Why Your Business Will Fail?

There are many reasons new businesses fail, and cannabis companies are not immune to the same issues non-cannabis operators face. The accountants and advisors at Breakaway have seen that financially savvy, professionally operated cannabis entities are far more likely to thrive. In the following piece, we list the three most common reasons cannabis businesses fail and provide guidance on how to avoid these pitfalls. 

Pitfall 1 - Running out of money

Surprisingly few operators have a solid understanding of their underlying profitability, which is the primary cause of failure. A pile of cash is all well and good, but operating without accurate financial information will not reveal unpaid taxes, outstanding payables, and the inability to cover recurring operational expenses.

Avoiding running out of money boils down to financial accountability and reporting. Preparing timely, accurate monthly financial statements allows a company to manage overhead expenses, calculate product cost and profitability, track and optimize inventory, lower one’s tax liability, and plan for tax payments (avoiding end-of-quarter surprises).

Keeping all this data organized and on-hand also makes sure you can pay vendors and staff, make rent every month, and reinvest in growing your business. As part of every engagement, we assist cannabis operators to establish and monitor these basic financial and accounting practices.  

Pitfall 2- Rapid growth and over-expansion

All too often cannabis operators hit the ground running with lofty, unachievable goals, expand quickly  and find themselves over-extended. This has happened as each new market opened, with the same results - distressed assets and licenses for sale. 

When flush with early investor capital there is an understandable desire to rush out and quickly build a business. It bears repeating, again and again – the cannabis business is like all others – short paths to “success” often end in failure. As stated above, sound business principles lay the foundation to the future.  Build business plans on sensible market data and implement the accounting and financial practices that are the foundation for all successful businesses.  

Pitfall 3 - Failing tax and regulatory compliance

The first responsibility for cannabis business owners and operators is maintaining compliance with shifting regulations and paying and filing proper tax returns.  Tax and regulatory compliance are complicated.  The first recommended step is to bring on a partner who specializes in these areas. For example, Breakaway’s CPAs are cannabis tax experts. We help you plan, optimize and maintain tax compliance, ultimately saving you money and helping you avoid IRS audits.  As to regulatory compliance, if you cannot staff a full-time compliance officer it is best to outsource this function and make sure all the processes and controls are in place. 

The second step is implementing, following, and updating appropriate internal controls. From the tax/financial side, this is as simple as closing your books and producing financial statements. The same goes for regulatory compliance - appropriately robust internal controls will save time, money, and major headaches down the road. 

Scott Tindall

Advisor

The accounting and financial professionals at Breakaway provide the requisite bookkeeping, virtual CPA advisory and tax guidance that are critical to a cannabis company’s success. For recommendations and assistance getting started, please email info@breakawayadvising.com.