Going Legal: 8 Small Business Accounting Tips for Your Cannabis Company
Spending on legal marijuana products is expected to reach over $40 billion in North America by 2027. This is a fast-growing, highly profitable industry that you need to jump into if you haven't done so already.
But, there is a bit of red tape around working with marijuana right now. You have to be careful with the legality of it in the state(s) you're operating in, and keep in mind that it's still illegal at the federal level.
This can make it hard to open a business bank account and handle other small business accounting needs. However, the work is worth it when you consider all the benefits of being an early adapter to this quickly-expanding industry.
Just be sure you do all your due diligence when opening your cannabis-related company. As far as the accounting side of things goes, use the following tips to make sure all your financial affairs are in order.
1. Track Your Inventory
Your business is nothing without its inventory. You can't afford to miscount your fresh flowers or lose a box of your oils/edibles. Whatever aspect of the marijuana industry you're going into, inventory tracking is crucial to keeping profits high and losses low.
There may be times when you have to write things off if you want to sample products in your dispensary or offer freebies at trade shows. Still, you need to keep an accurate count of all the inventory you have on-hand at any given moment, and how the numbers rise and fall depending on certain business functions.
2. Learn How Depreciation Works
Inventory is one of your major assets, but it's not the only one to account for.
If you're looking to become a grower of marijuana, you have to think about the depreciation of your warehouse and all the lights, pots, and plants that go into the production process. If you're more interested in opening a dispensary or becoming a distributor, depreciation will affect things like shelving and storage tools, trucks and pallets for transportation, and more.
The better you understand how this aspect of accounting works, the more prepared you're going to be for budgeting needs in the long run. Accounting for depreciation gives you a clear idea of when certain tools will need to be replaced and how their value decreases over time.
3. Budget, Budget, Budget
Speaking of budgeting for the long run, the only way to ensure you're successful three or five years from now is to keep a close eye on the budget every single day. You need to know where every single dollar of your business is going and how it's being generated.
This means tracking everything from big investments and grants to small sales and goods you have to take a loss on. Every penny matters. More so, it's important that you clearly define all the cash flows of your business.
4. Cut Back on Overhead
One of the biggest expenses you're going to have right out of the gate is overhead.
Overhead accounts for everything from your place of business to your operation materials. The best way to think about this category is anything you pay a reoccurring payment on, whether that be annually or monthly. One-time startup costs may also be included in overhead, though.
The more you can keep these costs low, the better your chances of succeeding are. You don't want to blow all your money right away or end up defaulting on vendor payments a few months after opening for business. Save your money and allocate it wisely into the things you absolutely need to keep such situations from happening.
5. Keep Employee Turnover Low
Here's another thing that contributes to overhead: the hiring of new employees. You're going to need to expand your team as your business grows. But, you want to refrain from refilling the same position(s) over and over.
A strong company culture with low employee turnover is one of the most valuable assets your business can have. This applies in terms of smart accounting as well as other initiatives that contribute to success.
From a financial perspective, though, having to fill positions due to high turnover puts a serious setback on your finances. You end up spending more on recruiting and onboarding costs for new hires than you do to pay for the salary and benefits of current employees.
The only exception to this rule is when you're expanding your team rather than filling positions that people have left. Investing in new employees in this manner is actually an investment in the good of your business -- not an unnecessary expense that you could avoid with low turnover.
6. Invest in Ways to Boost Productivity
Hiring and onboarding waste just as much time as it does money, if not more. But, time is something you should get the most value out of in everything your business does, which means you have to figure out how to boost productivity.
Getting more productivity out of your time offers all kinds of financial benefits.
It may make the difference between hiring one more person or keeping your employee count as-is. Beyond hiring, better productivity allows you to boost sales, create more innovative marketing campaigns, and better handle customer relations.
Put simply, higher productivity directly benefits everything your business does; it creates more profits by establishing a smarter, more efficient way of doing things.
7. Remember to Account for Taxes
This is one of the biggest expenses your business will incur every year, and it's not something you can afford to forget about. You need to set aside money for federal and state taxes. In fact, it may be better to establish a quarterly payment system instead of waiting until the end of the fiscal year to pay all of your taxes at once.
8. Hire an Accounting Professional
At the end of the day, there's only so much you can do to keep a good handle on all of your cannabis company's accounting needs. In addition to balancing the books, you also have to spearhead product development, lead generation, and figure out how to gain more funding for your business.
It's a lot to take on at once, which is why you should focus on building a strong team and identifying what you need to outsource.
Small Business Accounting Made Simple
There's no reason you should take on small business accounting on your own, especially if you're more passionate about your other duties as a cannabis entrepreneur. Put the more technical matters into the hands of trusted professionals instead.
This gives you the peace of mind that all your business needs are taken care of, and it also opens your schedule to put more energy into the things you really care about.
To discover everything we can do to support your accounting needs, click here.