5 avoidable mistakes committed by cannabis companies
1. Treating Investors and Employees Badly
The cannabis business is a newly legalized industry that is growing astronomically. To that end, poor accounting practices, lack of executive direction and leadership, an ineffective HR system, and a team that is improperly or under-trained will 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)
Seemingly countless federal, state, and local government agencies all have regulations affecting legal cannabis operations. Compliance with these regulations will help keep you out of hot water, so make sure your systems are in place to keep up with legislation. 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” market
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. 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. The Harborside case is an example of the legal nightmare that can arise when companies try to side-step 280e.
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.
If you have further questions about cannabis accounting, feel free to reach out any time.