Unveiling the Accounting Complexities of Cannabis Inventory Valuation and Compliance

Date February 12, 2024
Authors Boyd Goodner

Cannabis companies face a unique set of challenges, which have been detailed in hundreds of published articles. One challenge is the complexity of inventory costing. It’s a challenge in many industries, but in this area, the cannabis industry has a distinct advantage: state reporting requirements for seed-to-sale software. Whether you are required to use BioTrack, METRC, or MJ Freeway, cannabis companies benefit by strict reporting requirements for the plant. Whether you are a standalone grower, processor, or dispensary, or a combination of any the three, you are subject to mandatory inventory reporting procedures.

In it’s simplest form, inventory value equals quantity on hand multiplied by cost per unit. At any point in time, a canna-business would know, for example, how many plants they have in Grow Room 2, the weight of their fresh frozen in Freezer A, the dry weight of their products in cure tubes, or the amount of finished goods in Vault I. When it comes to quantity on hand, that ability to deliver precise inventory data is a dream-come-true for a cost accountant. Being able to rely on your quantity on hand at period ends goes a long way to securing state compliance as well as establishing an accurate inventory value.

As to the second portion of inventory valuation on the balance sheet, cost per unit is relatively easy to track in a retail environment. But it could be a more difficult calculation in a cultivation or processing environment. Cost accountants need to be able to conduct cost studies on their products to see how much they cost to produce. To complicate matters, cannabis companies have a strict 280E compliance standard to adhere to, making the accuracy of your costing essential to being federally compliant.

But what about inventory tracking for state purposes and 280E federal tax compliance? Did we overestimate the advantages enjoyed by the cannabis industry?

One drawback is software restrictions. Not all software providers are willing to work with cannabis companies and cannabis-adjacent companies. There are a few reliable resources available to help bridge the gap between state seed-to-sale software and financial reporting.

When it comes to accurate financial reporting, ERP (Enterprise Resource Planning) software solutions are the best way to aggregate an organization’s data. Historically ERPs, specifically older legacy on-premise, startup-focused, and low-cost solutions, have struggled to integrate seamlessly with outside software, leaving very manual processes for getting accurate financial data.

However, over the last half-decade there have been tremendous advances in cloud-based ERP capabilities, which not only have improved the software functionality itself, but also scaled well as organizations grow their business. This growth in ERP capability includes allowing solutions to rapidly share data across multiple, unique software solutions.

Let’s talk tech. Many companies ask, “How is this data shared between two entirely different systems?” The short answer is “API” (Application Programming Interface). As the name implies, APIs allow communication of specific data between different solutions so that either or both solutions have access to the data needed to run operations smoothly. METRC announced last year their commitment to improving API functionality within their system, which will make connections to third-party ERP software more straightforward.

With increased visibility into the inventory data stored in BioTrack, METRC, or other software directly within your ERP (in near real-time), organizations have all the data they need to produce robust and accurate financial reporting for inventory valuation. Even better, these ERP solutions allow valuable reporting to be shared by a wide range of employees, from cultivators to CFOs, which only improves operational efficiencies and compliance.

If you or your company have questions on inventory or coordination of state tracking, feel free to reach out to Eric Grischow at HBK Cannabis Solutions or Boyd Goodner at Vertilocity, an HBK Company.

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