Are you playing Russian roulette or firing on all cylinders?

The (life or death) importance of accounting and inventory tracking in the cannabis Industry

Having worked as a consultant for state regulators that control who gets (and keeps) commercial medical marijuana or cannabis licenses, as well as for licensed enterprises in numerous states and Canada, I know first-hand how critical it is for cannabis businesses to rigorously maintain state-of-the-art accounting and inventory tracking systems. Failure to do so will put any commercial cannabis license in jeopardy (sooner or later). And, when you try to sell your license/business, it could cause your sale transaction to either fall through or result in material price reductions.

Licensing implications

Virtually every state in the U.S. that currently allows medical marijuana and/or recreational use cannabis has implemented stringent regulations requiring real time inventory tracking – from “seed to sale” or “plant to patient.” This often includes such things as storage and destruction of unused product, transportation and delivery logs, employee activities, patient record keeping, and sophisticated security reporting. Additionally, most states require layered and detailed accounting processes and procedures – all which have to be reported to the regulators and ultimately to the IRS.

In every state in which I have done business, the scrutiny placed on licensed cannabis enterprises is getting more involved and more rigorous – particularly in states new to marijuana like Ohio, Pennsylvania, and California[1].  Each of these states (and many others) are heightening the intensity and focus of regulatory inspections. Additionally, the IRS has anecdotally become much more actively involved in auditing cannabis enterprises.

Failure to meet these stringent inventory tracking and financial reporting requirements can result in substantial penalties.  Even worse, it can result in loss of license and possible criminal penalties – not just for the employees involved, but also for the owners and investors.

Transactional Implications

Given the current federal position that marijuana is illegal, the investment community is laser focused on risk mitigation.

I recently spent three months working on a failed acquisition of a very successful dispensary in a state with limited dispensary licenses.  The investors were prepared to pay high seven figures for the dispensary.  The deal unraveled at the 11th hour because the dispensary management wasn’t able to conclusively prove to the investors that the business was suitably de-risked. In particular, there were material issues relating to the integrity of the dispensary’s accounting system including such things as inadequate cash management controls, inadequate employee controls, and issues with the integrity of the financial results, among other issues.

Interestingly, several months later, the same investor group decided to invest in another marijuana enterprise in another state.  In this case, the management group was able to confirm with high integrity the adequacy of enterprise accounting and inventory tracking systems – as well as tout a very strong compliance record with the state agency having oversight.  In other words, the enterprise showed the investors a series of inspections by the state department of health that showed exemplary record keeping and exemplary employee controls.

The bottom line

If you either own a legal marijuana enterprise or are interested in owning one, you are playing Russian roulette if you don’t require implementation of a sophisticated enterprise inventory and accounting tracking system, such as the cannabis ERP solution offered by Silverware, the developer of Silver Leaf CBC, built on Microsoft Dynamics NAV (and soon Microsoft Dynamics 365 Business Central). And due to the unique nature of the cannabis industry, you’d be well served to partner with a software consultant with experience in the industry — again like Silverware — one who can guide you through the selection, implementation, and ongoing adjustments of the software.

[1] California, while allowing medical marijuana beginning in 1996, has only recently adopted a layered regulatory reporting structure at the state level involving multiple tiers of licenses and related regulatory reporting.

Andrejs Bunkse

“Silverware, the developer of Silver Leaf CBC.  Silver Leaf CBC is a complete accounting and ERP solution for cannabis processors, manufacturers and wholesale distributors.”
www.cannabisbusinesscentral.com

Andrejs Bunkse is a lawyer and consultant. He is owner of Rain Legal in San Diego and of counsel with Nimbus Legal in Phoenix. He is also president of Endurance Strategies Group LLC, a full service consultancy.  Formerly general counsel and head of government affairs for two publicly traded multinationals, his emphasis is on heavily-regulated industries including commercial marijuana, gambling and traffic safety systems.