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The importance of proper accounting for cannabis businesses

Although many states have deemed marijuana an essential business and allowed retailers and other MJ businesses to remain open during the coronavirus pandemic, cannabis companies are beginning to feel the effects of the COVID-19 financial fallout.

That means cannabis companies need trained accountants more than ever.

The pandemic is causing many business owners to keep a closer eye on expenses as well as risks related to significant back taxes, penalties and the potential loss of investors or acquisition opportunities.

Audits

Cannabis companies are experiencing audits regularly, and non-compliant businesses face years of litigation, significant legal fees and back taxes.

Marijuana companies need a cannabis accountant trained in keeping sound books and records.In more extreme cases, significant penalties have been handed out for lack of accuracy, such as in the Alterman-Gibson court case, with a $78,000 accuracy penalty, and the Northern California Small Business Assistants case, with a $250,000-plus accuracy penalty.

Every number in the books should be supported and properly recorded. Organized books not only reduce risk but can result in cost savings during an audit.

It should be as easy as handing over a folder with all this support to the auditors.

Valuations

Cannabis companies must think about the following long-term goals:

  • Are you building a legacy to be passed down from generation to generation?
  • Do you want to show as much growth as possible to take advantage of buyouts and acquisitions that will occur once this industry goes federally legal?

If it’s the latter, executives must think about how the company will be able to get the highest valuations in the event of a merger or acquisition.

Buyers will be looking for cannabis companies that:

  • Maintain clean books and records.
  • Comply with Section 280E of the IRS tax code.
  • Have a reputable brand and market share.
  • Can grow and vertically integrate.

Recent headlines report many companies being sued by their investors.

As this news surfaces, it’s going to get increasingly more difficult for cannabis companies to secure funding if they don’t have a clean set of books.

Cannabis business owners should not only consider their long-term goals for valuations but also their short-term goals for bringing on new lenders and investors.

To Read The Rest Of This Article By Naomi Granger on Marijuana Business Daily

Published: April 28, 2020

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