12 Pitfalls to Avoid

We all make mistakes. What we learn from them helps us grow as individuals and business owners. As a certified public accountant for the last 16 years, I have worked with hundreds of small businesses and there are many mistakes I see from startups, and the cannabis industry is no different.

In this article, I would like to highlight the most common mistakes I have seen since I began working with cannabis businesses, which honestly are not much different from any other industry.

1. Wrong entity structure. Seek the advice of an attorney and certified public accountant before starting your business. Some business owners try the do-it-yourself approach to save money. This can end up costing them in the long run. The initial $1,000-$3,000 you save up front could end up costing you $5,000, $10,000 or even $25,000 or more to fix later. Don’t learn this the hard way.
2. No operating agreement. Operating as a limited liability company (LLC) is a great structure because they are a flexible entity for a number of reasons. Do not let that fool you into thinking you don’t need an operating agreement. Many businesses have collapsed because of misunderstandings, etc. Things can get ugly really fast so get everything in writing. The operating agreement dictates everything from how the entity is structured and the business’ purpose to who is responsible for what. The agreement also needs to include an exit plan for the individuals. The business may carry on for a long time, but it’s prudent to have a plan for those who want to exit the business in the future. Your attorney can work with you to draft an agreement. Do not attempt this one on your own.
3. Lack of record-keeping and accounting. How can you know where your business stands if your books are not up to date? I equate this to flying blind. Do your bookkeeping on a regular basis, print reports and look them over. If you do not like bookkeeping, hire someone to help you. That way you can focus on your business and use your energy to analyze the data to grow your company or improve your bottom line.
4. No budget. Do you know where you are going? A budget can help you pave the way. Without a paved road, the journey can be much more treacherous and bumpy. Your balance sheet and profit-and-loss statements are starting points to develop a budget based on where you have been recently. Do a month-to-month projection for the next six, 12 or 18 months. Once you begin, it becomes much easier and you will wonder how you lived without a budget.
5. Forgetting to work the business plan. Many cannabis businesses had a business plan as part of their licensing process. However, once they receive their license, they forget their plan. It should always be a work in progress. Don’t forget: Work the plan and if what you are doing is not working, modify and adjust accordingly.
6. Businesses are undercapitalized. If you are in the cannabis business and you don’t have enough capital to get started, you could end up losing equity in your company later when you are desperate for cash. Plan ahead and factor in unexpected costs. Licensing delays, city and county zoning delays and inspection delays are very costly. Plan on everything costing more. It always does.
7. Not factoring taxes into planning. Let’s say you’ve been doing your accounting and you have a workable budget. Have you factored your tax liability into your planning? Are you paying your estimated taxes quarterly throughout the year? If not, you will find yourself in a hole at tax time. Once you get behind, it’s harder to catch up, let alone get ahead. Plan on paying your taxes throughout the year. Ask your accountant or CPA to help you with tax planning.
8. Mismanagement of non-deductible expenses. Most cannabis business have heard about IRC Section 280E at this point, yet they do not monitor or manage their general and administrative expenses. These include advertising, administrative salaries, travel, meals, entertainment and office expenses to name a few. Work with your tax professional to help identify which expenses are cost of goods sold (the only allowed deduction for a cannabis business) and general and administrative expenses. Keep an eye on these non-deductible expenses for tax purposes. They could make it difficult to achieve a profit (after taxes) if they are out of control.
9. Trusting everyone. Properly vet your business partners, vendors, suppliers, employees and consultants. There are good and bad ones so do your homework before you hire employees and consultants or do business with vendors or suppliers. A little due diligence up front can save time, money and a lot of headaches later.
10. Screen your employees. Finding good help can be a challenge. Don’t be too quick or so desperate to hire that you skip a background check or the screening process. It’s costly to hire, so be sure you make the best attempts to hire the right people in the first place. Also, have documented procedures, job descriptions and employment manuals so your employees know what is expected of them. Hold employees accountable for following procedures by properly training and monitoring them. Great employees are integral to your overall success. They can be your greatest asset. When you find them, remember to treat them well.
11. Not utilizing banking when it’s available. Cannabis business bank accounts can be expensive. The fees are higher because the banks and 
    credit unions have to do more to ensure compliance. It you are tempted to try to operate without a bank account, trust me, it’s a lot more work and hassle to pay your state and local taxes, excise taxes and payroll taxes — not to mention paying employees, vendors and suppliers. It can also make bookkeeping and accounting a nightmare if these cash expenses are not properly documented. A bank account makes running your business much, much easier.
12. You do everything. One person cannot run a successful business if that individual is doing everything from production to accounting to marketing to invoicing. Find what you do best and hire trusted employees, business partners and professionals, such as bookkeepers, accountants and attorneys to focus on what they do best. It’s hard to focus on your business, let alone do any strategic planning if you are doing too much. Also, remember you need to be on the right side of a work/life balance. Remember what’s really important.

 

Final Thoughts

Running a business is extremely rewarding and a lot of work. You are bound to make mistakes along the way. If you can avoid the most common pitfalls, you can save time, energy and money. Don’t be a student of the school of hard knocks. Be smart right out of the gate and use your energy to propel your business rather than being bogged down with avoidable mistakes.

 

Dani Espinda is a principal at ACT Resources, PLLC, and tax manager and cannabis business consultant at Rhodes & Associates, PLLC. She has 16 years of public accounting experience and specializes in tax compliance and planning for individuals, partnerships, corporations, estates and trusts, as well as financial accounting and reporting and QuickBooks consulting. She focuses on medical and recreational cannabis, with more than 185 clients in Alaska, California, Colorado, Oregon and Washington, but also has extensive experience with manufacturing, real estate, professional services and construction. She can be reached at dani@actresourcespllc.com.

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