Do you track your spending after shopping for groceries? How do you manage your money to pay bills or set a budget for your next vacation? The importance of proper accounting shows up every day in our lives.
Accounting is essential to be financially stable and achieve our goals. The same is true if you're a cannabis business owner.
Suppose you need to know the profitability of a cannabis product you recently launched. To calculate its profit margin, you have to determine the total cost and the revenue generated from the sales. How can you get there without proper accounting?
Cannabis accounting becomes even more important during tax season. In this industry, you must file income tax returns like any other business but won't qualify for deductions or federal aid, which makes the entire operation much more complex.
All of this proves that this discipline is critical to the growth of a business in this highly regulated industry. Cannabis accounting is everywhere.
Are you struggling to track your company's finances? Do you want to find a way to improve your financial practices? Find some tips and tricks on how to be better at cannabis accounting below!
The Advantages of Having a Cannabis Accountant
Regardless of the industry they serve, all companies require efficient management of their finances. If you don't oversee your day-to-day financial processes and track revenue and spending, how else are you going to know if your business is profitable and successful?
Accounting helps you understand what's going on inside your company and is key for a project to thrive. That's why it's often called "the universal language of business."
But staying on top of your business's finances is a full-time job. As a cannabis business owner, you'll find yourself dealing with different challenges. Each state has its own cannabis-specific tax codes and regulations. So, you have to take care of tax management, compliance, and general operations.
Although this may be time-consuming and a bit overwhelming, you can build a solid financial foundation with the right support from experienced cannabis accountants.
These are some of the tasks cannabis accountants can help you with:
- Cash flow management
- Compliance with state-specific regulations and tax laws
- Business planning
- Analytical reporting
- Risk mitigation
Besides bringing in an accountant, using cannabis accounting software could make all the difference between good and great financial management.
Familiarizing Yourself with Cost Accounting
Before delving into other essential aspects of accounting for cannabis operations, let's answer an important question: Where is your company spending money?
Cannabis business owners need to know how much they're earning and where the money is being lost to reduce spending and determine whether they're actually making a profit.
This leads to another question: How can you keep track of this? Well, this is where cost accounting comes in.
In essence, cost accounting is the process of recording, reporting, and analyzing a company's cost structure. That form of management accounting can help you estimate the costs associated with manufacturing a product or running your cannabis business.
Cost accounting involves assigning costs to different objects, such as products, services, projects, processes, and other related activities. This makes it easier to improve productivity and efficiency to make better budget predictions and maximize your business's profitability.
Furthermore, this process provides information that can be key to decision-making, helping you determine where you should allocate your resources based on your specific needs.
Although cost accounting records historical costs and is key to identifying if you're making a profit or losing money, it isn't the same thing as financial accounting. Both are different in their target audiences.
While cost accounting is an internal process that keeps track of the costs your business incurs, financial accounting can help you understand your company's financial position. The former is essential for managers or employees who hold decision-making power, and the latter focuses on external parties, such as regulators and investors, showing the status of the business regarding assets and liabilities.
Example Scenario with Pre-Rolls
To better understand the importance of cost accounting, let’s walk through the following scenario.
Here's what you need to make a cannabis pre-roll:
- Between 1g and 2g of cannabis flowers
- 1 pre-roll cone
- 1 pre-roll tube
- 1 pre-roll tube sticker
This is your Bill of Materials (BOM), which is the list of raw materials, parts, components, and instructions you need to create a product. Each of those items has an associated cost.
If you tally up such costs, you'll calculate the Cost of Goods Sold (COGS), also known as "Cost of Sales," which measures all the direct or immediate costs of creating products in your company.
Why is it important to know this? Calculating the COGS for your products helps you determine if the revenue your business is generating is worth the cost of production. In other words, you'll know if you're making a profit from that item.
To calculate the COGS for your products, you can use this formula:
- Cost of Goods Sold = Beginning Inventory + Purchased Inventory – Ending Inventory
However, calculating the actual cost of a product is a little more complicated. Let's say you pay $2 for 2g of cannabis flowers, $0.50 for the cone, $0.30 for the tube, and $0.20 for the sticker.
Although the sum of all these ingredients suggests that each pre-roll costs $3, the truth is that other aspects that go beyond production should be factored in. For example, if you grow the flower, you should consider cultivation costs.
Similarly, if you sell or distribute cannabis flowers, you need to factor in the costs of doing that business, which may include gas fees, truck-related costs, and drivers' salaries.
The more comprehensive your cost analysis is, the more accurately you can calculate profitability. That's why it's so important to do accurate accounting for your cannabis business. It'll help you calculate the total cost of production by assessing both direct and indirect expenses.
The 280E Tax
Several tax codes affect the cannabis industry, but the one that hits it the hardest is the 26 U.S. Code §280E, which is simply referred to as "280E."
Since cannabis hasn't been legalized at a federal level and is still considered a Schedule I or II substance under the Controlled Substances Act, businesses that grow, process, and sell cannabis must operate under Section 280E of the Internal Revenue Code.
This tax code forbids businesses from deducting expenses related to producing or selling cannabis, even if they're "legal" in their state, because this activity is considered "trafficking" of illegal substances by the federal government.
Although state-legal cannabis businesses can deduct the COGS, other necessary business expenses, such as salaries and marketing, aren't deductible. As a result, cultivators, processors, and distributors face a considerably high effective tax rate that can reduce profitability.
This makes it much more important to calculate your revenue and spending, stay on top of your finances, and maintain accounting accuracy. Experienced cannabis accountants know the 280E best practices to help you save as much as possible on your annual revenue.
Setting Up Industry-Standard Accounting Software
With so much information about the costs you must calculate, the tax codes that can affect your business, and the regulations you must comply with, it's so easy to get overwhelmed. Fortunately, there's a potential solution: a comprehensive seed-to-sale software.
You'll need help from cannabis accountants to stay on top of your accounting. However, all-inclusive cannabis accounting software can simplify this process and help you address your business's unique financial needs.
One of the popular accounting solutions out there is QuickBooks, which isn't a cannabis accounting software option per se but can be used as one.
QuickBooks has a plethora of features that your cannabis business can benefit from, including tools that focus on the following:
- Income and expense tracking
- Financial reports generation
- Invoice management
- Integration with point-of-sale systems
- And more
Although this solution offers many advantages, you shouldn't depend solely on Quickbooks for your cannabis accounting. This popular accounting software comes with some limitations related to the legal intricacies of this industry, especially those that have to do with each state's regulations and reporting requirements.
Luckily, you can find a comprehensive seed-to-sale software solution with features that will make it easier than ever to do accounting for your cannabis business, including Distru.
Distru is a streamlined seed-to-sale software designed to simplify your cannabis operations. This solution can help you oversee each process from start to finish, manage inventory, drive sales, calculate state-specific excise taxes, and stay compliant.
Do you want to know if your business is making money or simply keep your finances up to date? Distru can connect with multiple cannabis accounting software solutions, such as QuickBooks, Sage, and Xero.
Stay on Top Of Your Accounting with Distru!
Accounting is essential for businesses in all industries, particularly cannabis, as this sector faces different tax rates, regulations, and special taxation.
Cannabis accountants can guide you through all the processes you should follow to remain compliant. However, complementary seed-to-sale software like Distru can play a crucial role in getting more accurate results and saving your team time when managing your finances.
Distru has a newly designed accounting suite that can help cannabis business operators get more granular about their costs and save over 100 hours of work per week!
Do you want to discover more about our seed-to-sale solution? Click here to get a personalized tour of Distru!
