“Then, shalt thou count to three. No more. No less. Three shalt be the number thou shalt count, and the number of the counting shall be three. Four shalt thou not count, nor either count thou two, excepting that thou then proceed to three. Five is right out. Once the number three, being the third number, be reached, then, lobbest thou thy Holy Hand Grenade of Antioch towards thy foe, who, being naughty in My sight, shall snuff it.” – Monty Python and the Holy Grail
While you are probably not lobbing hand grenades at your competition, as a business owner one of the biggest obstacles you’ll face while conducting business is counting your inventory, otherwise referred to as inventory tracking. To be honest, tracking inventory is difficult in any industry, but when you are forced by a regulatory board to use a specific tracking method it becomes even more difficult. Normally, inventory tracking is only associated with a business’ point-of-sale system; however, for a cannabis business, it is required from seed to sale. That complicates matters because it means that inventory tracking is not limited to just the dispensary or delivery service.
Recently, in Colorado, several dispensaries were raided and shut down by the state because of overselling to clients. That means that budtenders were selling more than an ounce a day to individual customers and they got caught. Now, I don’t know which point-of-sale system they were using, but I do know that here in Colorado they are required to use Metrc—a state-required inventory tracking system that tracks the plant from seed form until it is sold to the consumer. The system tracks inventory; however, it does not have a point-of-sale system built in.
Metrc has got to be the hardest system to learn and implement. Several state licensing boards including in Colorado, Washington, Oregon, and Alaska require its use. From an accounting standpoint, I’m not fond of Metrc. (Where did I set down that hand grenade?) It is a frustratingly difficult system to for generating reports that are readable and will easily translate into whatever accounting software you use. The idea behind it is to be able to track any plant from either seed or clone through the growth process into trim and finally to the final sale. The problem is that one plant might produce 800 oz of flower and another 5 pounds, but it doesn’t stop there. Those that use whole plant extracts will get a different yield than those using just the flower.
One of the key issues in tracking inventory for the cannabis industry is that it the inventory is so varied. A grow facility might have just the plants, or it could continue through to the extraction process. Once the extraction process is complete then a company could go on to manufacturing, where other ingredients are often added to create edibles: such as chocolate, sugar, and even other essential oils. That means those items must be tracked, as well. And don’t forget packaging. Every component in a cannabis product must be tracked.
Dispensaries have their own problems. Often, they are required by local legislation to have their own grow facility, and sometimes, even to create their own edibles; but they also often order products from other growers and manufacturers and each of those items must also be tracked in the inventory system. Then add in ancillary merchandise, such as glass or T-shirts, giving you even more items to track.
Inventory tracking isn’t just to keep state regulators happy, though. There are three reasons why you as a business owner will want to track your inventory, and they have nothing to do with licensing requirements.
- The most important reason is that it allows you to make sure you are charging the correct amount for your products. If you know that it takes two pounds of sugar, 10 oz of chocolate, 5 oz of oil, and 2 oz of cannabis extract to make one batch of edibles, and those ingredients together cost $200; you may charge $300 for the product. You might think you are doing well, but you still haven’t accounted for the packaging or the labor, so may still be losing money. A good tracking system will also alert you when costs change so you can adjust the selling price.
- Another reason is so you know when you are running low on a fast-selling product, or to identify when a product is not selling like you had hoped. Either of these are potential problems for a business. You don’t want to run out of a popular product because then clients will go looking for it elsewhere. On the other hand, you need to make sure you don’t have 200 units of something that is not moving but is taking up valuable shelf space. Inventory tracking gives you insight into whether you need to change the location of a slow-selling product to give it more exposure, or bundle it with the fast-selling product as a way to get it off your shelves and free up retail space for something more profitable.
- Legal cannabis is the only industry in which businesses are restricted by law in how much they can sell to one person. With a good inventory system, hooked into a good point of sale and CRM systems, you can quickly see the number of grams someone has bought that day or even that week—to ensure that they don’t exceed the legal limit for purchases from your store.
Below are some inventory tracking systems I have found to be effective; there are several more out there—so do your research before jumping into one because it is not easy to change systems once they are set up.
Flowhub is available in Colorado, Oregon, Alaska, California, Michigan, Maryland, and Nevada. The best part about this software is that it connects to Metrc, freeing up your time. This point-of-sale system also does the inventory tracking while updating Metrc for you.
MJ Freeway is an online inventory tracker and, therefore, it’s mobile—making your life much more balanced. No more being stuck behind a desk trying to figure out what products need to be re-ordered.
BiotrackTHC—This is available in all states because it integrates with Metrc, as well as Leaf Data Systems and is directly available as a standalone product in Washington, New Mexico, Illinois, New York, Hawaii, Puerto Rico, and Delaware, along with the city of Arcata in California.
Webjoint—This is unique in that it is designed for delivery services and creates a website as part of the system.
You must also audit or physically count your inventory at least once a year to ensure that what the tracking system says is there is, in fact, really there. Inventory counts can get thrown off by all sorts of things, such as mistakes in receiving or client invoices, stolen items, damaged items, or even out-of-date items that can’t be sold.
Cynthia L. Finkenbinder, CPA, is the owner of Alpha Omega Accounting, LLC, in Northern Colorado. With clients in 28 states and five countries, she is an expert in 280E compliance, accounting, and multi-state taxes, inventory, and running a profitable business. Feel free to contact Cyndi if you would like her to address your question in a future article or are in need of her professional services, at firstname.lastname@example.org or visit her website: http://alphaomega-acct.biz.