May 13, 2019
KNOW HOW

Pot firms must overcome financial hurdles

Dave McManus

With cannabis businesses steadily entering the mainstream, it can be easy to lose sight of how difficult it is to launch and operate an organization in a quickly evolving industry. The regulatory scrutiny and tug of war between state and federal legislation creates a delicate environment.

Initially, nuances put restrictions on company growth and hamper players from entering the market. Without the right financial backing and partners to get through this formative stage, navigating the additional expenses and challenges can be a major struggle.

Cannabis business owners may believe they have a handle on the accounting, but there is no room for error in putting a solid finance function in place to overcome these unique hurdles.

Sorting out federal tax is difficult in a straightforward setting. For cannabis, a number of pitfalls arise because the core business is still viewed as trafficking in an illegal substance. There are strategies to help maximize deductible business expenses, but owners need a sound financial accounting system to gauge risks and capitalize on opportunities.

Banking

The sale of marijuana remains a federal crime, so any money tied to cannabis operations can expose banks to significant risk. As a result, only a handful of financial institutions will work with distributors. Locally, GFA Federal Credit Union in Gardner has taken the leap into the recreational market, but its overall operations are restricted geographically. Other institutions are slowly jumping in, and help may be on the way in the form of the SAFE Act (Secure and Fair Enforcement Banking Act of 2019) under consideration by Congress. The act would clear the way for banks to work more traditionally with licensed cannabis operations.

For the time being, operators are faced with security issues coming along with tracking and moving large amounts of cash. They need to handle the added expenses associated with secure transport and insurance.

Financial statement audits are significantly more onerous. A different set of risks must be examined as auditors verify cash on hand, review safeguards and processes to manage cash. and ensure employees are not skimming.

Financing

Small businesses often live and die by financing vehicles to provide enough cash flow for them to achieve stability. In the cannabis industry, though, traditional paths to financing are blocked. With no bank backing, there are no available lines of credit or long-term debt facilities. Owners have little recourse but to seek third-party financing from friends, family or angel investors. That usually means higher rates and tighter terms.

Payroll

As with banking, few major payroll providers will work in the cannabis industry. Owners are limited to smaller, more local companies. Even then, complications arise in how payments must be made to the federal government, driving costs higher. Until federal restrictions ease, standard business operations like taxes, banking, financing, and payroll will put unique burdens and added expense on cannabis operations. When the playing field becomes level, new concerns will arise: It will be easier to enter the market, increasing competition and lowering prices.

In the meantime, cannabis operators who have a strategic plan in place and the right advisors will overcome these hurdles and set the pace in Mass.

Dave McManus is the co-managing partner at Westborough accounting firm AAFCPAs.

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