Preparing for and Understanding the Financial Review Process
Do you have an understanding of the financial review process? Are your business financial records review ready? Do you have a process in place to ensure compliant accounting and record keeping? Can your business produce an accurate balance sheet and income statement?
These are questions every business owner should ask themselves. However, business owners and managers operating in Michigan’s marijuana industry must make answering these “yes” a priority. To succeed in the state’s well regulated, financial compliance focused market, understanding the financial review process is a must.
Applicants under Michigan’s MMFLA (Medical Marijuana Facility Licensing Act) should prepare for a rigorous financial review of their personal and business financial information. It is expected that all sources of personal and business income can be traced and were also claimed for tax purposes. It may be very difficult to pass the licensing process without having this information complete and accurate.
“To succeed in the state’s well regulated, financial compliance focused market, understanding the financial review process is a must.”
So far, the MMFL state licensing board has regularly denied applications for failure to pass a financial review. Failure to pass may include personal financial history traceability. Maybe an applicant failed to file tax returns. Alternatively, maybe they could not explain where funds used towards capitalization originated from. (See our post here on understanding the Michigan MMFL CPA Attestation Process.) Whatever the reason, application denial is a possibility if the initial financial review fails.
Worse however, is when business information is not financial review ready. There are no good excuses for a business to not keep records that can be traced back to support balances. Understanding Michigan’s marijuana industry as it has evolved, and working with entrepreneurial minds, we know this is often the reality however.
Financial and accounting review readiness is unavoidable. Succeeding in the application process is only step one! Businesses must have complete, accurate, and review ready financial records in order to continue to succeed in Michigan’s market. With annual CPA financial reviews required by the state (and most investors!), understanding the financial review process is critical.
Preparing for and Understanding the Financial Review Process for Businesses
Step 1: Understanding the Financial Review Process for a Business
In a business financial review, the reviewer starts by asking several questions. Does management review and control financial records? How does the business ensure accuracy? Are full records maintained? What processes are in place to keep records completely and also properly recorded? Is there risk of financial fraud or misinformation in the financial records?
Once the reviewer has a better understanding of your business’s process, they will perform “tests” to determine if these are in place and operating correctly. For example, a reviewer may ask to see several vendor invoices, payment receipts, and then matching entries into METRC, an internal tracking system, and the accounting records themselves. They may trace inventory movement into sales totals, evaluate trends month over month, or confirm balances directly with 3rd parties. The goal of the review is to ensure that financial information (sales, expenses, assets and liabilities) are complete and accurate. An accounting system compliant with IRS Section 280E is also a must.
For a non-marijuana business, a standard financial review may last 2 weeks or longer. However, for first time marijuana businesses in Michigan’s new market, the financial review process may be more tedious. The business should expect to produce full, properly maintained accounting records that are review ready.
Step 2: Ensuring Business Financial Accounting Records are Review Ready
The best way to ensure your business’s accounting records are review ready is to work with a CPA who can help you implement proper accounting processes. Allowing someone who does not have appropriate accounting experience to maintain your bookkeeping and record keeping can also be a disaster! Working with a professional, industry specific bookkeeper and CPA may be necessary for most businesses without adequate internal support. Though your regular accountant or CPA can not perform the annual financial review, they will help ensure accounting records are properly maintained along the way. They can also bridge the gap in working with the 3rd party CPA reviewer and compiling information for them.
Step 3: Have a Process in Place to Ensure Compliant Accounting & Record Keeping
Every financial transaction must be traceable and also have appropriate record keeping support behind it. Your business must ensure full supporting records of transactions. The support must also be readily available. Sales, expenses, cash, inventory, payroll, building improvements and all other types of transactions should be recorded in the accounting records. Again, working with a professional accountant is a wise move!
Step 4: Being Able to Produce an Accurate Balance Sheet and Income Statement
Even if all record keeping is properly in place, and records are otherwise “traceable”, a business must be able to produce accurate financial reports summarizing balances. These include at a minimum a full balance sheet and income statement. Without proper accounting methods in place, businesses most likely cannot confidently produce these financial reports. Accounting has a fine-tuned method behind it, ensuring all accounting entries “balance” and are also accurately classified. Transactions often are improperly recorded without appropriate accounting experience. This causes inaccurate or misclassified balances on the financial reports. A CPA reviewer with strong accounting knowledge can often quickly look at a client prepared balance sheet and spot errors. The problem then becomes determining how and why the balances are incorrect and what effect correcting them will have!
How We Can Help:
At LC Solutions Michigan PLLC we provide our clients with unparalleled accounting support, professionalism, and industry specific knowledge that is crucial to their business operations. Our team of CPAs, bookkeepers and accounting professionals can help your business prepare and be ready at all times for the financial review process. We understand our client’s needs and the special purpose bookkeeping, reporting, record keeping compliance, and industry specific standards they require. We also understand business and what it takes to run one! This allows us to provide valuable insight and advice for effective financial accounting management and reporting. Finally, we understand the Michigan’s marijuana industry like we understand assets and liabilities, debits and credits. Its’s second nature to our firm!
To learn more about LC Solutions Michigan PLLC and how we can help your business, please visit our site here. For regular tips, insights, and industry accounting know-how, check our our Facebook page here.
October 27, 2018
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