Whether you’re considering taking on cannabis clients or currently operating a cannabusinesses, you’re probably wondering what to be aware of bookkeeping for cannabis. This makes sense, especially when considering the fact that many common cannabis bookkeeping mistakes can result in costly infractions (or worse).
Cannabusinesses operate the same way as other legitimate operations; they need accurate numbers and reporting for their bookkeeping practices. However, the main thing that sets these operations apart from non-cannabis companies is the cash collected that increases changes or errors and fraud.
Keep reading to learn more about what to be aware of in bookkeeping for cannabis operations.
Own a cannabusiness and worried your bookkeeping practices aren’t up to par? Northstar is here to help!
Contact us now to speak with one of our experts and avoid cannabis accounting errors.
Concerns While Bookkeeping for Dispensaries
Some of the most successful cannabis operations implement a series of checks and balances to minimize cannabis bookkeeping mistakes. This is the goal while bookkeeping for dispensaries as any errors can be detrimental to these businesses’ operations.
Here are some of the most common errors we see and how to avoid them:
Actual Cash-on-Hand Doesn’t Reconcile with Amount Scribed in Books
Sometimes, the cash on hand does not equal the amount the books have listed. This is common in cannabis and usually results from carelessness. But this is avoidable.
Avoiding this reconciliation issue involves performing regular cash counts. Dispensaries that make numerous activities weekly – sales, tax collection, distributor payments, and more – should be conducting cash counts every week.
To minimize the chance of discrepancies and maximize your chance of uncovering them as soon as possible, it’s best to have different schedules for on-site safes and on-site cash collection. If you can discover these problems fast, it’s usually easier to determine what happened to the missing cash and reconcile your books.
Point-of-Sale Receipts Don’t Match Sales Scribed Books
Most of the time, this is an indication of an absence of training. But this can be the result of human error, too.
Recording sales in the point-of-sale system generates a receipt that needs to be associated with the corresponding transaction in the books. In some cases, the person manning the register may have made a sale or given a refund and forgot to enter it in the system.
To avoid this error, make sure your employees are familiar with how transactions correspond to entries. Additionally, you can conduct daily cash receipt counts and run these against your point-of-sale system receipts.
Minimally speaking, you’ll need to run weekly or monthly reports to compare the point-of-sale receipts to the receipts listed in your books. But if you believe fraud is the problem, divide duties between two people. Have your cash collection handled by one person and put another in charge of reconciliation.
Your inventory management SOPs should include how to handle sales receipts. This is one of the most common cannabis bookkeeping errors we see in startups. But it’s also easy to resolve these issues with a series of checks and balances in place.
Inaccurate Accounts Receivable
Professional cannabis bookkeeping practices should always involve applying cash receipts to the right account receivable. However, sometimes, if the accounts receivable is inaccurate, this means this didn’t happen.
Another common issue is that the cash receipts were not applied to an account receivable.
To ensure you have applied all of the cash receipts to the right account receivable, all information provided to the bookkeeper should be clear with invoice numbers on payment receipts. For good measure, it’s best to conduct weekly reviews of receivables and collections.
Inaccurate Appropriation of Sales Tax
Sometimes, cannabis retailers don’t incorporate the right sales tax amount. However, the difference in tax is the cannabis dispensary’s responsibility, meaning this can be a costly error for the operator.
Cannabusiness operators should learn about and understand cannabis excise tax and the laws surrounding it. This is how they’ll know how much tax is necessary to include in product pricing.
On January 1, 2018, the sales and use tax applied by localities only apply to recreational marijuana.
Inaccurate Payroll
If your books seem off, your payroll could be off. Owning a cannabis business means accurately handling payroll expenses and taxes properly.
For those finding their payroll report from your payroll processor and payroll ledger don’t match up, something is probably wrong. Team members may be inputting work hours twice or skipping days by mistake. But addressing this isn’t too challenging.
Checking the payroll processor can reveal the data. Then, it’s time to look over the hours each team member submitted. All payroll information should be the same as the accounting ledger.
If your checks and balances don’t prove fruitful, you may need a cannabis accounting firm to help. Northstar is ready when you are!
We’ll check your books, examine the issues, and provide solutions. Contact us now to speak with one of our experts to get your books organized.
Love this post? Check out our other article on expensive expired inventory before you leave!
Issues with Accounting for Medical Marijuanas & More
Cannabis accounting is similar to traditional businesses. However, this emerging industry tends to have more restrictions and regulations in place.
Some cannabis accounting issues are easy to spot. But some of the most common accounting problems in cannabis demand help from a cannabis CPA.
Here’s a list of some of the issues cannabusiness operators face:
Obtaining a Business Bank Account
Even with full legalization in some areas, federal legalization is essential for cannabusiness banking. Some states permit adult-use cannabis while others don’t even allow CBD consumption. Regardless of such, obtaining a business bank account for a cannabis business is challenging, but not impossible.
