Managing & Safeguarding Cash Flow for Cannabis Businesses

Why Cash Flow Matters, Especially for Cannabis Businesses

Many Cannabis businesses such as dispensaries, manufacturers, and cultivators tend to have a lot of cash on hand, even six-figure amounts, due to there being a lack of available banking services and solutions. 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.

With improved cash flow comes greater peace of mind, greater profits, and better forecasting. That’s not all. A strongly safeguarded and managed cash flow shows investors and lenders that the business has specific internal controls in place to minimize the risk of losses due to theft or the misappropriation of funds.

So What is Cash Flow?

Cash is constantly moving into and out of a business, especially many Cannabis businesses, such as dispensaries. “Cash flow” is the term used to refer to the net balance of the cash that, at a specific point in time, is flowing into or out of a business.

Patching Cash Flow Leaks

If you watch where cash is “flowing out” on things like daily operating expenses, such as cleaning services, employee birthday lunches, or various supplies, you can get a snapshot of where the business is leaking money. From there you can ask questions like: “Would it be better to do away with the cleaning company and give employees specific cleaning tasks?” or “Would a T-shirt be a better birthday present than a $100 lunch?” Once you’ve assessed where cash is needlessly being spent, you can refine the systems accordingly. You also need to closely monitor and plan inventory purchases carefully as this will be your biggest outflow of cash.

Better Cash Flow, Better Planning

Another benefit of keeping an eye on cash flow is that it enables the founder, owner, and/or stakeholders to make better business decisions in both the short term (the next 90 days) and the long term.

Let’s say you own a Cannabis dispensary located on Main Street, a hub of restaurants and bars with plenty of foot traffic. A three-day dining festival starts next week. Would getting signage and pamphlets made via rush order be a good use of the business’s cash? Once you consider the actual tangible cash coming in against the cost of such promotional materials, it becomes easier to make informed, grounded decisions.

You Can Ensure You’re Adequately Funded, for Real

When you see how much cash is flowing into and out of a business day to day, you can get a handle on how much cash is needed to keep that operation running smoothly in both economic upturns and downturns. Once the fluctuations of daily cash flow amounts are assessed, a more informed cash flow budget can be put in place, ensuring the business always has enough cash to cover its expenses, in any kind of economic weather. And if you see a period ahead where more cash goes out than will be coming in, you can plan ahead for raising new debt or equity capital (you never want to put that off for the last minute).

Cash Flow & Corporate Governance

Investopedia defines corporate governance as the following: “Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled.”[1] In other words, it is the system and set of rules 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 (and the recording of such discrepancies when they occur), as well as stocking shelves, conducting inventories, etcetera. The most important internal control is Segregation of Duties (SOD) 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. Once everything and anything to do with cash or product is considered and addressed, internal controls need to be put forth in the accounting manual which is what we discuss next.

The Accounting Manual

In order to properly execute corporate governance, a business needs to 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 Segregation of Duties 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 the totality of the accounting manual can be held by the founder, CEO, CFO and investors, and accountant, some Standard Operating Procedures (SOPs) can be given separately to various employees as needed.

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 store manager’s manual may contain specific sensitive information on how to electronically verify the drop, but such information would not be included in the shift managers’ manual. The employees’ manual may have little more than an explanation of proper register counting and cash-drop witnessing procedures.

Along with SOD, the accounting manual should put forth specific procedures for handling inventory and cash, as well as documenting and reporting problems and discrepancies, such as:

What happens when money goes missing?…from a particular cash register?…from the nightly drop?

What’s the procedure and policy when a cash drop amount does not match the cash log?…or does not match the deposit amount on the bag?

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

…and more!

In other words, all day-to-day operations and foreseeable outcomes should be carefully considered and addressed during the creation of internal controls and drafting of the accounting manual. From there, proper and sufficient instruction and procedures can be distributed to management and employees.

Devising the Cash Flow Projection

A cash flow projection is nothing more than a forecast of predicted cash income and expenditures over a specific period of time, like six, nine, or twelve months into the future. Often used on loan applications and to protect the business during a crisis (fire, recession, natural disaster, major loss of customers), 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
Include taxes, tax distributions and address 280E
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

The 5-Year Cash Flow Projection

Bear in mind, predicting for any amount of time past nine months ahead is difficult. Nevertheless, a decent five year forecast is an important financial tool that enables a business’s stakeholders to make informed decisions about its future.

The five year cash flow projection should include:

Growth items such as: new locations, expansion or replacement of facilities, growth of payroll
Sales growth, sales reductions, and various “what if” scenarios
New sources of capital to fund future growth
Any capital repayments of debt or equity
Exit and/or merger & acquisition plans
Other pertinent factors

There is indeed a lot to think about. While protecting cash and cash flow is important for running and servicing any small business, in the Cannabis industry, it’s downright crucial. Whether you’re an accountant, Cannabis business owner, or stakeholder, having the right tools and team is key for remaining profitable, compliant, and informed in this unique industry. DOPE CFO has an array of educational resources on Cannabis accounting including tools, training, workpapers, guidance, an expert community of more than 500 CPAs, CFOs, accountants, tax attorneys, enrolled agents, bookkeepers, and more. If you need help, just reach out. We’re here!