Understanding the Importance of Clean Books

Business owners understand the need for meticulous financial management. Maintaining your books is an ongoing process that has many benefits. In addition to having a better grip on your cash flow, it simplifies compliance, audits, and tax filing.

 But what does it mean to have “clean” books?

 Simply put, having clean books means that your financial records are accurate, organized, and up to date. Having clean books is critical for all businesses, but for cannabis companies, we might say even more so. Managing taxes for cannabis businesses is challenging enough, but if your books are not well-maintained, you may end up in a disadvantaged tax flow situation or, worse, on the wrong side of the IRS.

 So, while maintaining your books might not be what you enjoy most, it’s crucial to your company’s financial health—and your sanity.

The Case for Clean Books

Not all small business owners are financial wizards; we get it. You have a lot on your plate, and updating your books isn’t always the first priority. However, we would suggest that putting some time aside daily might save you money in the big scheme of things. And for cannabis businesses, who are inordinately challenged by tax code Section 280E, committing to the chore might help you put money back in your pocket.

 Here are some of the many benefits of keeping clean books:

 ·       Understand the financial health of your company

·       Know where your money is coming from and going to

·       Make better business decisions based on sound financial data

·       Minimize your tax burden

·       Ensure you are being taxed on the correct amounts

·       Simplify the tax filing process

·       Reduce stress around financial decisions

 We have a few tips to help you keep your company’s books clean. It might require you to think a little differently, but guaranteed, you’ll be singing a happier tune at tax time.

Tips for Keeping Your Books Clean

Ultimately, the better organized you are with your financial records, the easier your life will be overall. Here are some actionable steps to clean up your books to prepare for tax season.

 ·       Record every transaction. No matter how big or insignificant, expenses and income must be recorded. If you spend money on anything, itemize and categorize it so you can easily track your outflow. Some expenses might not be eligible to be written off, but you should still keep track as things may change. Also, it’s a way to see where your money is going so you can reel it in if you need to.

·       Keep financial records organized. All receipts, invoices, and statements should be filed and kept in one place. Don’t just throw it all in a drawer, hoping to deal with it later. A little organization now will ensure you don’t miss any critical deductions when filing your return.

·       Reconcile your books to your bank statement. Your statement and books should match to ensure you’re not over or underestimating what you have.

·       Correct inaccuracies immediately. Updating your books frequently reminds you of things like unpaid receivables, bad debt, uncleared checks, etc., so you can follow up.

·       Keep your personal accounts separate from the business. This tip should go without saying that mixing personal and business expenses muddies the waters and may result in adjusted returns or other complications.

·       Categorize expenses correctly. Your chart of accounts helps you keep track of your spending and also makes it easier when claiming expenses on your tax return.

·       Keep receipts for everything. Knowing what you can and can’t deduct is vital. Keeping your receipts and invoices organized ensures your financial reports and business deductions are accurate and complete.

·       Maintain your inventory. Keeping track of inventory is an essential function of doing business. Inventory on hand must be reported for compliance and tracked meticulously to ensure you value your business accurately. Your inventory methods are also important as they may allow you to capitalize inventory and recover the expense as COGS. Ask your cannabis CPA about Section 471(c) and whether it might be helpful to your situation.

·       Track payments made to occasional workers and contractors. Payments to non-payroll workers must be tracked as an expense. You may have to issue a 1099 if you paid more than $600 to a person during the tax year, but even if the amount is less, you may be able to deduct it. Treat all contractor payments as a business expense and file the transactions accordingly.

·       Close your books at the end of the fiscal year. Once you’ve updated your books and made the necessary adjustments, close your books. Doing so will provide you with final numbers and reports for the year, which you can use for taxes and forecasting.

Additional Tips for Keeping it Clean

We highly recommend using software to track your company’s finances. The solution you choose should be simple enough for you to use comfortably, affordable, and geared toward your specific financial needs.

 Some small business owners may prefer to use spreadsheets like Microsoft Excel, but extracting business insights might be challenging unless you’re willing to crunch numbers and know what they mean. Plus, manual accounting is error-prone, and you may end up spending more time than you want tracking down things as innocuous as a misplaced decimal point.

 Popular apps like QuickBooks reduce manual input by automating entries between your books and bank accounts. There are also accounting apps that are purpose-built for cannabis. All you’ll have to do is log in and reconcile the transactions to ensure they are accurate and appropriately categorized. Additionally, accounting software can output detailed reports so you can view your business income and spending when needed.

Final Thoughts

Now that you understand what it means when we talk about “clean books” and the importance of keeping them up to date, we hope you’ll feel better about your business’s financial health.

 At Growise, we understand the needs of small cannabis companies and are here to help with sound financial and tax advice. Reach out today to set up a call. We’d love to hear about your company and show you how we can support your mission.