Cannabis Cash Management: Standard Operating Procedures from Tax Experts
You followed your passion or the trends and hopped on the cannabis business train. This industry is not for the faint of heart, if you weren’t aware we are sure you are by now. The intricacies and stress of potential IRS audits are enough to make someone scream. Then there is the cash management aspect of the cannabis industry- what are you going to do with it? How are you going to manage it? Redbud Advisors, cannabis tax experts, share cannabis cash management standard operating procedures.
What is a standard operating procedure? This is the minimum expectation. Everyone involved should be adhering to a standard operating procedure because it is the bare minimum. Having cash management standard operating procedures in place for your cannabis business will help owners and employees manage all the incoming and outgoing cash for your business.
A calculated process to manage your cash in any cannabis business is one of the single most important aspects of your business, any business really. In an already highly regulated industry by the IRS not having a standard operating procedure in place for cash management is opening your cannabis business up for an IRS audit. No one wants that. Audits can be potentially costly if you are found to be non-compliant. It could be even worse than penalties and fines- someone can do cold hard jail time.
The Redbud Advisors team will share, what we believe, are the best standard operating procedures for cash management for cannabis businesses.
First Off Where are You Keeping Your Cash
This is an important question, the cannabis industry is highly regulated, mostly cash, and not federally legal. Most people think, “I will use a bank, duh!” This isn’t always a viable option when your cash comes from a business that is a federally illegal schedule 1 substance. Because of this, there are few options for a cannabis business to secure a banking relationship.
Most well-known financial institutions are not opening their arms to the cannabis business. This is due to the federally illegal nature. They are required to ensure all of their depository accounts by the FDIC.
This is not to say there are no banking options- it just means there are more hoops to jump through. Banks or credit unions working with cannabis clients are still federally insured, there is just more reporting and paperwork associated with these accounts. Overall this really just means having a cannabis business account is more labor intensive than other accounts and a higher risk.
The Redbud Advisors team has a long list of information to prepare you for securing a banking situation, some of this can be found in our blog. But to get you started these are some obstacles you might encounter:
Due Diligence Period
Physical Site Examinations
Analysis of Risk
If using a bank for your cash isn’t the best fit for you there are a few other options. However, we do need to disclaim, these options are not our favorite due to the high-risk scenarios and increased crime surrounding cash businesses.
off-site private vault
We stay up-to-date on all banking procedures surrounding the cannabis industry across the United States. We encourage you to give us a call at 866-830-5144 for more information regarding your specific business.
Whatever you decide, you will need to have a standard operating procedure in place.
How Will You Manage Your Cash?
Now that you have a place to put your cash it is important to put procedures in place for handling cash at your business. These will be your cash management standard operating procedures all owners and employees will follow.
These procedures should evolve as your business grows and as times change- communication about changes is key to ensuring all parties are following the current procedures. It is always a great idea to consult your accountant for advice on these procedures. Your cannabis accountant will help keep you compliant.
When choosing a POS (point-of-sale) system you can set up all taxes associated with the location of your business and automated cash management reports so that your business can produce accurate and reliable information. Your POS will also allow you to set up internal controls so that you can identify any discrepancies. This makes your cash flow easier to track and let's face it one of the biggest parts of cash management starts at the source- in-store transactions. Your internal controls should manage all aspects of the cash you have collected throughout your day, as well as track all sales transactions and taxes collected.
All businesses, especially in the cannabis industry, need to have an opening and a closing procedure. Here are examples of opening and closing checklists.
Opening Cash Management Checklist
Count the safe or starting bank
Set up starting tills based on the amount communicated by the company
Process any deposits and paperwork associated with opening duties
Put the remaining money in the safe or the designated place for your business.
Closing Cash Management Checklist
Count all tills
Count the safe
Process any deposits and paperwork associated with closing duties
Put the remaining money in the safe or the designated place for your business.
In addition to opening and closing procedures, you will more than likely need to reset your cash tills during a shift change or drop money into your safe or designated area when your cash tills get too full. This is one way to help keep checks and balances throughout your business day and this isn’t just to alleviate room for all the cash you are making but it is a safety measure as well.
Keep in mind these are just examples and your business operations might warrant a more detailed procedure.
Other Areas of Cash Management
Cash management doesn’t stop with the actual tender. Cannabis businesses, really all businesses, need to track inventory and taxes as heavily as tracking cash. Your inventory is how you have revenue in the first place. Being compliant in tax management is how to avoid an IRS audit trigger.
Completing regular inventory counts and ensuring all items are paid and accounted for directly correlates to your cannabis business as a whole. Having a daily, weekly, and monthly inventory checklist can help track your inventory and catch any waste or discrepancies.
It’s also important to keep a cash log. This is a ledger just like a bank account, but instead, it’s with your cash. This shows that you are keeping contemporaneous records - something the IRS requires if using Internal Revenue Code 471. You can get a copy of our cash log here as well.
Cannabis taxes are not best left to a DIY nature. The intricacies are ever-changing and it is important to have someone on your team who understands what it all means. Cannabis tax experts help maximize your deductions, especially because you can’t take the same deductions as other industries can because of IRC 280E.
The Redbud Advisors team are cannabis tax experts and continuously stay up-to-date on any changes in this industry. We advocate for our clients and even provide representation during an IRS audit. We cannot express loud enough how important it is to have someone with experience in this industry working with your business.
Your cannabis business needs cash management standard operating procedures in place to establish a healthy business overall. Cash management goes way beyond the actual dollars you are counting.
Other aspects of cash management include securing a reliable place to keep your monies, establishing daily cash management procedures, putting good opening and closing processes in place, a POS set up correctly for taxes and reporting, keeping a cash log, and inventory counts.
As a reminder, Redbud Advisors always recommend using a credit union or bank to keep your monies. Other options are available but they aren’t the safest alternative and offer little protection.
It goes without saying that a business that doesn't have a standard operating system when dealing with cash is more susceptible to discrepancies and IRS audits. Managing your cash from every angle is a must to grow your cannabis business and be compliant.
Reach out to the Redbud Advisors team to help establish efficient cash management standard operating procedures for your cannabis business. We educate on compliance in your area at the federal, state, and local levels.