CANNAINVESTOR Magazine September / October 2016 - Page 83

#2 Strong financial records and reporting.

This is important in any young company, but in cannabis it is absolutely critical. Cannabis will come under much greater scrutiny by the IRS and state regulatory agencies. We are subject to reporting requirements that other products do not have to deal with, and compliance is a huge part of our business. If a company does not have good record keeping and reporting in its DNA, then it is unlikely that it will make it across the threshold in a rapidly emerging and highly regulated market where money is being raised and deals are moving at lightening speed. Most startups don’t have a CFO, and that is OK, but you should look for a company that has made diligent record keeping a priority and has reached out for professional level support in the areas of bookkeeping, accounting and financial management. The reason this matters so much comes down to valuation. At the seed stage, everyone is willing to suspend judgement and make a determination that strong business and accounting principles will be put in place when the company is bigger. Later stage investors are not so open minded, and future valuations will get hammered if good financial habits have not been implemented by a skilled practitioner willing to dig into the very complex world of cannabis. You are looking for a company that has, or is putting in place a finance department with many, if not all of the following characteristics:

•Produces accurate, timely, complete financial statements that comply with GAAP (Generally Accepted Accounting Principles).

•A robust Internal Control System including proper segregation of duties and safeguarding of critical assets.

•Detailed Accounting Policies and Procedures, electronic storage of all documents and appropriate hard backup source documents (invoices, sales receipts, bank records, etc.) that are readily available, good dashboard and key performance indicators, timely cash and tax forecasts.

•An experienced part-time CFO or controller who assists in design of the systems, reviews the accounting work, financials and forecasts, participates in strategic decisions, acts as a sounding board for tough decisions, and assists as liaison with legal, tax, accounting, audit, IRS, acquirers, and other third parties.

•Selection and use of the proper software (both operations and accounting) tailored for use in your niche and selected based on size and complexity of your business.

Companies with these systems in place have better access to capital (debt and equity), better reporting and relations with investors, get higher valuations at exit, have fewer headaches during due diligence (for mergers or exits), and can ease the pain of an IRS, State, or financial audit (as well as lower the cost of the audit).