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Managing Your Cannabis Business Fund Flow

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June 19, 2019

Cannabis operators take on a lot of risk by entering this growing market – with financial risk being the biggest liability of all.

One way to mitigate some of that risk is to outsource your CFO responsibilities to a qualified accounting and finance expert. A cannabis-focused CPA firm like GreenGrowth CPAs can cover monthly, quarterly, and finance reporting for your business and investors; set up your accounting system; and monitor your cash flow, making sure there are no leaks or vulnerabilities the IRS could target.

Why should you outsource your fund flow management?

Being proactive about managing your cash can make or break your business. Most cannabis operators have never taken in more than $35,000 in one week. It’s unlikely that as a business owner, you’ve been challenged to split cash between various safes and funds efficiently.

Further, some vendors require bills to be paid electronically, so while cannabis companies don’t have access to the banking system in the traditional sense, you will need to set up a personal or business account in some way.

Managing your fund flow is a challenge. In this post, we can give you some tips on how to split up your cash as it comes in, as well as tips for managing the fund flow within your cannabis business efficiently.

The goal of this guide is to offer some help with budgeting and allocating your cash so that you don’t miss any important bills and can keep track of your money.

Learn how to divide your cash

Why does it matter how you split your cash?

First, managing your cash among different safes and accounts ensures you know where your money is at all times.

Second, it will make it easier to reconcile your accounts for reporting purposes and to pay bills on time.

Plus, in the event that your cannabis business is audited, you will be able to show a clear system that prevents fraud and theft.

Below is an example of how money should initially flow in your cannabis business.

Initial-Fund-Flow

When cash comes in, some of it will be placed in a safe and some must be sent to a bank. The best way to estimate how much goes where is to look at which bills need to be paid which way (electronic or cash). Keep a list of which bills are paid in cash versus by card. This will dictate the initial allocation of funds between depositories.

Now as your business grows, you will need to update your fund flow and make it a bit more robust.

updated-fund-flow

As you grow, you can adjust the split based on if you have an electronic payment processor or a significant increase in your sales.

The key to managing your funds is to make sure you don’t run into a position where an e-bill is due and there isn’t enough money in a bank. Budget each week how much needs to go into the bank, and put those numbers on paper so you know ahead of time what to allocate.

Keep as little cash as possible at your place of business

Keeping cash on site creates serious security risk.

You may have rigorous security SOPs in place, but unfortunately, 90% of losses reported at cannabis dispensaries comes from employee theft.

As a rule of thumb, make sure you’re only keeping enough cash on site to fund your day-to-day operating expenses.

That means that all cannabis operators should have at least one other off-site safe. Only the business owner and your lawyer should know the location and how to access any secondary safe you have for your cannabis business.

If you have more than $300k-$500k cash on hand, consider splitting to multiple off-site safes to spread the risk.

For on-site safes, use only drop-safes, which means that anyone can add to but no one but the owner can take things out of it.

Add digital payments, such as debit cards

Despite the Cole Memorandum, there are still ways to get a bank account as a cannabis operator. It’s something GreenGrowth CPA experts do for clients all the time – so if you feel confused, get in touch for our advice and recommendations.

We can also help you connect with a merchant processor that allows you to accept debit cards. Cannabis operators can even add digital payments through a debit card solution like authorize.net.

Adding digital payments can significantly increase your sales, and also deposit funds directly in your bank account. It helps you avoid making large cash deposits and provides a better customer experience when you a POS debit card system.

Create strict internal controls

To be compliant with industry regulations, avoid business shrinkage, and meet the expectations of your investors, strict internal controls around the flow of cash are necessary for cannabis operators.

Enforcing these controls will keep your business out of financial trouble and build trust with your employees.

Standard Operating Procedures are necessary for cannabis operators to cut down on bookkeeping mistakes, help prevent fraud, and keep business running smoothly. Here are some examples of good fund flow checks and balances:

    • If the manager is counting the cash, make sure he or she is keeping a cash log
    • Owners should check in randomly once a week to count cash and spot-check cash logs
    • Take swift and decisive action when you find something inconsistent or dishonest; don’t let neglectful behavior grow, because it will bleed into other parts of your business operation

Strong internal controls and documentation will decrease your liability if an audit comes your way. And, since cannabis businesses are five times more likely to get audited by the IRS, you should do everything you can to protect your business.

Silo your accounting as much as possible

If you accept any payments electronically, then split your accounting up to keep clean records and capture data to make better business decisions down the road.

Separate all of your wholesale and retail purchases by processing those payments through different merchant processors. You pay different taxes for each of these types of transactions; and when you keep these transactions separate from others, it makes it easier for you to calculate tax accurately.

Next, separate merchant processor for each billing or sales system.

For example, for retail transactions, use Shopify/Paypal. For wholesale, use authorize.net or a different Paypal account.

This will help spread the risk by making sure one person or entity doesn’t have full control of your funds. It also makes it easier to sort data and reduces tax preparation costs.

A final tip for retail merchant processors: never pay for bills from a merchant processor account (this includes Paypal). This will make it difficult to keep track of cash flow, as it makes your books more messy and confusing. Instead, set up a separate account and pay from there if needed.

For more tips or to outsource your CFO responsibilities to us, get in touch using the button below.

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Post Tags: Taxes, Finance

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