Cannabis inventory management is critical to the financial success of your cannabis business for a variety of reasons.
From buying proper levels in time for sale or production, all the way to selling your business, having proper inventory control and management will impact your financial results.
If you need help with your cannabis business accounting or inventory management, then please reach out to us at https://greengrowthcpas.com/get-started/ or call 800-674-9050.
In this webinar, we covered:
- Understanding Inventory Management
- Inventory Costing Overview
- Inventory Software Considerations
- Misc. Inventory Management Best Practices
We also took questions from the live audience including:
So again, thank you for joining our webinar today. And our topic is inventory management for cannabis based businesses. And this presentation is brought to you by GreenGrowth CPAs. Now a little bit about GreenGrowth CPAs. Before we get started, we are a cannabis only tax and finance firm, and we can help you with your tax preparation audits of your financials and helping defend against audits with the IRS. We can help with business valuations, financial compliance, and the regulations around those. We have an outsource CFO service that can help you really get a grip around your numbers and improve the financial performance of your cannabis business, as well as get you ready to go public on the markets. Now we have hundreds of active clients throughout the entire United States, as well as international clients. And we service all verticals in the cannabis industry from cultivation, manufacturing, distribution, processors, retailers, delivery services.
If you’re in the cannabis industry and you’re touching cash, or you have some financial questions or issues, then we are the firm that is able to help you get a grip on those numbers and move forward and make better business decisions for your cannabis company. Now, before we get started, I need to let you know that the information contained in this presentation is meant for guidance purposes only, and not as professional legal or tax advice and further, it does not give any personalized legal tax investment or any business advice in general. So with that out of the way, let’s review what we’re going to cover in today’s webinar. So first we’re going to talk about the importance of inventory management. I know sometimes it can become one of those afterthoughts, Oh man, we’ve got to count our inventory and make sure it’s going well. But we’re going to talk about the importance of inventory management.
Then we’re going to talk a little bit about inventory costing and give you an overview of that. I’m not going to go through too detailed on it, give you a 30,000 foot look, and then we’ll move from there because next we’re gonna talk about inventory software considerations. There’s a lot of software out there that you can implement in your cannabis business, but we’re going to give you a few considerations, not the full list, but enough considerations to get you started with choosing the right software or tech stack for your cannabis business. And then from there, we’re going to move into some miscellaneous inventory, best practices, things you can roll into your business and see material results right away. So first, why is inventory management critical to the success of your cannabis business? First, it’s going to give an improved customer experience. Fresh product is always better than old stale product that was sometimes forgotten, but then sold by the retailer and the supplier because they found it in the back, right?
One of those bad interactions with your older inventory could be the last time that someone interacts with your cannabis business. Worst of all is if it’s the first interaction with your cannabis business. So make sure that you have fresh inventory. First in first out, just the basic movement of the inventory is important for that customer experience. But if you’re willingly offering older inventory, consider adding a discount and surely make the customer or the client aware that the inventory is old or it’s discounted to account for the age of that inventory. The next reason that inventory management is critical to the success of your cannabis business, that governments and regulators are watching. They’re keeping that EagleEye on the cannabis industry. So not only does proper inventory management techniques keep money from slipping through the cracks in your business, but those techniques also protect you. You from major fines, taking away your license by the regulators, or even a potential arrest, depending on the gravity of your inventory mismanagement.
Now all States have their own regulatory frameworks, but these intense and often confusing regulations do serve an important purpose in the industry. So by closely monitoring cannabis inventory, the local government can spot when regulated cannabis products are diverted to the illicit market, or if there’s any illicit products trying to make their way into the regulated market. Now, without these regulations regarding inventory management and tracking it, it would be more likely for these cities to see cash and tax revenue diverted out of the regulated industry and not into the hands of the cities to use as they promise to their constituents when they legalize cannabis. Another reason that inventory management is critical, the success is that it helps you find issues sooner rather than later now, no matter what business you are in the cannabis industry, nearly every onboarding that we do for our clients, they have an underlying inventory issue, and that is likely the same case for you too.
