The challenges and opportunities of the upcoming market

US: Will smaller cannabis businesses survive the high costs in the New York market?

“It is going to be interesting to see if the smaller individual owners getting their license will be able to sustain the costs of higher real estate, higher insurance, and higher taxes,” says Micky Williams, CEO of Accounting Intelligence. The cannabis accounting and technology solutions firm helps companies by providing entity selection, CFO services, and creating personalized business plans. With New York preparing for the adult-use cannabis market to go online later this year, Williams explains that there are some costly challenges on the horizon for any interested entrepreneurs.


Micky Williams

Will smaller businesses survive?
The applicants for the upcoming New York cannabis market are looking for leases or facilities to run their operations. However, many cannabis businesses will not be able to afford to purchase real estate, Williams explains. “The ones that are fortunate to be able to raise enough capital to buy real estate will be in a better position. But the situation means that real estate investors in this market are able to rent out the facilities at a premium, benefiting from the cannabis tenants. In this market, everything from insurance to real estate and banking is really impacting cannabis business owners from a cost perspective.”

Compared to other businesses, cannabis business owners are hit with paying a premium for the required services to run a business. “The New York market is particularly interesting, as it is providing people previously convicted of cannabis laws the opportunity to be cannabis business owners in the state. While that is a very good thing, it will be interesting to see if smaller individual business owners will be able to sustain the operating costs of higher real estate, higher insurance, and higher taxes. Therefore, being capitalized and having enough funds to survive is going to be key in that market.”

Unfortunately, those are not the only costly challenges cannabis businesses will face. “A lot of companies are still hesitant to service cannabis businesses. For example, a lot of banks do not want to take the risk, as cannabis is still federally illegal. As a result, cannabis business owners now have to search for a state bank or a credit union that will provide them with a bank account, but banks servicing cannabis entrepreneurs typically have really high fees. Additionally, with the major credit card companies not supporting cannabis business owners, some are running their businesses on a cash-only basis. As a result, that means that they have the additional costs of extra security, such as onsite security guards, armored truck services to transport the cash, and video surveillance camera systems.”

However, this also creates many opportunities. “There is a big supply chain of ancillary service providers to support cannabis businesses, from marketing to accounting and legal services, as well as cannabis software companies. This whole supply chain is going to be positively impacted by cannabis companies entering the New York market. For example, we are noticing that security firms are now already jumping into helping cannabis businesses.”

Helping businesses through the challenges
Luckily, Accounting Intelligence has many services to provide further help for businesses. “One of the pain points for the US industry is understanding what legal entity structure the business should select, a corporation or a pass thru entity. A lot of the social equity applicants are first-time business owners who may not fully understand the complexity of the entity structure. That is where we come in to help them to provide guidance. This is important as legislation 280E will impact a business’ tax situation. If you pick the wrong entity, you could be paying a lot of taxes at a personal income tax rate. Cost accounting is very important in this industry, and we can help cannabis businesses track costs so they can maximize their business deductions under the constraints of 280E.”

The company also provides CFO-level services, as cash flow is one of the key aspects cannabis business owners need to know. “How much cash do we have? Do we have enough to make payroll and pay our bills? We use AI-based technology reporting tools to provide business insights to our clients by leveraging their accounting data in Xero, a cloud-based accounting software. This provides an overview of the incoming cash, upcoming bills, and forecasts what your cash flow projections will be in a period of time. Growers, specifically, need a robust inventory system to keep track of their cost per pound of cannabis to maximize their business tax deductions. We provide companies with the proper systems to support compliance, accounting, and technology.”

With the high costs of a new business entering into the cannabis industry, Accounting Intelligence also helps cannabis entrepreneurs to raise funds so they have adequate capital to operate and sustain the business. “We help them by creating pitch decks and business plans. For example, this is helpful while attending conferences, using their pitch deck to tell their story about their business and the market they are in. Overall, there is a lot of opportunity in the market, and it’s important to support the companies and help them succeed.” 

For more information:
Accounting Intelligence 
www.accountingintelligence.net 

 


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