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With the legalization of cannabis, licensed cannabis operators are now seeing that the focus is clearly shifting towards financial compliance.

And if you want to be a successful cannabis company, you must have a competent Chief Financial Officer (internal or outsourced) who can help your company navigate the treacherous waters of financial regulations.

In this episode, Jim will explain the importance of having an experienced CFO for your cannabis company.

If you want to learn more about our outsourced CFO service, please contact us at https://GreenGrowthCPAs.com or give us a call at 800-674-9050.

Full Transcript

Hey everyone, thank you for joining. Again, my name is Jim Breese, from GreenGrowth CPAs, and today’s topic is why your CFO is the most important person in your cannabis company.

So, a little bit about us before we hop into the material here in the content, GreenGrowth CPAs has prepared over 1,200 annual tax returns for cannabis operators in all different types of verticals. From dispensary to distribution, cultivation, manufacturing, delivery and testing. We have 350 cannabis business clients covering more than just taxes from compliance services to IPO readiness, fund flow management, and even outsource CFO duties. We’re in 12 different states across America that have any type of regulated cannabis from medical to recreational–so California, Oregon, Montana, Michigan, Colorado–all the different states that have that kind of cannabis activity. We are there and we have a presence there. We also do audit related and valuation projects and have completed at least 15 of those through 2018 and 2019, as well as, we have a thorough and deep understanding of tax compliance and assurance related items of the cannabis industry. And lastly, before we hop into the content today, I need to let you know that the information contained in this webinar presentation is meant for guidance purposes only and not as professional legal or tax advice. Further does not give any personalized legal tax investment or any business advice in general. So, with that out of the way, let’s hop right into today’s agenda.

So, first I want to talk to you about the #1 reason cannabis companies fail, then we’ll go into the roles and responsibilities of the CFO. Also, do you really need a CFO and how involved should your CFO be at each stage of your business? We’ll talk about a cannabis-experienced CFO versus a general business CFO, as well as, how to find the right CFO for your cannabis company. And, is this a position that you can actually outsource?

Now the big elephant in the room–the #1 reason cannabis companies fail is very, very simple. They run out of money, whether it’s money to go at it with the courts, at it with the IRS to fund their actual project and their idea and their business, and expand and buy more product and get into more distribution channels. They simply run out of money. And, no matter how great your product or service is, mismanagement of finances will ultimately kill your business. If you run out of cash, you run out of oxygen. Money is the oxygen of the company. When you run out of the oxygen, you simply die. There’s no more business. You can’t just go working on with no more capital. You can get credit. But at some point that credit will run dry and you have no way to pay payroll. You have no way to cover your expenses. And, at that point is when you need to fold up and close shop. And, it’s a shame that some of these great companies, these great ideas, these great products, they end up dying by their own accord. They make this happen to themselves pretty much from the mismanagement of their finances.

So, my job today is to explain to you how to find the right person that will actually make sure you don’t run out of money. You don’t run out of that oxygen and your company doesn’t fold. So, the role of the CFO have many, many different hats they have wear, so they’re a financier, which is keeping cash in the bank. They’re also a technician by setting controls and creating reports. They’re prognosticator with budgets and forecasts. They’re an operator who creates processes and benchmarks, your metrics and creates discipline within the operation. They’re also a closer, they help bring in those big deals that help to step up your company and bring in more cashflow, bring in more sales.

They’re also part of that human rodeo where they find people, they make those thoughtful offers at the right amount and they monitor the equity of the business and keep the promises that your company is given to investors, as well as, to the internal constituents of the business. They also play a semi-lawyer role keeping you compliant with all the financial regulations, checking everything with all the words and putting that signature on the documents to make sure that what they promise or what is necessary for their business to operate is actually being done in the financial sense. They’re also a system admin. They develop systems and information and they are the data guy or data gal for your business. When someone asks, “hey, what are our margins?” You’re going to the CFO in a company to get those kinds of pieces of information.

