It is essential that cannabis business owners understand the importance and value of their operational data. Whether it is the yield per plant for cultivators, THC content per batch for processors, or the average sale per customer for dispensaries, gathering and interpreting operational data is imperative to the success of every cannabis business. Like operational data, financial data plays a critical role in any major business decision. The combination of financial data and operational data summarizes the business’s performance and is key to understanding the business’s financial health.
Due to the fast-paced and dynamic nature of the industry, cannabis business owners often view the accounting function as an afterthought. However, proper accounting is critical to prevent risks to an operations’ assets. Accounting is the source of obtaining the best results from financial reports and should be considered an integral part of operations. The fundamental accounting functions are collecting, managing, and interpreting financial data.
Cannabis business owners can implement several tactics to guide them, improve their processes, and enhance the results within their accounting function.
Tracking Workflows: Precisely Understand How Much Money You Have, and How it’s Being Spent
The first step in collecting accurate financial data is to understand the workflows within your cannabis business. Workflows will outline how money is being received and spent. Identifying where money is coming in, or ‘cash inflows,’ and where money is leaving your business, your ‘cash outflows’ translates to each accounting function. For example, cash outflow for packaging expenses relates to accounts payable, inventory, and cost of goods sold. This workflow can be traced to operations. In this case, packaging expenses were likely ordered by the packaging manager, who can identify how orders are placed and how bills are received.
Identifying Areas to Improve by Creating, Defining, and Adjusting Processes
After beginning to track and measure workflows, processes should be created to collect and submit the data to the accounting software. As cash inflows and outflows are continually monitored, identify opportunities to improve the operational workflow. Department managers should communicate with accounting departments to ensure operational data is collected and reviewed alongside financial data.
To use the same packaging expense example above, the packaging manager should be instructed to submit purchase orders prepared by accounting. When goods are received, the packing slips and invoices should be provided to accounting to be applied to the open purchase. It is essential to identify how often the process should be performed within departments. In addition, inventory controls, such as purchase approvals, the review process for financial and operational data, and the process to retain supporting records, should be reviewed frequently. Digital copies of all bills, receipts, sales, and invoices, should be retained and included with the corresponding transactions in the accounting software. Audits are a recurring theme for the cannabis industry, and cannabis business owners should be diligent in maintaining updated records.
Developing and Implementing Cannabis-Specific Accounting Policies to Accurately Measure Business Activities
Cannabis accounting is entirely different than any other industry and includes many additional steps and techniques. It is imperative to understand the implications of various federal and state tax codes and cost accounting methods, which can vary depending on the business activities. Cannabis businesses should structure their accounting policies in accordance with their tax and costing approach. The chart of accounts should be aligned with the accounting policies, and methods to track workflows should be established within each department, such as cultivation, extraction, packaging, etc. If the operation has multiple locations performing similar operations, tracking business functions by location within each department is highly recommended. Comprehensive policies will be the guidance for the application of the financial data processed in the previous concept. If cannabis business owners are unsure of the cannabis accounting methods that apply to their specific cannabis operation, do not hesitate to reach out to us.
Building a Monthly Reporting System to Gain Operations Insights
The ultimate goal for the cannabis business accounting function is to obtain sufficient information to make informed business decisions, reduce risk, and increase the bottom line. This can be accomplished by working with accounting to develop and implement a monthly reporting package. This process will summarize the financial data and provide insights into the cannabis business’s activities. A consistent monthly reporting package will enable management to analyze performance, develop key performance indicators, establish budgets, and forecast cash flow. Management should always have access to this essential information, and it is critical that potential investors and lenders have access to this data as well. Furthermore, this information should be readily available to assist in the management of the cannabis business. Accounting can further customize reporting to the business’s specific target market and users.
Building a robust accounting function and implementing comprehensive policies is recommended from the inception of a cannabis operation. These vital steps provide management with the necessary tools to make data-driven, strategic decisions. In addition, thorough accounting policies will prevent issues in the long run. Whether a startup with limited resources or a well-established cannabusiness, we recommend consulting with cannabis industry experts to get the most from your financial data.
As advisors serving the cannabis industry since 2009, Bridge West Consulting serves more than 600 cannabis clients, including cultivators, processors, transporters, dispensaries, management, and intellectual companies, throughout the United States. Our clients rely on our cannabis expertise to maintain their financial data so they can focus on their growth and operations. Reach out, we’d love to talk.