High Times: Accounting for Cannabis Companies

On October 17th, 2018, Canada legalized recreational pot; the second country in the world to do so. As a result, an estimated $4.3 billion Canadian cannabis industry was born—now that's a lot of green.

While this decision may not have much of an affect on the average consumer, for accountants and bookkeepers, a whole new “cannabiz” has just opened up, and with it, a whole new revenue stream. In Canada, where convoluted tax, regulatory, and banking rules are evolving faster than cannabis companies can keep up with, there’s an increasing demand for financial experts who can help them to navigate this budding new opportunity.

But for professions who may be new to the world of accounting for cannabis companies, it’s important to understand the challenges these “cannapreneurs” are facing, where accountants and bookkeepers fit in, and how these companies can benefit from professional financial guidance.

Accounting Challenges for Cannabis Companies

As the legalization of recreational marijuana is relatively new in Canada, many cannabis companies are in their infancy and have little prior experience with proper accounting procedures. Indeed, the “gold rush mentality” has led many inexperienced business owners to dive into the industry head-first. As a result, few of these early-stage cannabis companies have properly designed accounting systems in place, nor anyone who is able to prepare financial statements. Indeed, the day-to-day operations of running a cannabis company are unlike any other sector and even CEOs with past business experience in other industries are bound to run into challenges keeping their finances in order.

Often these early-stage cannabis entrepreneurs are also in the position of raising funds to get their companies off the ground. The problem is, few understand what information they need to compile in order to position their business to secure capital investment. Developing an effective investor deck is a process that often requires past experience and specific knowledge pertaining to early-stage investment, which is something that cannabis entrepreneurs may lack.

Perhaps most importantly, cannabis is an industry poised for long-term growth in Canada, which means cannabis entrepreneurs need to be designing viable financial models. Without prior experience, building a financial model can be exceptionally challenging. Developing a strategic plan that will result in sustainable, profitable growth is something that few cannabis entrepreneurs will be able to create without professional expertise.

How Accountants Can Help Cannabis Companies Succeed

It’s clear that for many cannabis start-ups, developing a proper accounting and corporate structure early on is crucial. Without guidance, these companies may stall or even fail before reaching their full potential. This is where bookkeepers and accountants come in.

Ensuring Compliance

The stakes are high for cannabis start-ups, which are faced with navigating a minefield of highly-nuanced rules and regulations—just take the recent changes to Ontario’s retail system or the ongoing debate about the regulations surrounding edibles for example. If cannabis companies fail to properly navigate the bureaucratic maze, they face significant penalties or even the shutdown of their company. Accountants and bookkeepers are vital in helping business owners ensure they have appropriate financial controls in place in order to stay compliant as they grow and remain audit-ready at all times. In some cases, accountants and bookkeepers may be able to draw on experience from other industries to overcome industry-specific roadblocks as they occur

Financing Assistance

As noted above, securing sufficient financing is necessary for cannabis start-ups to get up and running. While this scenario is a challenge for entrepreneurs in any industry, it may be particularly difficult for cannabis companies who must overcome lingering social stigma and intense scrutiny of their business models. Accountants can help to mitigate many of these challenges by identifying the right investment banker for the company, advising on pricing and size of raise, and reviewing documentation from counsel.

Tax Planning Knowledge

Like any company, tax planning is necessary in order to enhance profit margins and avoid paying excessive income taxes. As a result, most cannabis companies understand the importance of having the right tax and accounting structures in place for all jurisdictions—especially when considering an international expansion strategy. As a result, cannabis companies can benefit from accountants who can offer expertise on estate planning and the strategic allocation of founders’ shares. In addition, accountants can help to review documents prepared by counsel and related tax filings.

Business Consultation

Entrepreneurship is a rocky road in any industry, but this is especially true for today’s cannapreneurs. Therefore, proper guidance and advice can be instrumental in getting a cannabis business off the ground and helping it to scale over time. If cannabis companies find an accountant or bookkeeper with enough clients in the industry already, they can draw on a wealth of data to compare their own business trajectory. This guidance can be priceless, especially for first time entrepreneurs.

Going Public

Going public is a major step, and for cannabis companies that are looking to make that leap, the guidance of an experienced expert is vital. Accountants who have advised other entrepreneurial companies on going public can assist by reviewing agreements, helping to draft the prospectus or listing document, and reviewing the management discussion and analysis. Any company that goes public must also present audited financial statements and accountants can help to provide guidance and audit assurance services to help those companies meet that standard. As Fernando Costa, partner at the accounting firm Manning Elliott LLP explains, “The process itself, from the time the company approaches the lawyer or accountants, could take up to six months or even longer at times to get listed on one of the stock exchanges in Canada.” Meaning companies that want to be proactive about getting their financial matters in order will be in desperate need of accountants.

What's In It For Accountants

It’s clear that the future of Canada’s (and the world’s) cannabis industry is intricately tied to accountants and bookkeepers. However, with many larger firms staying out of the space, there is a whole new cottage industry popping up for accountants and bookkeepers who are willing to specialize in this burgeoning sector.

This is not to say that it’s “high times” all around. Some accountants who have entered the fast-moving industry have noted that the issue of how these business are funded has led to many headaches. As a result, rigorous vetting may be necessary when it comes to brining on cannabis clients.

But while accounting for cannabis companies is a fast-paced sector that can be tricky to navigate, those looking to make a strategic, long-term career move may find it worth their while to start building a strong foundation of cannabis accounting skills. The spread of education is still relatively narrow and by specializing in the industry now, accountants and bookkeepers have the advantage of getting in on the ground floor and charging a premium to help cannabis clients develop key solutions that will help their companies thrive. Not to mention, it’s an opportunity to be part of a multibillion-dollar global industry that's set to disrupt everything from pharmaceuticals, to consumer-packaged goods.