I was recently dining with a group of Cannabis Business Entrepreneurs, and while leaving the restaurant, straight cash was falling from one of these Entrepreneur’s pockets. As I picked it up and handed it to them, my thoughts immediately jumped to cash controls.
There are few businesses these days that maintain a giant balance of pure cash. Most companies have their cash represented by digital numbers on a computer screen within a financial institution. For cannabis businesses, this still proves to be difficult, as many banks (being federally insured) do not accept custodial duties over cannabis businesses’ cash. They see it as a risk and avoid being associated, although some banks, mainly local credit unions and some open-minded bankers are willing to help cannabis businesses with banking needs. Thus, cannabis businesses hold a lot of cash. Enough cash that cash is falling out of their pockets. This raises the accountant’s question: how do you know that your cash balance on the books is accurate?
A king has their royal guards; cash on hand needs adequate controls. The question is how do cannabis business people marry practical controls with ideal controls? It might not be practical to count cash every day and adjust the balance, especially for growers and processors. It might not be practical to have a single safe with all the cash in it that would allow for easy oversight, but be a potential target for nefarious individuals.
We recommend using cloud based accounting systems, which allows for control over cash through the books. For example, if using QuickBooks Online (QBO), I generally recommend the following steps:
- Identify cash repositories and individuals who have cash, as a sub-category of cash on QBO. You can protect identity of location by naming the lines “Cash A”, “Cash B” etc.
- Make an expense account labeled as “Cash Discrepancies”. This allows the business to track if there is shrinkage in cash over time.
- Make it a rule for cash handlers to keep track of their cash. If cash is spent for business purposes or if cash is received, keep a running tally.
- Timely reconciliations of cash should be performed. If the running tally by cash handlers is compared to the QBO balance, is there a discrepancy? If so, expense it to the “Cash Discrepancies” account. This might be prudent to do on a weekly or monthly basis.
A lot of cannabis businesses are on a cash basis the majority of the time. If they are recording and booking their expenses and revenue to QBO timely, their cash on the books should match their counts. There are different levels to cash controls depending on how accurately businesses want to track cash, but this is a basic method. Cannabis businesses are subject to federal tax law in Internal Revenue Code Section 280E, which generally limits tax deductions to cost of sales. Cash shrinkage as an expense, is hard to argue as a Cost of Sales, which makes it even more necessary for cannabis businesses to avoid cash shrinkage. Cash controls also help ensure that large cash transactions are tracked for filing the IRS form 8300. Tax compliance and planning with 280E and filing form 8300 are topics I’ll discuss for future articles.
Brian Kuo is a manager with the business advisory group at McDonald Jacobs where his focus is on maximizing after tax cash flow used for growth by small to mid-sized businesses.
You can read more of his articles for entrepreneurs at TyeeCarr.com