Have you seen the news lately? Cannabis CEO’s are getting in big, BIG trouble, and it’s only going to get worse. The cards are stacked against cannabis businesses in this current political climate. Even with that being the case, some businesses are able to figure out how to not only be profitable, but to do so without getting into hot water with the feds or local authorities.
Others are cutting corners, cheating the system, or simply not following the rules. While they may get away with it in the short term, there’s the simple fact the crackdowns are only going to get worse and more frequent.
For those that want to run a legit cannabis business, avoid crazy fines, and really lead the pack in operating a cannabis business during this time of growth and opportunity, listen up.
We’re going to discuss 5 common, avoidable mistakes that are getting folks into trouble.
These are some of the major missteps that cannabis CEOs and accounting professionals make in their business design and operations:
1. Treating investors and employees badly.
Everyone must follow the rules in order for a cannabis business to be compliant. From safety to how cash is handled, if everyone isn’t on the same page, it creates a recipe for disaster.
And while it’s a newly legalized industry and it is growing astronomically, a cannabis business is still a business. Poor accounting practices, lack of executive direction and leadership, an ineffective HR system, and a team that is improperly- or under-trained are all still going to sink the ship, just as with any other business. This can result in potential disputes, legal action, or even the demise of the company.
2. Lack of Compliance function within their business unit(s).
The lack of a Compliance Plan, Chief Compliance Officer, or regular compliance audits can lead to compliance issues, amongst all sorts of other problems. Seemingly countless Federal, state, and local government agencies all have regulations affecting legal cannabis operations. Compliance with these regulations is what is going to keep you out of hot water, so make sure systems are in place to keep up with legislation that applies to your geographical region. Not adhering to these laws and regulations can lead to potential fines, penalties, or even the loss of your license.
3. Staying in the "black" or "grey" markets.
Those companies that are transitioning from the black market (no regulations) to the white market (heavily regulated) will find that it is an incredibly difficult process. Problems can arise when there is a poor “tone at the top,” or when leadership suggests that some rules are ok to break. Investors will avoid companies that toe the blurred line between legal and illegal, which in-turn will devalue the company. Also, the lack of a zero-tolerance policy when it comes to illegal activities can form bad habits from the top down, and lead to very serious problems like fines and penalties. Accounting plays a huge role in this transition. Proper cash flow and inventory systems must be put in place to ensure compliance, even in the beginning of the company’s life cycle.
4. Trying to beat the IRS and 280e.
Since cannabis has been legalized in several states, many cannabiz companies focused on finding ways to beat the IRS and circumnavigate laws and regulations, as opposed to setting up sustainable systems and procedures and building a World Class company. This has come in the form of incorrect valuation and maximization of COGS, setting up overly complicated entity structures, and not correctly setting up cannabis and non-cannabis divisions. The Harborside case is an example of the legal nightmare that can arise when companies try to side-step 280e. These companies are standing on very thin ice, and will feel the wrath of the IRS when they are audited.
5. Not having World Class Accounting!
Most cannabis companies do not have qualified and experienced accounting service professionals involved in their operations to advise and guide them.
Poor record-keeping and documentation, not being GAAP or audit compliant, not having cost accounting procedures in place, and the lack of monthly tie outs, reviews, and perpetual data room can bring doom for cannabis businesses in any state. Constantly changing laws and regulations must be adapted to, and accounting professionals can help these companies stay compliant. Without World Class accounting service, these companies may survive an audit, but lax systems will lead to a devaluation of the company which will frighten investors.
Maneuvering through the world of legal cannabis ventures can land businesses in huge amounts of trouble if not guided and nurtured through every step of the accounting process. Cannabis companies need qualified and competent accounting professionals, and you have the potential to be the catalyst that leads to a successful, and sustainable, operation for the executives and investors.
For more on how to add massive value to Cannabis businesses for their CEOs with our Cannabis Accounting 5.0 program, click here.