Hidden Costs of Cannabis Inventory

Inventory is one of, if not the most important elements of a cannabis business venture.

Keeping track of that inventory is crucial for survival from a compliance aspect as well as financial. Small business owners walk a fine line between success and failure in their first 5 or so years of business.  As a cannabis business owner don’t be fooled into thinking that accounting for inventory ends upon its purchase.  Given that inventory can be your second biggest cost after payroll, understanding the true cost of cannabis inventory is crucial to survival.  The carrying costs of inventory is described as a percentage of the value of the inventory and can be as much as 25% of the inventory on hand. It is extremely important to keep it under tight reign.. The cost of inadequate inventory management can be far greater and could very well be your demise. Many problems can arise from not having an accurate view of your inventory and the financials involved with holding it.

Too much product on hand leads to problems with shelving, spoilage, and cash flow.  Too little can lead to loss of sales, customer dissatisfaction or increased shipping costs if ordering small amounts too often. You may re-order certain items simply because you didn’t know you already had the item on hand.  There can be significant costs in strategic planning time- you spend more time with suppliers getting orders done and less time in your business.

Many people only the consider the actual cost of the inventory they have on hand when calculating the cost of holding inventory for a business. They may calculate in obvious things, such a shrinkage, but there are numerous other, so called hidden, costs that come into play if you want to have an accurate view.

Cost of shipping, handling and housing of the item as well as taxes, employees and insurance not to mention the cost of the actual capital used to purchase the items are all considerations that are often overlooked by businesses.  In the cannabis industry storage of your product can have a huge affect on your bottom line. Cannabis needs to be kept both fresh and secure. You may have costs that involve rent, lighting and climate control as well as various security implementations to avoid theft or “shrinkage”.

Perishability and cannabis potency are very important factors not only for customer satisfaction but also in your costs.

Everything from UV light, to heat to humidity can affect your cannabis. If a product sits out too long or on a shelf too long or is stored improperly it can cause wasted or damaged product which leads to mark downs and write offs. There’s a movement towards “micro” or “craft” grows that’s been gaining traction lately where growers are focusing on quality over quantity. You want to make sure you are holding only the freshest product and not something that’s all dried up or an edible about to hit its expiration. One of the best ways to keep the right amount of inventory on hand is to know what sells and what doesn’t. With a good inventory management system you will not only be able to keep an accurate inventory count but you will also be able to keep track of exactly which items are turning over faster, and have those numbers right at your fingertips.

Shrinkage, or pilferage, is another common annoyance in the cannabis business.

It’s not only annoying but can also cause compliance issues if it exceeds state set thresholds  for shrinkage. If a restaurant has a case of wine, of course someone’s going to notice if a bottle goes missing, but is anyone going to notice if a bud goes missing? After all it weighs so little…but this can add up over time and cost the business thousands, not to mention get you into hot water and cause compliance issues. Cannabis laws vary from state to state but most allow only a small margin where shrinkage is concerned.

With the implementation of a comprehensive inventory management and tracking system you will be able to make sure that what you received is what you ordered, and at the end of the day, or year, what you sold or chose to give away is exactly what you inventoried. Every gram accounted for.

Keeping and tracking your inventory accurately can also have a big impact on what little tax write off you do get.

Tax law 280e allows you to deduct cost of goods sold. You may also be able to deduct that portion of your space that is dedicated to the storage of that product.  Keeping  accurate inventory that includes the actual costs of each and every individual item and all of the costs involved in holding those items helps you to more accurately calculate the cost of goods sold so you get a more accurate tax deduction.

The way a business manages its assets will have a great impact on the future performance and success of the business.

Understanding cost of inventory can help you understand your customer base, keep up with expenses, help you maintain cash flow and increase profits. Accurate inventory calculation doesn’t just include costs of physical items you have on hand. Be proactive and ensure the success of your venture by making sure you clearly understand the true costs involved with carrying inventory. Implement a comprehensive inventory tracking and accounting system, if you don’t already have one, that will provide you with the information you need and help you have a clear picture of costs and profits!