expertcannabiscfo

[expertcannabiscfo]

Importance of Cash Flow Management in a Cannabis Dispensary

Congratulations, you’ve finally been approved and received your license to open your cannabis dispensary. Your doors are open and sales are beyond your expectations. Your income and expense projections you prepared indicate the first few years of your dispensary will be, at best, a break even proposition. The cash generated from your dispensary covers the day to day operating expenses, leaving little, if any, to build a reserve. BAM, then income tax time gives you an unpleasant surprise. Due to the restrictions of Internal Revenue Code (IRC) Section 280e many of your expenditures are not allowed as a deduction from income for tax purposes. The result is a rather large income tax liability that must be paid! Unfortunately, you have few funds or no funds available to pay the tax. NOW WHAT? Your options are limited due to the lack of traditional bank financing, as you know banks do not lend to cannabis dispensaries. If you own the real estate for the dispensary, your bank may allow you to borrow against the real estate. You could borrow funds from a non-traditional lender, with high interest rates, onerous payment schedules, or restrictions on uses of future funds generated from sales, generally not a viable alternative. You could try to eliminate unnecessary expenditures but that generally is not feasible as you are already operating on bare minimums. You may wish to start a growing operation to better utilize the benefits of IRC Section 471-11. If you are not already, you may wish to change your business strategy to building your brand and entertain offers to sell the dispensary. Lastly, you may be faced with discontinuing the dispensary operation, if additional capital is not available. If your current accounting team and CFO are not preparing a rolling cash forecast based on IRC Section 280e you are setting yourself up for failure. If your accounting team does not have a complete understanding of the nuances of IRC Sections 280e and 471, you are not using the tax code to your fullest advantage. In summary, your dispensary must be properly capitalized at the start of operations or have access to additional capital to continue to fund your dispensary, mostly due to IRC Section 280e. Opening and operating your dispensary is not a get rich quick proposition, it is a capital intensive business, plan for it accordingly. Unfortunately, many startups will not have sufficient capital to fund continued cash flows issues and will be forced to close their doors. Jeffrey F Reinert calvinpete.com A Dope CFO VIP Pro member