With the legalization of medical and recreational marijuana, more states than ever are opening the doors to cannabis entrepreneurs. Despite the exciting changes in the industry, there are still tricky financial challenges to hurdle to find stability and profits. Learn more about how cannabis entrepreneurs can manage their finances and maximize their potential for profits.
Shop Around for Bank Accounts and Credit Cards
Cannabis entrepreneurs face battles when securing traditional bank accounts and credit cards. There are more risks involved with banks, and they charge more if you run a cannabis business. Fortunately, the financial landscape is slowly changing. The Secure and Fair Enforcement (SAFE) Banking Act of 2021 prohibits federal banking regulators from penalizing financial institutions that serve legitimate cannabis-related businesses. Your best bet is to look into smaller institutions and banks that cater specifically to hemp, cannabis, and marijuana businesses.
Plan for Tax Hurdles
The federal government still considers cannabis a controlled substance and does not offer the same tax deductions that other businesses often enjoy. Currently, the tax law allows the deduction of costs of goods, even for cannabis entrepreneurs and their related businesses.
Unfortunately, expenses like rent, utilities, payroll, and advertising your business are not deductible. Your gross profits are taxed, and you could lose more money than you make without careful tax and financial planning. Yes, local rules and regulations are more flexible than the federal government, but it also depends on the nature of your business and the state of your business operations. Allocating part of your budget to a cannabis CPA or accountant is a must to help you navigate your taxes and stay compliant.
Get Unconventional When Raising Money
Raising capital isn’t straightforward, just like everything else in running a cannabis business. The regulations are complex, and licensing can be a lengthy process. Raising money isn’t straightforward, just like everything else in running a cannabis business. The laws are complex, and licensing can be a long process. Bootstrapping is the most obvious way to start and keep your day job or start a side hustle to fund your venture. Finding loans through traditional financial institutions is complex and doesn’t always have favorable terms.
Instead, pre-selling your products or launching a subscription membership helps raise money and establish consistent cash flow before you start. Another option is crowdfunding, where cannabis entrepreneurs raise money from non-accredited investors. In exchange, you can offer VIP membership tiers, products, or a small portion of the revenue.
Diversify Your Business
Depending on the products you sell, you may need to diversify your cannabis business to realize the success you want. For example, hemp is agriculturally defined as containing 3% or less of tetrahydrocannabinol (THC), the psychoactive component of cannabis. As a result, hemp is considered different than cannabis and only needs to follow traditional agriculture. Depending on your business and what else you sell, adding hemp to your inventory may be more profitable than exclusively focusing on cannabis.
Running a dispensary is highly profitable in some states, while others make it nearly impossible. Assessing the legal and tax landscape and getting creative to find solutions to bring more profit into your cannabis business is essential.
Track & Measure Your KPIs
It’s not enough to just track your daily profits and subtract them from your expenses. You also need to track and measure your KPIs (key point indicators) to figure out the true state of your finances and make strategic decisions. Here are a few KPIs for cannabis entrepreneurs to consider:
- Number of daily transactions
- Average purchase size
- Inventory on hand
- Cash flow
- Online traffic for online stores
- Foot traffic for brick and mortar locations
- Marketing promotions
Work with a Cannabis CPA
When you’re a cannabis entrepreneur, you face challenges and hurdles to make a profit and thrive. However, you’re also at an advantage as you grow your business. The more challenges there are, the less competition you have and the more opportunity to stand out. Ready to take the next steps in your journey? Maximize your revenue potential, reduce your tax burden as much as possible, and make strategic business decisions with the help of a Cannabis CPA.
Our firm provides compliant accounting practices for both hemp and marijuana businesses. We have helped hundreds of cannabis companies navigate complex and sometimes contradictory laws and regulations. Contact us today for a free consultation.