Is cash a double edged sword?
Cash is a given in cannabis, but in a highly regulated market, good accounting systems are indispensable.
If you’re one of the lucky few who received a license or the unlucky many who were granted a CAURD license and subsequently frozen out or one of the many who are currently applying for an AU license; you are likely aware that cash is not only king in this space, it’s the only thing in most cases. I know, why would cash be a bad thing right? There are several reasons why cash has its challenges, from compliance to operations.
The difference with cash in cannabis
Cash compliance in the cannabis space is the elephant in the room and it’s not for the faint-hearted. Owning and operating a cannabis vertical isn’t like any other small cash business you may be familiar with. There is no “skimming from the drawer” to save yourself paying a portion of sales, excise, or income tax. There’s no “borrowing” from the drawer to put gas in your car or pay for that door-dash. There’s also no paying employees “under the table” with cash. When you sign off on the documents for your cannabis license, you are agreeing to not only report every dollar of sales and remit every dollar of tax collected (or earned), but you are also committing to implement and follow policies and procedures (referred to as SOPs) to ensure that every dollar of product sold it reported accordingly and tax is remitted.
How will they know? The reason the state legalized cannabis isn’t because they had an epiphany that cannabis has medicinal benefits or that certain demographics have been unfairly targeted for too long; they legalized it because they see it as a cash cow to fill the state’s budget gaps. When the market is fully matured, the state will generate hundreds of millions in tax revenue and accordingly, they will dedicate the resources necessary to police each and every licensee to make sure they are following the rules and remitting every tax dollar they should be. If you are a licensee, you should be expected to be audited by the state at least annually. If you are found to not be in compliance and owe additional tax (plus penalties and interest), you can expect to be audited more frequently and if you continue to be found to be non-compliant; you will lose your license. The moral of the story with cash compliance is; just as there is the focus on seed to sale for product, you should look at cash similarly with a receipt to deposit mentality.
Cash in the legal cannabis market requires systems
How does cash compliance roll into operations? As mentioned previously, you will need to have SOPs that breakdown how cash is handled from the time the sale is made and recorded in your point of sale to the time it either is paid to a vendor or deposited into your bank account. If you’ve operated or worked in a retail environment, you are familiar with nightly reconciliations of the point of sale (i.e. cash register) to ensure that cash is reconciled. Now multiply that times 10. All shortages will need to be investigated and documented thoroughly. Given the nature of the business, you will accumulate cash quickly which means that security of that cash is paramount. Whether you’re using a “smart safe” that communicates with your bank for pick-up or going with an old school safe, you will want to have secure cash logs that keep track of every dollar that went in and came out so it can be reconciled and recorded correctly. A banking relationship, albeit much more expensive than traditional bank accounts, will be instrumental in securing your cash. Without a bank account, cash will give you nightmares as it will not only take up a significant amount of space, it becomes almost impossible to manage its accuracy. With a bank account, you will easily be able to pay vendors, employees, utilities, etc. by simply writing a check, setting up an ACH, or wire funds; all of which provide a paper trail for compliance. Without a bank account, well, your life is exponentially more challenging as you will need to plan for appropriate increased security protocols, how to pay vendors who are remote, paying employees, etc.
The Takeaway
The moral of the story, cash handling can be an overwhelming aspect of owning and operating a cannabis business. We recommend compiling a team of professionals who are committed to the cannabis space, who understand these challenges and who can help you stay compliant and secure. These individuals are your best chance at not only staying compliant but also simplifying your life so that you can sleep at night.