It can be something very basic, old inventory, just aging out. It’s not really that good to sell or counts that are just not done, right? If you’re not doing your inventory counts at all, or if you’re not accounting for it properly, maybe also another issue is that your value of the inventory is not booked properly. And there are many other issues that you could run into, but you understand that inventory is not that big in cannabis with a retailer. You know, you’re not dealing with millions and millions of pieces. Again, it’s not like we’re maintaining or counting an Amazon warehouse of goods. So it’s not that burdensome to take it seriously, but it’s still very easy to make mistakes on every local government develops robust laws regarding their inventory tracking and reporting for cannabis businesses. So you will have to regularly enforce inventory audits, counting of your physical inventory in your store or in your warehouse or in your cultivation space and comparing it to the inventory reported on the state seed to sale tracking systems like metric.
Now, if there are any discrepancies or issues, local governments may expect that those actually get reported to them and failure to comply will cost you money will potentially cost you money and potentially cost you your license. So make sure that you’re getting all of these issues remedied sooner rather than later. And lastly, another key point about the importance of inventory management is that inventory systems and having them in place and running smoothly will allow you to make better business choices such as should we buy more of this product? How much should we buy? And when, or another choice you may have to make is should we increase buying third party flour instead of producing our own to make concentrates, having your inventory costing done properly and accurately can help you answer that very detailed question that could change the trajectory of your cannabis business. Now inventory management data is a treasure chest for actionable business insights.
But again, in order to get these insights, these numbers must be translated into meaningful reports and the data coming in needs to be accurate and complete, right? There’s a saying out there called garbage in garbage out. If you put bad data into your inventory management system, you’re going to get garbage reports coming out. So make sure that these systems are running smoothly in the data going in is accurate, but rather than crunching numbers on your own cannabis business owners can actually rely on inventory management software and other softwares that can actually produce high quality reports with potential actionable insights, as well as when you work with a CPA who’s experienced in the cannabis industry, they can help you make sense of all of those reports. So make sure that you have the right systems in place to make smart choices for your cannabis business, which can ultimately lead to a more valuable business in the end.
So next, let’s talk about canvas inventory costing, and I’ll give you an overview of this again, a 30,000 foot look. So inventory costing is the process of assigning value to your inventory and thus to your cost of goods sold. That’s the magic in accounting for the cannabis industry, cost of goods sold. Now, though, all inventory costing involves assigning a value to your cost of goods sold. There are a number of costs, methods. You have things like [inaudible], which is first in first out, or you also have life, which is last in first out, and you also have average costs and weighted average. Now inventory costing also helps you answer certain questions about your business, such as what is my true cost per pound as a cultivator or what is my true cost per gram of oil as a manufacturer or as a retailer? What is the actual true cost of my products aside from just buying the products?
Are there any other indirect costs that I have to incur to sell this product to an end user in the retail space, but understanding the answers to these questions and allows you to understand things like your margins and your profitability, right? Knowing how much you sell it for very, very easy, but accounting for all the indirect costs of the product can be quite difficult. And we know this from experience, we do this day in and day out, but once you know it, you can make intelligent choices about your cannabis business and a side note here about inventory costing. It’s very, very difficult and complex to measure for the cultivators and for the manufacturers. You have crap inventory and work in progress or plants in progress. I understand it can be very difficult to do this, but it’s very, very important that you get your cost per pound and know your true cost per gram of oil or whatever you’re producing.
So you can make smart choices about your business. Now you may be asking, well, how does this tie to, 280E? That’s the one thing I know about accounting and cannabis with IRC 280E the goal is to reasonably allocate as many costs into cogs as possible. But what if you have a huge production month or many production months, and then huge selling months that don’t coincide with each other, that would be large expenses with no revenue in large revenues with no expenses. If you’re doing cash accounting, now that can make your books look a little wonky, right? This means that you could have complications with taxes and getting a true and accurate representation of your business’s performance. Here’s a concrete example of this. Maybe you grow outdoor cannabis and your cogs are building up as your plants grow for many, many months, but you have no revenue to offset those cogs.
