Cannabis Inventory Best Practices

Inventory is one of the most valuable assets for a cannabis business, and without proper inventory control, you could lose thousands of dollars in lost revenue and product.

The best practices in inventory management for cannabis cultivators, manufacturers, distributors, and retailers can be boiled down to constant accounting, frequent inventory counts, inventory reconciliations, controlling access to inventory, and focusing on customer service and training staff.

Constant Accounting

The data you have in your accounting system is only as good as the data that gets in there. It's important to prioritize your accounting and include all vendor purchases, customer sales, inventory write-offs, and adjustments.?You should be analyzing your inventory and accounting numbers every week at a minimum.

Frequent Inventory Counts

The importance of frequent inventory counts and inventory reconciliations cannot be over-emphasized. These two controls tell you really quick how much inventory you have on hand, and if it matches with your accounting records.

During a physical inventory count, it's important that all inventory be accessible and available for the inventory count and all products should be labeled and tagged.

Inventory should be counted by at least two people and performed blind.

A blind inventory count will allow the counters to see the inventory SKU or item but does not show the amount of that product in the inventory system. This prevents a lazy inventory counter from matching the inventory counted with the inventory listed.

Inventory Reconciliations?

After a physical inventory count, the results should be compared with the inventory in the accounting or inventory system. This process is called an inventory reconciliation.??

Inventory variances are expected during the inventory reconciliation process. For example, if you have goods in transit to customers, but have not yet sent out the invoices, you may have an inventory variance. If you received products from your vendors, but have not yet issued a purchase order, you may have an inventory variance.

When you cannot identify the source of the variance,?it may indicate shrinkage.

Shrinkage is the loss of inventory that usually is related to factors such as theft, error, fraud, and damage. Most businesses have a certain amount of shrinkage that they plan for.?The major difference between a non-cannabis business and a plant touch business is that?cannabis businesses that are plant-touching (i.e. directly trafficking in a controlled substance) are not allowed to deduct their losses related to inventory.

Control Access to Inventory?

Backroom and Inventory Management is where the bulk of shrinkage problems can arise ("back end shrink"). Back-end shrink can cause by inconsistencies in vendor purchasing, payments, and receipt of the actual goods.?A significant portion of back-end shrink can be the restriction, or lack of restriction, of inventory goods. If inventory items are not restricted or safeguarded, do not have proper labeling or storage, the likelihood of that inventory getting up and walking out of the warehouse is high.

Focus on Guest Service.?

Guest and Customer service is one of the biggest areas where shrink can occur in a cannabis retail environment. This is considered "Front End Shrink." Front end shrink can include your sales associates/cashiers registering a sale incorrectly by miscoding the products purchased; giving their friend a buy one get one free or even miscounting a customer purchase. All of these instances create a?discrepancy?between your accounting records and the actual physical product on hand. Controls such as employee training, daily inventory counts, and sales and cash counts can help.

Build a culture around inventory compliance.?

At the end of the day, the people responsible for the inventory and accounting function of your business need to feel empowered and trained on their roles and responsibilities. Makes sure that all staff responsible for handling inventory are trained on the inventory policies and procedures, including how to receive inventory, how to sell inventory, how to count inventory, and how to register an inventory return.??

If you want to learn more about inventory counting and inventory controls, check out our?Cannabis Finance Bootcamp.