They’re also a cheapskate. They say, “no” a lot. They have to have this discerning personality where they say, “hey, we can do this or we can’t do that. We have to cut this cost. We have to increase this cost for this particular reason.” They’re also a counselor. They have to listen a lot. They have to take in many different personalities and viewpoints, synthesize those, and make the right financial choice for the company.

An d lastly, they’re a partner. They’re a CEO partner, they’re pragmatic strategists. They make sure that the CEO’s vision comes alive, that the financial groundwork is being laid so that this entrepreneur can step from Point A to Point B to Point C, and make sure the financial strategy between Point A and Point B is the right one, because we know that the strategy that got you from Point A and Point B is not going to take you from Point B to Point C. You have to have someone with an experience that can take you down this long winding path. Entrepreneurship is not a straight line. It’s up and down and sideways and left and right and all the different directions and hopefully you land at that final destination of, hopefully, an IPO or a merger or an acquisition. Lots of hats being worn by the CFO. It’s not just all about the numbers, but balancing everything to make sense of those numbers so that you can get to where you’re trying to go.

Let’s really look at what is a CFO responsible for within your business. We’ve got 8, 10, 12 things here that your CFO is going to be responsible for, and first and foremost, developing an overall financial strategy. Again, you can have the world’s greatest product, the world’s greatest marketing message, but if you have no financial strategy and how to deploy that cash that you either personally put in or raised, your business is not going to go anywhere fast except down.

They also do short and longterm forecasting for the finances. “Hey, here’s the plan for your business,” and then they also create reporting on your plan. “How are you doing towards your annual operations plan? Are you above your margins? Are you below your margins? Is your burn rate getting a little too high? What can you cut?” They also create financial systems strategy and designing those systems and implementing those systems. It’s very important that you have financial systems that talk to each other. You have a point-of-sale system that talks to a CRM system that also talks to your compliance system. They also do budgeting making sure that the right amount of money is allocated to a specific sector of your business. If you say, “hey, we only need $2,000 in marketing,” an experienced cannabis CFO will tell you, “you’re actually going to need $12,000 in marketing and here’s A, B, C, D, E, F reasons why that needs to happen.”

They also help facilitate and interpret financial reporting. So, after you do a period of business, whether that’s a month, a week, a quarter or a year, they will be able to look at those reports and give actionable insights to the operator or to the senior executives and the senior team, “hey, this is how we’re doing,” or “we’re seeing this trending up or this trending down. You need to make these kinds of tweaks and changes.” Also, they help in raising capital. It’s important to have a finance person on your team when you’re going to ask for money. $1 million is a lot of money, $2 million, $50 million, right? It’s not just raising $50,000 bucks. $50,000 bucks will not take you very far in this industry. So, when you have someone that understands the numbers and the nuts and bolts of those numbers, and when you change a lever here or a lever there, this is how it’s going to affect the business and why we need this much capital, and this is how we’re going to use this capital further.

They can also offer interim CFO services. You don’t necessarily always need a full time CFO, but you may be in a pinch. Again, when you’re raising capital, you may find someone to come in and speak knowledgeably and intelligently about those aspects of your business when you’re raising capital. Also cashflow analysis and restructuring your cashflow. Businesses feed on cash and you’re going to chew up a lot of that cash in the beginning. Most businesses take that 12 to 18 months to become profitable or at least get to the right metrics and milestones to raise that next round and they’ll help you. The CFO will help you analyze your cashflow and potentially restructure nuts and bolts of your company to make sure that you’re becoming cashflow positive or approaching that break even point further. The CFO has to do the really tough part of cutting costs, and that’s a really hard thing to do when, as a CEO, you don’t really understand why this needs to be cut or you have an emotional attachment to it, where, the CFO comes from a very objective point of view and says, this needs to be cut for this reason because you will die without it being cut.