So you’re operating at a loss month after month. Now then you sell that cannabis in a one deal thing. And after all those expenses have been incurred, now you have a huge revenue with no expenses to reduce your tax exposure in the period in which you made those sales. And that’s a problem, especially if those straddle years now using a cruel accounting can smooth out these waves and give you a more accurate view of your business. So let’s get a little bit technical here. So you really understand what I’m saying, right? There are two primary ways to do accounting. There’s the cash basis and the accrual method. Now under cash basis, accounting income is recorded only when received and expenses only when they’re paid. And that’s regardless of when either is actually incurred those expenses or those revenues. Now this differs significantly from the accrual method in which income and expenses are recorded on your books.
As soon as they are incurred, even if no money is received or paid out until long, long afterward. Now these differences highlight why it is necessary to use accrual basis. Accounting to track inventory. Inventory goods must be accounted for at the start and the end of a tax year without tracking purchases and sales on an accrual basis. Cash basis principles would lead to a large discrepancy between the inventory accounting and reported expenses and income and further businesses with inventories, almost exclusively use accrual basis, accounting to record their inventory, even if they may use cash basis, otherwise in their accounting. And this is the same with many cannabis businesses. So tying this all back to 280e, let’s make a roundabout here. Proper inventory costing allows you to make reasonable allocations of particular indirect costs where it’s good and where you follow the guidance of one dash four seven one to show the true cost of your inventory, which allows you to maximize your cost of goods sold in the periods in which those actually get sold. And you can get a better look at your numbers. Now, accrual accounting allows you to book expenses and income when they actually are incurred, which gives you a more accurate representation of your businesses, real performance. And lastly, inventory costing is probably the most labor intensive and analysis intensive part of the accounting for cannabis business. And that’s why it’s overlooked so often. But again, it’s incredibly important to get this right for so many reasons as we’ve previously discussed, but primarily to get a true and accurate representation of your businesses real performance.
We’ve talked about cannabis inventory management and why it’s critical to success. We talked a little bit about inventory costing and an overview of that. So let’s talk about some of the software tools and considerations that you may need to think about when implementing a tech stack into your cannabis business. Now, first you want to get something that is cannabis specific. Now, cannabis retailers, dispensary’s delivery, drivers, cultivators manufacturers, they all face a unique set of challenges related to the inventory tracking for their particular vertical. Now cannabis businesses have inventory management needs that traditional systems just aren’t really that equipped to handle. Not every basic inventory tracking system has a way to plug into metric. So that’s why you need to get something cannabis specific, right? You’ve got that seed to sale tracking and inventory management. It directly impacts your cannabis, businesses, profitability, and compliance with tax regulations.
Therefore it’s critical that a cannabis business uses software built specifically for their use case. Now, when you’re shopping and looking around, you may see some all in one software systems, but most of the software suites out there will focus on one vertical. They’ll do really, really well in that. And then they’ll add other modules to be a quote unquote, all in one system, just look for one that works really, really well for your particular vertical. And if you expand verticals later down the road, you can potentially add those additional modules in now finding systems or a tech stack that works well for your cannabis business is very, very difficult. It can be actually overwhelming. So if you need help with determining the technology stack, that’s best for your cannabis business and the vertical that you’re in, please reach out to our team. We do this day in and day out.
We can walk you through exactly what you’re going to need for your particular business. Now, when selecting a cannabis inventory software, you want to think about the integrations that are possible, and those that are coming down the pipeline. Now, there are three basic thoughts around integrations. First, does it integrate with your local seed to sale program? Again, nearly all States require that cannabis retail stores and everybody else within the supply chain actually report their inventory and their sales transactions to that state administered seed to sale program every day or some time of period, whatever that’s going to be. So any inventory management system that you invest in should integrate directly with your state seed to sale program, which helps eliminate any manual reporting or formatting. And it helps you save time, money, and the risk of costly compliance errors. So that’s number one, make sure integrates with your seed to sale software.
