Why cash flow matters, especially for cannabis companies

As the cannabis market begins to grow in Connecticut and is expected to reach $1B in sales over the next few years as the industry matures, there will be a lack of banking services available. Obviously, securing large amounts of cash is essential to day-to-day operations, but there are many other reasons why managing cash flow is so important.

With the current ambiguity surrounding a non-traditional industry like cannabis, there are a few standard operating procedures that should be closely followed and implemented. For example, a procedure for counting and recording the day’s cash deposit might involve a witness verifying the amount of cash deposited into a clear, tamper-evident deposit bag signed by both the shift manager and employee and recorded on camera.

The company should also establish specific procedures for handling inventory and cash, as well as documenting and reporting problems and discrepancies, e.g. B.: What happens if money is lost?

What to do if a cash drop amount does not match the cash log?

What applies if the deposit amount does not match the amount on the bag?

How is the per diem closed and paid if there is no witness present?

Creation of the cash flow forecast

A cash flow forecast is a projection of projected cash receipts and payments over a specific period in the future, such as six, nine, or 12 months. The projection is often used in loan applications and to protect the business during a crisis, the projection must include:

Worst case scenarios for sales when they are lower than expected

Worst-case scenarios for expenses when higher than forecast

Account for increases/decreases related to loans and equity

View a net increase or decrease in cash balance each month

View starting and ending money and if there is a gap, plan to fund that gap

Corporate governance is essential as the system of rules, practices and processes by which a company’s practices are managed and monitored. When a company lacks adequate and enforced corporate governance, attracting an investor or obtaining a loan can prove difficult.

Internal Controls

Internal controls can be viewed as the way in which corporate governance is filtered down ‘top down’ and applied to every relevant aspect of business operations. Anything related to the handling and management of cash, valuables and products or inventory should be addressed.

For example, a cannabis dispensary should have established procedures for receiving and verifying shipments of product for accuracy, resolving discrepancies, stocking shelves, conducting inventories, etc. The most important internal control is the segregation of duties and this ensures that any employee who has access to store cash or product (ie the budtender) does not also have access to the accounting system or POS system.

In developing internal controls, standards such as a daily reconciliation of cash and sales, procedures for counting, reporting, depositing or “dropping” cash in a safe or cashbox, and providing sufficient cash to keep registers giving change are provided and paying suppliers and vendors should also be addressed.

The Accounting Handbook

In order to properly execute corporate governance, a Connecticut corporation should have an accounting manual that provides an overview of all of its accounting rules, procedures, and policies. Developed internally, it serves as the core document that shows a company’s approach to corporate governance and also describes the SOD, which establishes which employees have access to the accounting systems and ensures that cash handling is not restricted to one person delegated, but a system of accountability and review carried out by two or more employees is in place.

SOD significantly minimizes the risk of fraud and theft. Unfortunately, some employees abuse their position when given too much control. We’ve all heard the stories of trusted managers or assistants stealing thousands of dollars, sometimes over a period of months or even years. A robust SOD helps ensure that the physical custody of access is separate from the recording of transactions in the accounting system (i.e. delegated to different people) and that the possibility of theft or misappropriation of cash is accounted for and secured in every transaction and operation.

While protecting cash and cash flow is important to the operation and maintenance of any small business, it’s downright critical in the cannabis industry. For new businesses just entering its Connecticut market, having the right tools and team is critical to staying profitable, compliant, and informed in this unique industry.

Andrew Hunzicker is CEO of DOPE CFO, a cannabis/CBD accounting and tax firm.