Now on top of this, they do tax preparation, they quarterback all the tax prep, your cannabis excise tax, sales tax, and every other tax that goes along in the process of the cannabis business. They help quarterback that whole process. And lastly, if you’re successful enough, they help facilitate mergers with other companies and either acquiring other companies or becoming acquired by another company, and you pass all these smell tests that an acquisition partner or someone who’s going to acquire your company will give to your company and make sure that you’re not bluffing on your numbers, that you’re not pumping things up that aren’t actually true about your business, right? They help you set that stage.

Now you may be asking, “hey, do we really even need a CFO for our cannabis company? You know, we’re just something small, or we’re just, doing a little bit, $3 million in revenue.” Well, the answer is yes, you really do need a CFO. Cash crimes are the new drug crimes. Cannabis is an illegal drug now in most states, I think it’s over 30 states now. So, the government is not going to come after you for selling cannabis. They’re gonna come after you for financial crimes, right? This is an all-cash business. So, there’s demanding financial regulations and compliance items that you need to abide by. And if you don’t, you’re going to be in deep trouble with the IRS and any other governing agency that has their hands in the cannabis business. Pretty much if you have no CFO, you’re going to be operating your company blindly, and probably on a lot more emotion than logic. CFOs put processes into place. They give you plans to benchmark against and they report back on your performance on how you’re doing against those plans and if you actually following those processes.

If you don’t listen to a CFO, again, you’ll be operating blindly and you could be walking off that cliff of death a lot sooner than you think you are or a lot faster than you want to be walking towards that painful, painful process of losing your company. Next, many of you want to be able to compete on the biggest stage. You want to become one of the biggest cannabis companies and leave your mark on the industry and that will probably push you towards an initial public offering or an IPO in the next three to seven years. And, if you want to do that, you are surely going to need a CFO because when you go for an IPO, all of your financials will be audited. And if there’s something that doesn’t jive right or the numbers and the confidence in your numbers is not there, nobody will underwrite your deal. Nobody will be an early investor in that IPO. So, the CFO sets your trajectory for the future if you have these big plans for your company.

Now here’s some examples of what a CFO can help to do within your company, just some tangible concrete examples. So, if you have bad cash handling policies due to bad standard operating procedures, that will cause theft and diversion. What a CFO will do is make sure that those SOPs are the right SOPs for your vertical and make sure you’re not having theft or diversion, which can ultimately increase many, many issues down the line with potentially overpaying your taxes, which is another example here. So, every $10,000 you mismanage, you will have 21% of that liability. So, for a C-corp, your tax is at a flat 21% rate, and say that your books say there is $100,000 in cash there when it’s $80,000 in cash that is actually in the safe. So, you have $20,000 of mismanaged money, you now owe $4,200 still on taxes because there’s a paper trail that says there’s that much cash in your safe. It’s a very big problem. Most people don’t understand until they get to the point of like, “well, we don’t even have that cash to pay the taxes on. Where are we going to come up with the money for this?” So, a CFO makes sure at these checkpoints and milestones that you’re not bleeding cash.

And lastly, I think one of the most important parts to the cannabis industry is missing on deductions and backing product costs into COGs. With 280e there’s a lot of things that you cannot deduct off of your revenue to lower your taxable base. And, a CFO will give you the right strategies to put the most costs into COGs so you don’t have to pay as much taxes. If you can save $50,000 a year on taxes for those first four, five, six years, it’s $200, $300 grand that you can save and reinvest in your business and really crush the competition or level up the execution of your company so that you become the next big thing. Or you can take over new markets and open up in another state, or you can go out into another country, or you can buy another company or you can invest in a supplier and increase your margins, so you have a lot more money to play with.

