Your Inventory is Drowning You - How Lack of Inventory Management is Costing You More Than You Think
"It's the same with almost every client we work with" says Andrew Gervais, CEO of Cultivate Consulting and experienced cannabis inventory consultant. "We ask how their inventory management and counts are and everyone says 'we're spot on' but that doesn't mean the numbers are accurate".
Cultivate is the only CPA firm on the East Coast that provides the level of inventory consulting needed to actually make a financial difference to cannabis business owners. But why is it so important?
Because Federal laws still prohibit cannabis companies from taking normal business deductions from operations, the only item cannabis companies can legally use to reduce their taxable revenue is cost of goods sold, and determining that number isn't as simple as you think.
"Both direct costs like the cost of buying flower, as well as indirect costs like the labor paid to harvest, or the rent for a cultivation facility, have to be tracked, documented and then allocated accordingly to cost of goods sold" added Andrew. All those numbers then need to be reconciled to your point of sale system.
The reconciliation to the point of sale system is where we see the biggest breakdowns. Rarely are businesses doing full inventory counts, which means counting 100% of on-hand inventory, everything from t-shirts, to pre-roll papers, to bulk flower, to plants in process to seedlings. Most businesses "count" but not 100%, they'll skip cultivation because they don't consider plants part of their retail process yet, or they'll skip supplies because they don't consider packaging as part of the inventory. The problem with this is that cost of good sold is calculated based on a formula that ties inventory counts in. Cost of goods is calculated by taking beginning inventory, adding purchases throughout the year, and then subtracting ending inventory. If either inventory count is inaccurate, so is your cost of sales, and that can impact your tax liability.
The other mistake that we see frequently is businesses editing the point of sale system directly. Counts will get done but when you have 100 pre-rolls that you count and 105 in the point of sale system, the system gets edited to say 100 and no one ever researches the 5 pre-roll variance. This may seem small, but over time, if you're hard keying the variances like this and never researching where the differences are coming from, there is a 100% chance you're losing money. Variance reports tell us where we're losing product, where our team might not be ringing items up correctly, or even just where weights and measurements might not be translated properly. All these different areas can cause numbers to be off which are going to impact the cost of sales potentially resulting in an inflated tax liability.
"The best thing for businesses to do", says Andrew, "is implement inventory standard operating procedures and then enforce them. You have to write an inventory management Bible, everyone who handles products, touches the POS system, or helps to count has to be trained and know those procedures inside and out. It's your best defense to cost management hands down".
Need an inventory consult? For the month of May only, you can book a free 20-minute discovery call to discuss your current inventory procedures where may need help to tighten up controls. Custom quotes are available for inventory training, operating procedure manual development, point of sale system implementation and training, and more to meet your needs. If your tax liability was higher than you expected this year, this is one area that can make a big difference when you get it under good control early in the year.