How Indoor Growers Can Set Up Financial Systems that Scale with the Harvest
The cannabis industry is enjoying explosive growth nationwide as most states have now either partly or fully legalized and decriminalized its sale and use. While we still have a ways to go, there’s no question that business is booming.
Unfortunately, until the federal government reschedules cannabis from a Schedule I (illegal) substance down to Schedule III (where it ought to reside), operators are challenged to meet compliance mandates in the rapidly evolving landscape. IRC 280E puts cannabis companies in a tax-disadvantaged position, as they cannot deduct what would usually be considered standard business deductions. This situation falsely inflates taxable income and increases the tax burden at the expense of margins and growth plans.
Furthermore, financial compliance is stringent and specific, requiring an accounting professional to ensure records are auditor-ready at any given time.
With all these barriers, it’s easy to wonder why people get into the business at all. Startup costs are excessively high, licensing systems are complex, and margins are so tight that any little misstep can put you in the red, either from financial mismanagement or due to penalties for late filing or poorly managed financials.
If you’re a cultivator, you have some advantages, as most of your expenses can be attributed to the cost of goods sold (COGS) and are therefore deductible. That’s all good news, but what if your plans involve expansion? How do you scale a business with so many moving parts?
For indoor growers looking to scale, establishing solid financial systems early lays the foundations on which you can grow.
Today, we’ll focus on indoor cultivation operations and how to set the stage for compliance now, helping to make your scalability plans achievable.
Financial Systems for Indoor Growers: Eight Tips to Support Scale
Know the ins and outs of cannabis tax, compliance, and finance
We’ve already touched on the regulatory challenges of cannabis, but it bears repeating. Understanding what you’re up against is essential, as cannabis is heavily regulated—and will continue to be even after rescheduling. Your financial systems need to be in tune with:
280E taxation. Though cultivators can attribute many expenses to COGS, others cannot. Improperly classifying expenses will result in undue auditor scrutiny, penalties, and will no doubt put you at a disadvantage. Apply best cost-accounting practices to ensure all costs are allocated accurately. Using cannabis-specific software can help you achieve this.
State compliance. Federal rules are one thing, but each state has its own tax structure, reporting, filing, and compliance requirements. All financial systems must be set up to align with these needs.
State decoupling. Some states have decoupled from 280E at the state level, which will require you to maintain a separate ledger for these expenses. Trust us, it will be worthwhile, as it provides much-needed tax relief.
Acknowledging these variables from the get-go will set you up for long-term success.
Prioritize cannabis-specific software
Smaller grow-ops might start out using spreadsheets or off-the-shelf accounting apps. These decisions will come back to bite you. You’ll inevitably need to migrate to professional software as your books will soon become unmanageable. Do you really want to be spending all your time on bookkeeping? We didn’t think so!
Do this instead:
Choose cannabis-specific software as it is capable of handling complex rules and charts of accounts.
Set up your charts of accounts by cultivation stage, expense type, and revenue stream. Structuring your chart of accounts properly at the outset will make it easier for you to track profitability, even down to the individual plant level or growing methodology.
Automate everything you can. Payroll, expense categorization, and accounts payable can be at least partially automated in your software, saving you time and headaches. When you scale, your systems will be ready to grow with you.
Pay attention to cash flow
Indoor cultivation is costly. Equipment, utilities, and labor add up quickly, and since cannabis is a cash-heavy industry (due to limited access to banking options), false signaling is common.
If you’re not tracking cash flow and projecting expense needs, it’s easy to fall behind, and you don’t want to be there when your filing or license renewal date rolls around.
In best practice:
Use forecasting and budgeting tools to predict cash needs for each growth cycle.
Track expenses in real-time instead of waiting until you close out the month.
Build up a healthy reserve fund to ensure you have funds on hand for emergencies.
Ensure your financial systems are aligned with compliance needs
All states that permit cannabis sales require operators to integrate a mandated seed-to-sale system. These platforms are sometimes capable of handling many other aspects of your business, including inventory management, cost accounting, tracking transactions, and maintaining detailed tax records. You can also choose to integrate your preferred systems if that suits you better. Doing so might help you gain some efficiency, as state-run systems are prone to glitches, and you’ll have less control if you need to remediate.
Ensure your software integrates with your seed-to-sale platform.
Audit your financial records and inventory against seed-to-sale frequently (weekly or monthly) to ensure everything aligns.
Maintain meticulous transaction records with complete documentation describing your processes and rationale. Anomalies will be flagged, and you’ll want to ensure you have the answers ready!
Establish standard operating procedures
Standard operating procedures (SOPs) are essential if you plan to scale. With well-established processes, it’s easier to onboard new people and increase capacity with minimal disruption. Keep in mind that the very definition of scale is not just about growth, it’s also about being able to do so without adding complexity!
Set up your business entity to maximize tax efficiency
Initially, it might be tempting to structure your grow operation as simply as possible. However, if you plan to scale, you need to think about the future and how best to protect yourself—and your assets. Working with a qualified cannabis CPA will help you think about the right things before you make structuring decisions you’ll regret later. Speak to the experts at Growise to get started!
Lastly, we can’t stress enough how critical it is to have cannabis-specific financial expertise in your corner. Growise supports indoor cannabis cultivators with the insights and strategies you need to grow. Set up a call today, and let’s talk scale!