Now, I brought up earlier, you don’t need to always hire a full time CFO, right? So, what is the involvement of a CFO and do you need to get one right away, day one, early, early phase? So, at this point you’re going to need someone who’s an advisor, someone who can give you at least a gut check. Are your financials good? Are they at least on point? Are they within a certain bound that “hey, this sounds right for the cannabis industry,” that as you get to that early funding, whether it’s friends and family or seed round, you’re going to need to hire at least a part-time CFO. And again, it could be someone who does your accounting and does your bookkeeping, but they are given that job title as CFO, right? That’s not always just wearing suits and going into meetings. It’s actually making sure that the numbers are counted properly because when you go for your Series A and you want to get onto real big money, you’re $1 million, $2 million, $5, $20 million in raises, you don’t have to bring that full-time CFO in. But at that raise, the people that are investing in your company are going to do due diligence, and then when you say you make $500 grand a year, your gross margin is 52.5% and this number and that number, they’re going to send in a junior analyst to make sure that your numbers are actually correct and they’re actually on point with what you saying.

So, if you don’t have that part-time CFO doing the proper accounting and doing the right financial reporting for you, you have a very, very low chance of securing that funding because if those numbers aren’t properly accounted for, you lose investor confidence. And it’s really, really hard because the investor community is very small and when someone does the due diligence and they find out that your company is pretty much misrepresenting their numbers or can’t fully present their numbers in a confident way, that word gets around and it’ll be very, very difficult for you to raise money. We highly suggest that you start off with an advisor at day one, whether it’s a friend from college that does finance and they want to help you on the side and you break them off a little bit of equity, or when you get to that early funding, getting a part-time CFO, someone that comes in maybe once a week or once a month to make sure that your numbers are accounted for properly. And then as you go for these Series A and Series B, and finally for your IPO or your big exit, you have a full-time CFO making sure that all the right financial milestones are being hit and being crushed.

Now, one of the questions that comes up quite often in calls with some of our clients and just in general being in the cannabis industry, people are always asking, “does the CFO need to have cannabis experience?” 100% yes, this is a very highly regulated industry with its own nuances and tactics and strategies that only work in the cannabis space. We highly suggest you do not get a general business CFO because you’ll be paying them to learn on your dime. And, if they make a mistake, it could be extremely costly, whether you’re overpaying in your taxes or they make a big screw up and then you have to go back to suppliers to renegotiate, because it’s not the right price, because industry standard is this or that. It’s really, really tough experience and your company will die slowly on that general business CFO’s sword. So, at any rate, I highly suggest you have [a CFO] with cannabis experience because they have that deep intimate experience with the financial compliance regulations for the cannabis industry, again, tax strategies that are acceptable and necessary for the cannabis industry, like 471 allocations or a cost segregation study to help mitigate the impact of 280e. You keep hearing this come up in this video here and you’ll hear it everywhere else in the cannabis industry, 280e pretty much says you cannot deduct any other expenses, indirect costs that are not product costs.

So, an experienced CFO will help you back as many of those indirect costs in a compliant manner into COGs, so you lower your taxable base. Also, a CFO with cannabis experience can see anomalies that a general CFO may not notice. They can see how these important line items on your P&L or on your balance sheet are trending up and down. And they can now true that up with their cannabis experience. Like they’re saying, “all right, your COGs are trending up.” And maybe that’s natural for an early stage cannabis company, but they say, “hey, your average ticket is going down and we know that it should actually be going up every month for the first 12 months and then level out from month 12 to month 22, and then it’ll start to go down because you have increased competition,” or whatever it’s going to be. So, you need someone with that experience and that exposure to the cannabis industry to know what the life cycle of a cannabis business is and if you are actually hitting those milestones properly.

And lastly, they are also there to measure an industry benchmark, your KPIs and give you the insights that you can finally take specific actions to improve your business. This builds on finding those anomalies. You don’t want to wait and find out too late when you can’t recover from your business mistakes, right? That person who’s been in the cannabis industry will give you these insights so you can take action sooner rather than later. Because if a general business CFO waits two or three quarters to say, “hey, why are we getting taxed so high? Why are we not putting this expense into COGs?” And all these other questions where it has some with an experience from Day 1 is making sure you’re in the right position to pay your taxes in a way that’s most beneficial for your business.