For those having trouble with getting a business bank account for their cannabusiness, keeping cash on hand is a way of life. However, other options exist. While federal bank accounts are difficult to get, some local banks or credit unions have options for cannabis businesses.
The major banks are still on the fence about opening bank accounts for cannabis businesses. Since marijuana isn’t federally legal, there’s a lot of liability associated with serving this industry. But state-wide banks will sometimes allow cannabis businesses access to bank accounts and banking services.
Changing Cannabis Tax Laws
States with legal cannabis have sales taxes. But while this helps the states accept this industry, cannabis tax laws tend to be rather complex.
Even with federal taxation an issue with 280E and marijuana’s federal classification, cannabis businesses are still scrutinized by the IRS. Thus, paying taxes is essential for those operating in the legal cannabis industry, even if it’s not federally legal at this point.
With this being the case, a cannabis CPA can help. At Northstar, our expert cannabis CPAs understand the industry’s needs and ensure all tax documents are properly recorded.
Lack of Audit Preparation
Federal cannabis taxation is still one of the hottest issues in the space. With this being the case, cannabis businesses experience an elevated risk of being audited by the IRS.
At Northstar, we make sure our clients are always audit-ready, just in case. We understand the common reasons for tax audits and help our clients minimize their chances of these filing-related issues.
Overlooking Crucial Tracking Practices
Tracking is essential for those operating in the cannabis space. And as these businesses become more profitable, it becomes even more necessary to track all sales. This is how these operations track profits and losses.
This is where Northstar can help.
We track all sales and business expenses, advising our clients on how they can save money and take advantage of all applicable deductions.
Challenging to Find Third-Party Cannabis CPA
General accountants are sometimes willing to delve into the cannabis space. However, it’s important to keep in mind that these professionals may not be well-versed in the industry’s nuances.
Cannabis businesses need someone to manage their bookkeeping, payroll, merchant processing, and more. But it can be challenging to find third-party cannabis CPAs as many professionals refuse to work with those operating in this space.
Besides providing financial services to the cannabis space, we also connect our clients with other professionals that specialize in helping cannabis businesses. These connections encourage our clients to thrive in the cannabis industry as they have access to all of the services they’d otherwise have difficulty finding.
No Accounting Software Incorporation in Operation
While we don’t recommend using accounting software without guidance from a professional, cannabis business accounting and finance software can help with tracking. This software gives business operators the ability to input and track all financial information, create crucial financial documentation, and improve cash flow management.
This accounting software cannot replace a cannabis CPA firm. However, paired with the Excel sheets we set up for our clients, we can handle the accounting aspects of cannabusinesses.
Lack of Finances & Cannabis Inventory Protection
Protection for capital and cannabis inventory is especially ideal in this industry. Even though cannabis legalization. decreases drug-related crime and violence prevalence, marijuana businesses are still at-risk. Particularly, dispensaries.
Since these businesses typically operate on a cash-only basis, they have a higher chance of being the victims of robberies and thefts. With this being the case, it’s essential to protect each operation’s finances and inventory.
We guide our clients to finance protection solutions and cannabis inventory control strategies. With these actions, cash-only cannabusinesses minimize their losses.
Difficulty Finding Cannabis Business Tax Deductions
The cannabis industry is not applicable for the same tax deductions as other spaces. Since the IRS placed limitations on cannabis business deductions, we must use the cost of goods sold to offset profits.
This is something we help our clients with because it ensures they obtain as many deductions as possible. Our services help these operations determine which deductions they’re eligible for and implement strategies to save on taxes.
Failure to Account for Unforeseen Expenses
Unforeseen expenses run rampant in the cannabis industry. Sometimes, startup expenses alone can run up to $750,000! However, other expenses are of concern, too.
Just like with traditional businesses, cannabis businesses run into many unexpected expenses. These can include repairs, drug recalls, product recalls, and more.
When our clients contact us about their concerns regarding unforeseen expenses, we suggest solutions to manage them as much as possible. We recommend working with cannabis insurance providers as these professionals safeguard against some of these problems. But having a cannabis CPA firm ready to help is another type of insurance!
Concluding on What to Be Aware of Bookkeeping for Cannabis
The cannabis space is growing rapidly. This growth attracts more legalization, which means an increase in cannabusinesses. However, this industry is difficult to navigate through.
While the emerging cannabis space requires cannabusinesses to hire CPAs that specialize in working within this industry, it’s also important for them to retain the services of a qualified cannabis CPA firm.
With these professionals, cannabusinesses can minimize the stress of keeping up with their accounting. This means they have more time to focus on their operations and prospering in this industry.
To learn more about our comprehensive suite of cannabis CPA services for cannabusinesses throughout the USA, contact us to speak with one of our experts. We’ll discuss cannabis bookkeeping solutions to fit your operation’s unique needs, ensuring your business is always audit-ready, just in case.
