Accounting & Inventory Tracking: A Matter of Life or Death Matter for Cannabis Companies

Accounting and inventory tracking capabilities are crucial for running any type of business. But, for cannabis companies, they’re an urgent priority that can make or break your business.

Failing to invest in the right solutions could open the door to all kinds of risks. It could put your license in jeopardy, trigger an audit from the IRS, undermine your ability to make smart business decisions, among other things.

Worse, it could result in regulatory non-compliance – which comes with its own set of substantial penalties. Think – fines, reputational damage, even forced shutdown.

And, even if your end-game is trying to sell your business or license, poor record-keeping could cause the deal to fall through. Or, best case scenario: force you to sell at a “fire sale” discount.

In this article, we’ll look at the implications these technologies have on compliance, performance, and the bottom line.

Account and Inventory Tracking Capabilities Are Prerequisites for Doing Business

Pretty much every state that has legalized cannabis also requires inventory tracking and detailed financial records as a condition for licensing.

Inventory requirements are typically handled by seed-to-sale software, which are used to manage the entire cultivation process, plus storage, manufacturing, shipping, and the destruction of unused products. Seed-to-sale software also helps companies keep detailed records of sales, employee activity, and security logs.

Unfortunately, it doesn’t track inventory costs, provide insight into critical business processes, or help employees be more productive or make better decisions. Instead, all of that critical data exists in a silo, separate from the rest of the business.

And, that separation can impair your ability to meet basic regulatory requirements, rapidly locate contaminated products or labeling errors, or demonstrate to authorities that you’re even prepared to meet the requirements of doing business in your state.

In addition to state-mandated seed-to-sale tracking, cannabis companies must also keep detailed records of all revenue and expenses — including cash-based transactions. Most states require cannabis companies to follow detailed accounting processes and procedures — all of which must be reported to state regulators, and eventually, the IRS.

It’s also worth noting that the IRS is placing increased scrutiny on cannabis operations. And keeping up with ever-changing rules and regulations is also really hard for humans to do on their own – even if they’re not juggling multiple processes and priorities.

All of this means that without baked-in controls for managing compliance, quality standards, and data entry, it’s extremely difficult to prove that your business meets the latest requirements. In turn, that lack of documented proof can cause your license application to be delayed or rejected.

One more thing: even if you’re planning on hiring outside experts to do the heavy lifting, detailed reports are a must. After all, CPAs, financial advisors, etc. can’t help you if they don’t know the whole story.

Accounting & Inventory Practices Are Directly Linked to Financial Performance

How you handle accounting and inventory management also has large-scale financial implications for your business.

A business must be able to proactively manage cash flow and burn rate. Otherwise, they could be forced to pursue alternative sources of funding from private lenders offering unfavorable terms. Think — high interest rates or sale-leaseback agreements — that could impact long-term profitability.

When you’re using one system for managing accounting activities and another to track your inventory, you lack the information you need to understand where things stand and how to improve.

Consider the connection between inventory and financial performance (not to mention the link between these functions and sales, marketing, and the rest of the business). Inventory factors into budgeting and procurement decisions, as well as choices about where to invest existing resources to achieve specific business outcomes.

You might also have a hard time, say, understanding the value of your products, your cost structure, and how each business process impacts the bottom line.

Accounting and Inventory-Tracking Matter to Investors Too

The fact that cannabis remains illegal at the federal level makes it harder to attract investors.

Whether you’re trying to raise capital to expand your business or trying to sell your company and make an exit, investors are hyper-focused on risk mitigation.

As such, poor record-keeping can undermine even the most attractive deals.
As an example, we spent three months trying to acquire a successful dispensary in a state with limited dispensary licenses. Investors were prepared to pay in the high seven figures for this dispensary, yet the deal ultimately fell through at the 11th hour.

What happened was, the existing management team couldn’t prove to investors that the business was sufficiently “de-risked.”

In that case, the dispensary’s accounting system was revealed to have significant problems. Among those issues: poor cash management, inadequate employee controls, and problematic financial records.

Months later, that same group of investors closed a deal with another marijuana operation in a different state.

This time around, the investors were able to confirm the integrity of the company’s accounting and inventory tracking system and records. What’s more, they were able to verify strong compliance with state regulations.

That ability to demonstrate exemplary record-keeping and controls played a major role in ensuring the second deal went through.

Link Between Inventory, Accounting, & the Rest of the Business Underscores the Importance of a Unified ERP

We could talk all day about the critical role different tools or features play when it comes to running a cannabis business. But, the benefits of individual solutions can only go so far on their own.

Without a uniform ERP system that spans the entire business, cannabis companies will bump up against the limitations of a fragmented system.

As it stands, there aren’t any dedicated ERP systems built specifically for cannabis.
Viridian Sciences offers a solution based on SAP’s ERP offerings, though we’ve found that many cannabis companies do well using Dynamics 365 Business Central as their core ERP. They can add ISVs and customizations – like our Metrc API – to BC to help take on the challenges and opportunities of this space.

If you’re interested in learning more about SAP vs. D365, we recommend checking out a couple of recent posts. One compares SAP B1 to D365 BC and the other looks at D365 Enterprise and SAP S/4 HANA.

Ultimately though, you’ll find that Microsoft’s ERP options offer more in the way of customizations, which are central to creating a solution that speaks to the needs and requirements of the cannabis industry.

Final Thoughts

Bottom line: If you own a legal marijuana business or you’re thinking about getting into the biz, you’re playing with fire if you don’t have a sophisticated ERP system for managing inventory, accounting, and the rest of your business.

Because of the unique nature of the cannabis industry, your best chance of success is partnering with an experienced Microsoft partner like Velosio. We’ll guide you through the selection and implementation process, then help you adapt to the dual pressures of digital transformation and the uncertain regulatory landscape that defines the modern cannabis industry.

You can learn more on software solutions for Cannabis Growers.

More resources:

Taking Stock of What Cannabis Business Investors Want

Your Complete Guide to Cannabis ERPs

Mastering the Planning Process for Cannabis Production