Okay, so we’ve established that you need a cannabis CFO in many different varying capacities at different life cycle stages in your business. So, how do you find the right CFO? You have two options. You can either hire a full-time CFO and that’s a good option to do for some companies, but it’s a very long and involved process, because likely you’re giving away equity to this person. So, you don’t want to just give away a piece of the business to just anybody, right? So, it’s a long due diligence process, and there’s a limited supply of cannabis specific CFOs that are willing to come in in a full or part-time basis here, right? They are in high demand and they’re not just going to take some kind of general deal where there’s not a good severance package, there’s not a good equity compensation package, there’s not full benefits. And hiring is a guess and firing is knowing. When you go to hire a CFO full-time or part-time, you’re really making a guess on this and you don’t really know if they’re going to be doing the right things, right? They may have experience in one company, two companies, but when you really get them in you, hopefully I do a great job, but if they do a crappy job, then you know, and that’s when you fire this person.

So, hiring is really a guessing game and a long involved process. Now you have option two is outsourcing the duties until you really, really, really need to hire someone full or part-time. The benefits of this is that you get to hire for specific tasks, almost like an ala carte service. So, in that early stage, you may need to hire someone as a CFO to make sure your taxes and accounting is done properly so that you can put yourself in the best position to raise that Series A round. These flexible arrangements really give you a peace of mind that you’re not just letting go of all the financial sides of your business, you can still retain some of that financial responsibility as a CEO or as a COO of your business. And the most important part is that you get to experience the benefits immediately. Usually when you outsource the CFO duties, the person or group that you’re outsourcing this duty to has experience and knows exactly how to deploy their experience the fastest way possible so that you can see the benefits.

So, let’s hop into kind of some of those benefits of an outsource CFO. So, first you get the proper guidance that is backed by experience. Industry professionals, usually someone when you outsource a CFO service to them or to that group, they’re bringing experience from a variety of companies in the cannabis industry. They probably have 10, 20 or even 100s of clients that they’re pulling their large scale experience from to know that you’re on the right path and you get expert advice at a fraction of a price. If you’re gonna bring someone on full-time as a CFO, it’s going to be about a $300,000 a year and payroll plus those benefits. You know, you’re going to have to bake in some kind of severance package. All of these different things and these costs add up and that’s going to take a huge liability hit onto your P&L or onto your balance sheet.

Further, this outsource CFO service can give you a fresh objective view on your business, especially if you’re in those early days and you have some kind of founder conflicts where emotions run very high. Founders love their companies and sometimes founders come from different disciplines, don’t see eye-to-eye, and they need that third-party to balance things out and make sure that they’re doing the right objective things for their business to set them up for the future. So, further, when you put someone in the position of being responsible for the finances, it creates team and investor confidence at that early stages of your business. Because again, if you are just living by the seat of your pants, it could be just one week, one month that could really wipe out your business. You don’t know what you’re doing, and then you have to delay your licensing and then now you’re only 30 days away from being bankrupt. When you give the investors further confidence, they’re willing to write those checks, $300,000 lead investor checks and then the add on checks for another $100K, $200K or whatever that’s going to be. You need to create confidence, again, investing is even a guess. A lot of investors are making investments that they know they’re going to make 50 investments over the next three years and they know that 47 of them are going to go to zero, but those three that don’t go to zero are going to pay off for all those bets and they’re not betting on the actual product. They’re betting on the team, they’re betting on the jockey, not the horse. So, if you can make your team look more robust and financially responsible, you have a much better chance of raising capital.

Now, another benefit to an outsource CFO service is kind of that short term emergency engagement for stability. Did you fire your CFO recently or did you fire your accountant recently? And you need someone to step in and take the reins right away and keep you on track so your company doesn’t go off the rails? That’s something you can do right away. Deploy those. Again, al a carte services to make sure that your company is staying afloat. And lastly, one of the important things about a cannabis business is that you’re going to have a lot of things you think you need to spend money on. Again, it’s a very emotionally charged business as any kind of startup, especially in the cannabis space.