Now, the second consideration around those integrations is going to be hardware, right? Manually inputting all product information or sales data is going to be a costly use of your staff and people’s time. And it opens your business up to compliance risks. So before investing in an inventory management software for your cannabis business, which, Hey, that could be your POS system, some of them have them built in already be sure that it can integrate with any hardware, right? Things like barcode scanners, tablets, computers, things you already have in your business or things that you’re looking to purchase. And building on that hardware does your inventory management system actually integrate with other software systems. Cannabis is such a young industry, and you’re not going to see a full, beautiful all in one system that supports every little use case throughout the industry. So when implementing any service provider into your technology stack, do your best to choose someone that either has some type of API or at least the ability to connect to other software systems via exports and imports.
This can help again, reduce those human input errors and surely improve the efficiency with closing your books every month, right? Your inventory management system has to talk to QuickBooks at some point, whether that’s automatic or manual, that’s something that’s gonna be based on the software systems that you choose. But something that does have an API that talks back and forth would be great to reduce the time to close your books every month. Next, when you’re choosing some type of inventory software or any software in cannabis, you want to consider data security and redundancy of that data. Meaning does it repeat other places in case something does crash? You have access to that data. Now, again, this is important for everyone in cannabis, but especially for the retailers. So whatever inventory management system you decide for your cannabis business, it’s critical and very, very important to make sure that your provider can keep your data safe.
You don’t want any, especially consumer data getting out into the wild because you could open yourself up to litigation and legal matters down the road. So when evaluating a technology partner, make sure they can provide secure servers and a cloud based service that ensures that your data is going to be scalable. It’s secure in the cloud and available whenever, wherever you need it, right? Sometimes hardware fails. You don’t want everything sitting on one server in your office or in your retailer or in your warehouse, make sure you get a cloud based software for your cannabis business. And lastly, when evaluating your inventory management systems, this is a bonus. It’s not a requirement, but see if it has the ability to produce any type of reports, not only what your state requires, certain reports, right? Things like sales transactions, inventory audits, inventory discrepancies, but your inventory management system should go above and beyond your local government’s reporting requirements.
You know, the inventory system pair with your QuickBooks should be your most powerful tool for understanding the financials of your business and the performance of your business, right? The inventory technology you choose to use should give you some insight around key metrics, including, but not limited to things like your inventory turnover, the products, sales performance, right? What’s your product mix, gross margin and shrinkage. Now, again, if you need help with determining a technology stack that is best for your cannabis business, then please reach out to us. We understand it can be an overwhelming task, and that’s why we’re here to help you out. Now, the last thing I want to cover in the webinar today is going to be miscellaneous inventory, best practices. These are things that we’ve seen from the field that work that could and should be implemented in your cannabis business. First and foremost, you want to assign someone as the inventory manager, someone that is going to be the last person that has a say in how the inventory is managed and everything that has to do with the inventory.
And this is especially important for the dispensary’s. Now this inventory manager can oversee the flow of your merchandise. The inventory audits, the reconciliations of those pieces of data, the procedures, and training around the procedures of inventory management, and much, much more than that last person that has to make all the choices and in hold the responsibility. Now they’ll need to work closely with other departments, including your compliance department, your accounting department, your purchasing department, as well as your front of house salespeople. You don’t want this task of inventory management just floating out there in the ether and no one taking responsibility for it. Make sure that someone is responsible for inventory and they know they’re responsible for inventory. Next, you should consider mapping out your whole inventory flow in the process of the movement of your inventory, right? This includes things like the steps from receiving inventory to auditing the inventory before it comes in, how you monitor your stock levels, reordering procedures and criteria around that who is responsible for each of these tasks and much, much more.
