Five Reasons Accountants Should Serve Cannabis Clients

The biggest growth industry since cable TV desperately needs good accountants.

By Andrew Hunzicker
dopecfo.com

There are many reasons that accountants, bookkeepers, and CPAs are launching their own cannabis firms, and some of these might apply to you as well.

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Here are just five.

1. Growth

Cannabis is the fastest growing industry in the US. Industry think tank ArcView Group says this: “Very few consumer industry categories reach $5 billion in annual spending and then post anything like 25 percent compound annual growth across the following five years. Cable television came close, growing 19 percent annually in the late 1980s as national networks like CNN and HBO proved to be wildly popular."

Sales are estimated to top $20 billion in the next couple of years. In nine states cannabis is fully legal for adult use, and there are only six states in which cannabis is completely illegal, even for limited-use medical purposes. It is the one national agenda item that has bipartisan support and 71 percent of the population opposes federal government efforts to stop marijuana sales, according to a CBS News Poll.

2. Opportunity

The cannabis is the least served industry by accountants. Almost all major and mid-sized (and even many small) accounting firms have chosen to stay out of this space due to federal legality and insurance requirements. That said, many CPAs and accountants are successfully serving this industry in most states in the U.S. The absence of “Big Accounting” has created a huge vacuum and need for good/qualified accountants to serve the 1000’s of companies that are being launched each year nationwide.

That said, do your diligence, when deciding if this niche is for you. The AICPA's “Issue Brief on State Marijuana Laws and the CPA Profession” strongly encourages contacting the state board where the CPA is located and discussing the state’s position on serving cannabis clients. It goes on to say: “The AICPA is not aware of any state boards of accountancy that have taken action against a CPA for providing services to a marijuana business, nor has the AICPA Professional Ethics Team received any referrals from state boards for such action." And, "The growing medical and recreational marijuana industry provides numerous business opportunities for CPAs, but the potential for increased business also involves risk."

3. Complexity

The cannabis accounting in this niche is complex and most service providers currently working in cannabis don’t have the skills, experience, knowledge, or training to correctly perform accounting at the companies they serve. Under IRC 280e, cannabis firms are disallowed all deductions (however, with the exception of Cost of Goods Sold, which is an offset to income, not a deduction or credit).  Correct accrual and cost accounting must be maintained in order to qualify for this one expense (using IRC section 471-3 and 471-11).  Additionally, most states require accurate accrual accounting for the cannabis company to be in compliance with state law. So, in effect, good accounting is a must for cannabis CEOs that want to avoid the risk of being shut down, or hit with large IRS penalties and interest.

Additionally, “cannabis” is made up primarily of four sub-industries, each of which havs its own complexity:  farming, chemical processing, food production, and retail. Add to that, many cannabis companies vertically integrate (or plan to as its one way to maximize profit), and most clients will have many entities. That brings into play issues like consolidated accounting, intercompany transactions, and investment in subsidiaries (more complexity).

The good news to all this: there is a huge need for good accounting. Clients will pay for it (based on value, not cost per hour). And there is almost unlimited opportunity right now.

4. Multimillion-Dollar Clients

Many cannabis companies, (even startups) will achieve seven-figure revenues in year one or two. Farming, manufacturing, and retail dispensaries are all “big” operations, use many employees and resources, and require significant capital to launch. Many will see their revenues grow quickly. Even in very small cities, dispensary revenues will often be in the millions. We generally price our services tied to the value we offer and it is tied to a percent of topline revenues (with a minimum fee for startups). This way our fee is able to grow with our client and in this industry, growth is often substantial.

5. CEO Clients

As more and more states legalize, there are so many new companies launching every day. In California alone, its estimated 10,000 new licenses will be issued in 2018. On top of all the new companies launching daily, each with a need for good accounting, I estimate 80 percent to 90 percent of the existing cannabis companies are not doing their accounting correctly, are at risk, and would greatly benefit from finding an accountant who is capable and knowledgeable in correct cannabis and cost accounting.

Finding these CEOs is not hard: Check LinkedIn and Facebook. Read cannabis blogs Go to your bookstore and buy the many cannabis publications. Or attend one of the many national or local cannabis events in every part of the US.

The Bottom Line

The cannabis tidal wave will likely continue forward as there is much good coming from this industry, including medical benefits for those with autism, epilepsy, and pain management, the potential to offset and lower the opiate crisis in the U.S., providing jobs in every industry, and more tax dollars for city and state.

Accountants must be a part of this massive change because we can truly make a difference.

 

One Response to “Five Reasons Accountants Should Serve Cannabis Clients”

  1. John Castner

    Besides the economic reasons for contracting with a client, accountants need to consider social and moral factors. I think a lot of investors in these companies are probably projecting that a high percentage of marijuana sales will be for recreational use. Do we really want to legalize marijuana and subject ourselves to being addicted to this stuff? I’m 69 years old and for most of my lifetime, the planet has been on the verge of WWIII. I think this is a time for leaders to keep the public as sober and perceptive as possible. Public officials are constantly reminding us that we need to be alert and diligent and aware of their surroundings. How does being stoned on pot fit into that scenario? It is debilitating to our society for states to be legalizing it.

    Reply

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