q&a with kevin michaelan: “the complexity and risks cannot be understated.”
by 卡塔尔世界杯常规比赛时间 research
cannabizcpa.pro
kevin michaelan, cpa, mst, is the director of cannabis practice at aafcpa, a leading cpa and consulting firm based in boston with national & global reach. massachusetts recently authorized sales of cannabis for recreational use, and the first retail stores opened last year.
more at cannabizcpa.pro: kareyna miller mines michigan cannabis niche | high times at aicpa | 5 do’s and don’ts for cannabis cpa marketing | cannabis cpa readies for when maine ‘goes recreational’ | integrity wins in cannabis accounting | more at cannabizcpa.pro
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here michaelan offers 卡塔尔世界杯常规比赛时间 insights into some of the technicalities of accounting for cannabis businesses.
q: how is your firm involved in the cannabis industry?
since 2012, our cannabis practice has focused on representing nonprofit medical dispensaries and private medical and recreational cannabis operators, management, and their financial sponsors from concept to exit. our cannabis practice is supported by a network of industry-leading attorneys, bankers, and other professionals. together, we work to help clients address traditional and cannabis-specific challenges and opportunities.
q: from the client’s perspective, what are the financial problems and risks that they have to be aware of?
for cannabis companies, financial problems include taxation, access to capital and traditional banking services, and long-term investments with short-term or expensive financing. they also face risks across a number of other categories, including operational and regulatory. consider, for example, a company that is 100% focused on vape products, lacks liquidity, has expensive debt financing, and 60% operational efficiency–there would certainly be cause for concern.
the “cannabis premium” creates challenges as well. there is an additional cost of doing business in this industry due to the supply and demand imbalance for capital, real estate, products and services that stems from federal illegality. it touches all aspects of financing, investments, and operations. examples include higher taxes, higher financing costs, indoor cultivation, higher rents, higher professional fees, higher banking fees… the list goes on.
from a tax perspective, challenges also arise through internal revenue code section 280e and the requirement to make federal tax deposits (e.g. payroll taxes) electronically. section 280e effectively imposes income tax on gross profit, resulting in lower profitability and higher cost to invest in marketing and sales to grow. aggressive or not-fully evaluated tax positions and structures are at significant risk based on the irs’ view and enforcement, which is strict and pervasive.
payroll is another problem area. payroll may need to be in cash if the business does not have banking services. employees may be at risk with personal bank account relationships. there are a limited number of major providers that will work in the cannabis industry. additionally, complications arise in how payments must be made to the federal government, driving costs higher than those in a more traditional relationship with a payroll service.
q: does the client (the cannabis business) need to do any special bookkeeping that would not be required in a traditional business?
the complexities of the cannabis industry require specific industry knowledge to ensure proper bookkeeping and accounting. any regulated business should consider the appropriate bookkeeping to show compliance with regulations (e.g. no illicit or unapproved sales or purchases). proper income tax accounting is not unique, but there are unusual aspects that come to light, as cannabis businesses must accurately determine the cost of goods sold due to code section 280e. in many cases, operators are required to pay a fee to the cities or towns in which they operate based on a percentage of sales or production and the estimated impact on the city or town. therefore, bookkeeping should be sufficient to demonstrate compliance and to possibly demonstrate the estimated impact (and thus potentially reduce the fee).
cannabis businesses have the same key performance indicators (kpis) as the sectors they compete in, but they also have unique and state-specific regulatory requirements that warrant other specific kpis. together, bookkeeping considerations for traditional and unique sector-specific regulations are necessary for compliance and to demonstrate value-drivers, differentiation, and competitive positioning.
q: what are the mistakes that upstart businesses are most likely to make? what is most likely to cause the business to fail?
most new businesses in the cannabis sector stumble due to overly optimistic expectations, under-estimating political/regulatory risk and competition, failure to align with experienced business advisors, and failure to implement best practices. the results may be seen in the lack of working capital to pivot (e.g. the business dedicated to vape products).
cash is the lifeblood of a business. cannabis companies have limited access to cash given federal illegality, the current state of the capital markets, and banking restrictions. although we hope this will change in the near future, for the time being, managing cash is the most important element of a successful financial strategy.
cannabis businesses require steadfast planning. executives should generate an outlook of the next 12 to 18 months to prepare scenarios, including risk management and disaster recovery plans. regarding risk, it is important to consider all types, including economic, business, operating, financial, asset, product, market, technological, regulatory, and legal.
a thoughtfully developed and comprehensive plan will provide confidence and a roadmap that is focused on what company operators can control: strong balance sheets, disciplined growth, operational execution and efficiency, and risk management.
q: financially speaking, how is a cannabis business different from traditional business, be it the product, distribution, wholesale or retail?
long-range planning is more difficult in the cannabis industry, as significant regulatory changes are coming in fits and starts.
the banking conundrum also causes a ripple effect throughout the business and the supply chain; with such a heavy emphasis on cash, a wide range of issues come into play that traditional businesses are not exposed to. the risk of having large amounts of cash on hand, transporting cash, making simple purchases, managing payroll – all these elements become more complicated and carry greater risk.
q: in your experience, what do cannabis clients tend to not know?
in some cases, cannabis clients have functional expertise in areas other than finance, such as cultivation. in other cases, cannabis business owners and investors lack experience with the unique and ever-evolving nuances of cannabis accounting, e.g. cost accounting, taxation, and financial management. without these elements, businesses will have difficulty providing representative financial performance, managing risk, and taking action to improve operational and financial performance.
q: how should a cpa orient a new client to the special nature of the business?
many of aafcpas clients have inquired about the risks and opportunities associated with investing in the cannabis space. we advise new investors on the necessary due diligence when identifying a suitable business to invest in, as well as understanding the timeframe in which they’ll likely see a return on their investments.
q: what possible pitfalls and risks should a cpa be aware of? how can those pitfalls and risks be avoided or managed?
cannabis companies must manage the overlap between traditional and unique business challenges and opportunities. the complexity and risks cannot be understated: cannabis is not an industry in which to dabble. therefore, it is critical for the cpa to be committed to understanding the nuances and risks, collaborating, and staying up to date as the industry continues to become increasingly complex and competitive.