-case scenario situation is always ideal in this space. This could cost up to $50,000 annually.
Even a smaller dispensary serving the adult market will need a team to operate successfully. Depending on the size of your cannabis operation, your annual payroll could be $250,000 or more!
How Much Does a Dispensary Owner Make?
How much a dispensary owner makes depends on several variables. For example, medicinal weed sales might earn more in one cannabis market than it does in another. However, in some spaces, medical marijuana might not be as popular as adult use.
Furthermore, your cannabis business might grow its own marijuana indoors. This would minimize your inventory cost while allocating some of your operating income towards elevated utility costs.
The money dispensaries or cannabis retailers spend on inventory varies. Some might spend more to supply stores with special medical-grade strains while others need to focus on stocking other cannabis products like extracts or edibles.
Operating dispensaries isn’t an exact science. But you can learn a lot from your sales data and use this to increase your annual revenue and average profit margins.
But how much money should you expect as a dispensary operator? If your business generates over $5 million annually, you could expect to pay yourself an annual salary of $500,000+.
How Much Does a Dispensary Make in Sales?
Dispensary sales are much like coffee shops; annual sales depend on several factors.
Think about the market competition. Dispensaries focusing on patient access to marijuana can run a profitable company. But they miss the adult-use market.
However, entrepreneurs interested in operating a dispensary in the recreational marijuana space will need a strong marketing campaign to acquire customers. Medical dispensary businesses will also need marketing, but the operation can become profitable based solely on word of mouth if they’re in the right location.
If a location is saturated, running a profitable marijuana business becomes more difficult. Business opportunities become more profitable with less competition, and this holds true in cannabis, too.
Tips for Maximizing Dispensary Profit Margins
Find Your Break-Even Point
Use the break-even formula to determine your break-even point. This is the point at which marijuana dispensaries break even, meaning this is the minimum dispensaries must earn to continue operating.
Check each month’s revenue receipts to determine whether you’re within the threshold of breaking even. Marijuana dispensaries are notorious for having high inventory costs. But if you’re selling enough product to cover all costs and then some, your cannabis supply store could be running at a profit.
Research Your Competition
Marijuana prices have been dropping throughout the US. As more competition enters the space, more marijuana is available, and this drives the price down.
Look at your competition. They likely use professional packaging, sales, and digital marketing to increase their market share. See what you can do and how you can improve upon what your competition is doing.
Improve Your Product Offerings
Whether you operate a recreational cannabis supply store or a dispensary focused on medical marijuana, you’ll need to offer more than just cannabis.
You might even go the extra mile for your customers by offering their favorite infused snacks or drinks. You can win over customers by analyzing what the market demands.
For example, your average supermarket might notice that more customers are looking for organic items. To compete with the local Whole Foods Store, it might begin offering more organic options.
For a dispensary, you might notice that more people are looking for quality concentrates. If this is the case, sourcing these products from top producers could be a good idea. While you might need to charge a premium, you could maximize your profit margins by offering products no one else is offering.
The same goes for impressive flower strains, edibles, and other product offerings.
Doing promotions on a limited-time basis is a good way to increase dispensary sales. And if it’s something you can purchase in bulk at a great price, you could increase your profit margins tremendously with the right promotion.
For example, you can run a promotion offering a first-time discount on concentrates on first visits. You could even try implementing a loyalty program that offers customers high-quantity discounts for purchasing regularly from your dispensary.
You might also consider providing a daily deal. You could offer 50% off a single item or a free gram with a purchase of an ounce.
Streamline Your Operations
One of the simplest most direct ways to optimize a dispensary’s profitability is to make it more efficient. Identify your operation’s daily functions and look for ways to reduce costs. With the right system of checks and balances in place, you can ensure your business is operating as cost-effectively as possible.
Business owners should also make every effort to only carry the products they need. Being selective about inventory will help save on monthly carrying costs while minimizing costs related to these risks.
For example, if you’re already paying rent for space, using that space effectively can increase dispensary revenue and profits. What’s more, adding storage shelves or cabinets to that space can help you store more product, allowing you to purchase in bulk at a discounted rate.
Manage Your Inventory
Inventory control is one of the most critical aspects of operating a marijuana dispensary. Government regulatory requirements in the US demand dispensaries closely monitor their inventory. Without a POS system in place to manage inventory data in real-time, inventory audits and discrepancy reporting are nearly impossible, and this can result in costly compliance violations that put dispensaries out of business.
Also, if you lose track of what you have, you could find yourself with excess products and nowhere to store them. Or worse, if your records aren’t accurate, you could run out and jeopardize the health and well-being of your customers.
You can avoid these issues by ensuring that your inventory records are organized and up-to-date. This can also help you make better purchasing decisions moving forward.
Staying mindful of dispensary costs is essential for success in this competitive industry. Profitability depends on bringing money in. But if costs become too excessive, this can become a serious problem.
Regularly monitor your dispensary expenses and make adjustments as needed. Focus on the expenses that have the most significant impact on the business’s profitability, and outsource critical non-retail operations to experienced professionals.
Think about your marketing activities and how you can enhance them. Use your sales data insight to get the most out of your marketing budget, as well.
Dominating the Cannabis Industry with Northstar
The marijuana industry is growing exponentially every year, and attracting more people to the market means that there’s room for many dispensaries to do well in spite of competition from larger businesses.
Looking to increase your dispensary’s profitability? Northstar scales dispensary profit margins successfully with the right financial guidance.
Contact us now to learn more about how we’ll grow your dispensary in this budding space.
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