Opinion: Why cash flow matters, especially for cannabis businesses

Marijuana plants to be sold commercially are grown in a Connecticut factory.

Marijuana plants to be sold commercially are grown in a Connecticut factory.

File photo

With Connecticut’s cannabis market beginning to ramp up, and expected to eclipse $1 billion in sales over the next several years when the industry matures, cannabis-related companies like dispensaries, manufacturers and cultivators will find themselves with a lot of cash on hand due to the lack of available banking services. Obviously, safeguarding massive amounts of cash is essential to day-to-day operations, but there are many other reasons why managing cash flow matters greatly.

Standard operating procedures

With the current murkiness surrounding a nontraditional industry like cannabis, some standard operating procedures should be closely followed and implemented. For example, having a procedure for counting and recording the day’s cash drop could include having a witness verify the amount of cash deposited into a clear, tamper-proof deposit bag that’s signed by both the shift manager and employee, as well as recorded on camera.

The business should also spell out specific procedures for handling inventory and cash, as well as documenting and reporting problems and discrepancies, such as: What happens when money goes missing?

What’s the procedure when a cash drop amount does not match the cash log?

What is the policy for when the deposit amount doesn’t match what’s on the bag?

What’s the procedure for closing and depositing the day’s cash when no witness is present?

Devising the cash flow projection

A cash flow projection is a forecast of predicted cash income and expenditures over a specific period of time into the future like six, nine or 12 months. Often used on loan applications and to protect the business during a crisis the projection needs to include the following:

Worst case scenarios for sales if they are lower than expected

Worst case scenarios for expenses if they are higher than projected

Consider increases/decreases related to loans and equity investments

Show a net increase or decrease each month to cash balance

Show beginning and ending cash and if there’s a gap, plan to fund that gap

Corporate governance is essential as the system of rules, practices, and processes by which a business’s practices are handled and overseen. If a business is lacking in proper and enforced corporate governance, bringing in an investor or taking on a loan can prove to be difficult.

Internal controls

Internal controls can be thought of as the manner in which corporate governance “from the top” gets filtered down and applied to every pertinent aspect of the business’s operations. Anything having to do with the handling and management of cash, valuables, and product or inventory should be addressed.

For example, a cannabis dispensary should have spelled-out procedures for receiving and checking product deliveries for accuracy, addressing any discrepancies, as well as stocking shelves, conducting inventories, etc. The most important internal control is segregation of duties, and this ensures that any employee that has access to custody of cash or product (i.e. the budtender) does not also have access to the accounting system or POS system.

When devising internal controls, standards such as a daily reconciliation of cash to sales, procedures for counting, reporting, depositing or “dropping” deposits of cash into a safe or dropbox, and having sufficient cash to supply the registers, give change, and pay suppliers and vendors should also be addressed.

The accounting manual

In order to properly execute corporate governance, a Connecticut business should have an accounting manual containing an outline of all of its accounting rules, procedures, and guidelines. Developed internally, it serves as a key document that demonstrates a business’s handling of corporate governance, and also describes the SOD establishing which employees have access to the accounting systems, and ensures that the handling of cash is not delegated to one person, but rather, a system of accountability and verification performed by two or more employees is set in place.

SOD greatly minimizes the risk of fraud and theft. Unfortunately, when given too much control, some employees will take advantage of their position. We’ve all heard the stories of the trusted manager or assistant who filched thousands of dollars, sometimes over a period of months or even years. A solid SOD is one that helps ensure that physical custody of access is separate from the recording of transactions in the accounting system (i.e. delegated to different people) and that the potential of theft or misappropriation of cash is taken into consideration and hedged against in every transaction and operation.

While protecting cash and cash flow is important for running and servicing any small business, in the cannabis industry, it’s downright crucial. For new businesses just entering his market in Connecticut, having the right tools and team is key for remaining profitable, compliant and informed in this unique industry.

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