Why Accounting & Inventory Tracking Important for Cannabis Companies


For any business, accounting and inventory tracking are essential. They are a critical priority for cannabis businesses. Failure to invest in the best solutions can open the door to all sorts of risks. This could lead to your license being suspended, an IRS audit, and a weakened ability to make business decisions.

It could also lead to regulatory non-compliance, which can come with its own set of severe penalties. You could face fines, reputational harm, or even forced closure. Even if you are trying to sell your license or business, bad record-keeping can cause the deal to fail. You could even be forced to sell at a discount for a "fire sale".

This article will examine the impact these technologies have on compliance, performance, and the bottom line.

For doing business, you need to have the ability to track inventory and account balances

Every state that has legalized marijuana requires detailed financial records and inventory tracking in order to be licensed. Seed-to-sale software is used to manage inventory requirements. This software can be used to track the entire cultivation process as well as storage, manufacturing, shipping, destruction, and disposal of any unused products. Companies can also keep track of employee activity and sales with seed-to-sale software.

It doesn't keep track of inventory costs or provide insight into business processes. It also doesn't help employees make better decisions or be more productive. All of this critical information is kept in a separate silo. Separation can make it difficult to comply with basic regulatory requirements, quickly locate contaminated products, label errors, and show authorities that you are even ready to do business in your state.

Companies that sell cannabis must keep accurate records of their revenue and expenses, including cash-based transactions. Many states require that cannabis companies follow specific accounting procedures and processes -- all of which must then be reported to the state regulators and, eventually, to the IRS.

Not to be overlooked is the IRS's increased scrutiny of cannabis operations. It's also very difficult for humans to keep up with constantly changing rules and regulations - even if they don't have to manage multiple priorities and processes.

This means that it is extremely difficult to prove compliance with the latest regulations without having in place controls for data entry, quality standards, and compliance. This can lead to your license application being delayed or denied if you don't have enough documentation.

Another thing is that detailed reports are essential, even if you plan on using outside experts to do the heavy lifting. After all, CPAs, financial advisors, etc. They can't help but tell you the whole story if they don’t.

Accounting and Inventory Practices are directly linked to financial performance

Your business's financial health is directly affected by how you manage accounting and inventory. Businesses must be able to manage their cash flow and burn rate effectively. They could have to look for alternative funding sources from private lenders with less favorable terms. Consider high-interest rates and sale-leaseback arrangements -- these could have a negative impact on long-term profitability.

If you use one accounting system to manage your accounting and another to track inventory, you don't have the information you need.

Take into account the relationship between inventory and financial performance, as well as the link between these functions with sales, marketing, and the rest. Inventory is an important factor in budgeting and procurement decisions. It also influences where you invest your existing resources to achieve certain business outcomes. It is possible to have difficulty understanding the cost structure and the value of your products.

Investors also need to be aware of the importance of inventory tracking and accounting

It is difficult to attract investors because cannabis remains illegal at the federal level. Investors are focused on risk mitigation, whether you're looking to raise capital for expansion or to sell your company. Poor record-keeping can make even the most appealing deals less attractive.

We spent three months trying for a dispensary to open in a state that had limited dispensary licenses. The deal fell through because investors were willing to pay seven figures for the dispensary. The dispensary's accounting system had serious problems because the current management team could not prove that it was sufficiently "derisked." Poor cash management, poor employee controls, and financial records were just a few of the issues. The same investors signed a deal with a marijuana business in another state months later. The investors were able this time to verify the integrity of the company’s records and accounting system. They were also able to confirm compliance with state regulations. This ability to show exemplary record-keeping was a key factor in the success of the second deal.

The importance of a unified ERP underscores the link between inventory, accounting, and the rest of the business

It is possible to go on and on about how important different tools and features are in the running of a cannabis business. However, individual solutions only have so many benefits. Cannabis companies will struggle to compete with a dispersed ERP system. There are currently no dedicated ERP systems for cannabis.

Arion ERP is an ERP solution that uses SAP's ERP offerings. Arion ERP offers more customizations than SAP's ERP offerings, which is crucial to creating a solution that meets the needs of the cannabis industry.

Last Thoughts

If you are thinking of starting a legal cannabis business, or if you already have one, it is a gamble. You don't need an ERP system to manage inventory, accounting, and other business operations. Velosio, a Microsoft partner with experience in the cannabis industry will give you the best chance of success. We will guide you through the selection, and implementation and then assist you in adapting to the dual demands of digital transformation as well as the uncertain regulatory landscape.

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