So, from an outsource CFO, your cost cuts will be much more objective, because cost cutting is not a simple, “hey, big numbers are bad and small numbers are good,” right? It’s not that kind of game. To achieve cost cutting that is sustainable and that drives company goals as opposed to undermining them, it takes thoughtful consideration, data analysis and objectivity in how you actually see the numbers, as well as, that experience to see are you on par with other successful cannabis businesses within your vertical.

Now at GreenGrowth CPAs, we offer an outsourced CFO service, so I want to talk about a little bit of the services that we offer so you can kind of get your wheels turning and see, “hey, maybe this might be something that’s smart for our company.” So, what we do accounting setup, getting your chart of accounts set up in your bookkeeping system set up. We set up those critical processes or standard operating procedures so that you don’t have theft or diversion. We also do periodic financial reporting so that all of your operators and your founders know this is how our businesses performing month after month, quarter after quarter, year after year.

Now as you start to take in lots of cash, we also do fund flow management. How should you separate your money towards a safe towards a bank account, towards bill payments towards digital bill payments and cash bill payments? These problems, you don’t know until you start to get into the business and you’re like, oh my goodness, how are we going to come up with a $300,000 tax bill and all the cash for that? We help make sure that you’re hitting that milestone month after month. We also have the ability to do 471 allocations to accelerate your depreciation, so if you’ve got a building you spent $30 million building out, you may want to accelerate that depreciation to lower your taxes so that you have more money to invest in those early years so that you can level up your business faster than your competition.

We also do ad hoc financial analysis. Maybe you’re thinking about buying a large piece of equipment. We can help you understand will that increase productivity? Will that bring down your cost per unit? We also do financial projections and fundraising preparation, so maybe you need to go approach some investors and you need to create some pro forma financial documents. We can help you do that in a thoughtful way and explain the nuts and bolts of those financial documents so that when you go and you talk to your investors, you can say we ran a sensitivity analysis and if we see the industry has a supply increase of this much, this is how margins are affected, this is how profitability is affected, and this is how cashflow is affected, right? We help you speak intelligently to the numbers of your company. We also help with the tax filing at the city, state and federal level. And, one of our most important services that we offer is IPO readiness. You want to become a really big company. You want to start to put your company on the map into a big, big center stage. You’re going to get the experience and talent necessary to keep your cannabis business healthy as you grow to set that stage for a massive, massive exit such as an IPO, a merger, or an acquisition.

So, we’ve covered a lot here on why the CFO can make or break your cannabis business. I would want to cover a few takeaways from this presentation here. So, again, the #1 reason companies fail is that they simply run out of cash for a multitude of reasons. Next, if you want an IPO in the next few years, you need to set that positive trajectory sooner rather than later with an experienced cannabis CFO who can make this more of an “alleyoop” instead of a half court shot for you. Next, you do not need a full time CFO in the early stages of your company, not financially responsible to bring someone in at $200K a year when they’re not going to be doing all the range of services and skills and responsibilities that a CFO would have. It’s something you can outsource and give to an experienced group who can really, really make an impact on the financial performance of your business. And, understand lastly, that CFOs wear multiple hats. They’re not just bean counters and not just men or women in suits that go and do the negotiations on financial deals. They wear a lot of hats within your company to keep it financially healthy so that you are landing and hitting all of your milestones when you need to in the fastest, most financially responsible way possible.

So, if you’re thinking about outsourcing your cannabis CFO duties, please reach out to Greengrowth CPAs today by going to our website@greengrowthcpas.com and hit that “Get Started” button at the top-right corner and requests a one-to-one consultation with us, or give us a call at (800) 674-9050. Thank you, again, for taking the time to listen and understand all the complexities of the CFO within your cannabis company. And, have a great day and we’ll talk to you soon.