When you start to map it out, you see how big and pervasive the inventory management processes and how integral it is to the entire business. And then once you get it mapped out, you can see what can be automated such as maybe kicking off a report in a software that then sends an email to a manager to do an inventory room walkthrough and an audit or reconciliation, right? Things like that. Look for those efficiencies. And once you see your business operations and steps on your paper, you can actually also find points of failure. Where can this process go wrong and cause issues for us, or look for ways to compress certain steps or see if there’s a proper division of duties. You don’t want someone collecting the inventory, counting the inventory and auditing the inventory because inventory will somehow find legs and walk out of the building.
It’s just how this stuff happens. No matter what the industry is next, you want to make sure that you’re doing your month end counts. Now, this seems so basic, but they are so many companies that we work with. And when we onboard them into our CFO service, we realize and see that they’ve not done any counts of inventory at all. Maybe they’ve done an annual count, but you need to do a month end count because with inventory, it’s a snapshot in time. And I’m not sure if you knew this, but we can’t go back in time and get those numbers, right. We can estimate it, but it’s not an accurate representation of the business’s true performance and not counting. We’ll hold back the closing of all your financials for that month or for that period, especially if you’re doing annual financials. So make sure that someone is doing a physical walkthrough, checking the products, their age, and their quality or whatever kind of requirements your regulations force you to do.
But at least those. And lastly here consider changing from cash basis to accrual basis. Accounting. Now you can not represent your books or your business properly in the best way possible if you’re not doing an accrual basis for your books. And in most cases, accrual accounting adjustments or the basis on a method of cruel accounting is not something that your $25 an hour bookkeeper can handle, but surely they can assist in the matter. Now this is where GreenGrowth CPAs comes in. Your bookkeeper can maintain the books and the activity, the basic journal entries here and there. And then we come in with our team every month, review your books, make any accrual adjustments. And then you’re on your way to getting a more accurate representation of your financial performance during that period. And here’s a reason why you should consider moving to the accrual basis for your accounting since EBITDA, which is earnings before interest taxes, depreciation, and amortization, that EBITDA it’s based on a cruel accounting figures.
And it doesn’t accurately represent cash that the company has collected, but just what it’s earned on paper. But this is how many investors measure your financial performance for the period. When they’re looking at three or four different investments, they may compare EBITDA for each of those companies to see where they want to place their money. And a second example of this is if you want to match expenses and revenues together for a look at your profitability, then you’re going to need to move to a cruel accounting, to take costs from inventory and flushing them through cogs. When you sell that product at the period that you sell that product. Now, because as we said before, you may spend lots of money building up your inventory. And then months later you’re going to sell that inventory. So in a cash basis, you’ll never have a clean P and L to see how you actually perform during a period.
If you have those big gaps, right? Lots of production months. And then later some selling months, you’re going to have to wait for a full aggregate annual P and L to see how your company’s doing. And also when you go to sell your business, potential M&A partners are going to want to see the books for your business from an accrual standpoint. So it’s best to just be ready and not have to do a whole book overhaul when you go to sell the company. Because again, you’re not gonna be able to go back in time to reconcile the numbers and make sure that things are lining up properly. So hopefully this webinar has provided you with some value and helped you to better understand the thoughts and considerations around inventory management procedures, the software, and a few best practices that you can roll into your business right away.
Now, if you need help with inventory management for your cannabis business, then please reach out to us via our website GreenGrowthcpas.com or give us a call at (800) 674-9050. Again, we help hundreds of clients every year work with their accounting systems, make sure that things are being booked properly, moved properly, accounted for properly so that they can get a real grip on the financial performance of their cannabis business. So again, if you need help with inventory management, maybe you need an outsource CFO or you need help with any other accounting matters related to your cannabis business. Then please reach out to us via our website GreenGrowthcpas.com or give us a call at (800) 674-9050. And thank you again for taking the time to join for today’s webinar. I’m going to pull these slides down and go and answer any questions that you have before we close the session today.