Cash management is important for every small business but can sink a cannabis operator quickly. In an industry where virtually every transaction is handled in cash, strong cash handling policies are critical for survival.
One example of how poor cash handling procedures can bite you is that sales tax will follow you for the rest of your life if you don’t pay it correctly; in a cash transaction, sales tax is the state’s money – not yours.
Unfortunately, companies misuse cash that should be allocated for sales tax for operating activities instead. When incoming cash dries up, and sales tax bills are still due, the cannabis operator runs into trouble with the IRS and state authorities.
Bottom line: you need to know what’s your cash for taxes and what’s your operating capital cash because regulators are focusing on the cash, not on the cannabis.
Follow these tips for good cash handling practices.
Know ALL YOUR TAXES: state, local, and federal
Work with a CPA that has cannabis-specific experience to learn the different percentages and calculations you need to make to allocate cash for tax purposes. Are your taxes based on gross receipts? What is the base that the tax rate will be calculated on? This can vary, so speak to an expert about your specific situation.
To make this point clear, a well-run dispensary will likely have some type of target revenues for each month/quarter/year. This also means that you can calculate what your expected tax bill would be for each of those periods and that's what you need to have as your savings goal.
Check out some of our resources on taxes to get a basic understanding of what your cannabis operation’s tax responsibility:
- Everything Cannabis Distributors Need to Know About Taxes
- Tax Preparation Checklist for Cannabis Operators
- How to Collect and Disburse the Cannabis Excise Tax
- Everything You Need to Know About California’s Cannabis Excise and Cultivation Taxes (and Penalties)
Practice Regular Reconciliation
At the end of each day, reconcile your cash on hand with your POS system to ensure that there is no theft or diversion. Make sure your team is following your standard operating procedure for cash handling, which should answer the following questions:
- Where will the cash be kept?
- How will it be counted, who will count it?
- Will the business get bank account and where?
- How will the cash be transported from the facility to the bank?
- Where will the safe be located?
- What type of safe will be used?
Put aside money for all the regulating agencies
Cannabis operators must be compliant with regulations from many different agencies: state, local, and federal. Set aside money not just for taxes, but for license renewal fees and any potential penalties that might arise. This is the most important rule that no one sticks to, but wish they had since taxes can add up quickly.
Good cash flow management means setting aside cash for the right purposes. Have an emergency fund that can cover the operating expenses of your company for up to 60 days. This fund can mean survival when you get an unexpectedly high tax bill or are hit with an expense that you hadn’t planned for.
Put all the cash in a drop safe
Using a drop safe can help keep your cash safe and make sure that you’re budgeting money in the right places – literally. Physically separate the cash you want to use for taxes in a different safe than the cash you will use for payroll or other operating expenses. Make sure that few (or better yet, no) people have access to your drop safe except the owner, their lawyer and one designated cash custodian. Record each drop in your cash log so you can easily reconcile your stores at the end of the month.
Use a cannabis-approved bank account
If you do have a business bank account, then be sure you make cash deposits at least two to three times a week. If possible, break your cash into separate accounts (more on this recommendation in a minute). If you can’t break your cash into separate accounts, then be sure you set a minimum balance that is at least equal to 115% of your estimated tax bill that you calculated in the first step of this article.
Receiving digital payments? Separate income from taxes immediately.
Certain merchant processors will allow you to automatically break down your deposits so that you can set aside income money from tax money. For instance, if you record $100 through your POS, you can set up your system to automatically move $10 to a sales tax account, $10 to your city tax account, and $20 to an account for state and federal taxes and then whatever is left (less the processing fees) over to your main account. If you do not have the ability to set up these automatic deposits, into separate accounts, then make sure to reconcile your merchant accounts weekly to account for how money needs to be separated out.
Have a plan for collecting cash from multiple locations
If you run multiple dispensaries, then all cash should be put into drop safes at the dispensary, collected by one trusted cash custodian, and reconciled at your main headquarters. Do not stress out the dispensary staff with having to pull money out of the safe to pay bills. A security plan also reduces your exposure for theft or fraud. All bills should be paid by a centralized accounting staff at HQ. Read more in our guide to Optimizing Multi-unit Cannabis Operations.
Have till ownership for each register
Accountability is critical for good cannabis cash handling. Give your general manager or shift manager the responsibility of counting the cash in the till at the beginning and the end of the workday – make sure they do so in front of your cashier/budtender that will be ‘owning’ the till so they can sign off on the count in/out. Then, have your general manager reconcile cash with a record of the day’s sales. Make sure this is all done in a recorded room with clear views from multiple angles including from overhead.
Set up counterfeit cash detection procedures
Unless you’re working with employees who were former CIA, it’s not always easy to spot fake bills. Unfortunately, the government doesn’t care whether or not your employees have experience counterfeiting. If you’ve accepted fake money, you’re on the hook for taxes on that cannabis sale. Save yourself from paying taxes on fake money by adding counterfeit cash detection procedures or using a device.
Place cameras over the top of every register
Security is important both for your bottom line and for your employees. Make sure you’ve installed the right protocols and security equipment to keep everyone safe during work. Keep an eye on the front line workers; they have the most access to cash throughout the day. If someone gets into a customer dispute where the customer reports giving the budtender a $100 bill, but it was only $50, you’ll want instant replay to verify. And letting your budtenders/cashiers know that you have them on camera all the time can help mitigate diversion of cash as well.
If you need more help with developing customized cash handling policies for your cannabis business, then please reach out to our team today.