How To Manage Common Software Issues in Cannabis Accounting
The key to success at dealing with common software issues that occur in Cannabis accounting is keeping a cool head and positive attitude. It’s easy to get overwhelmed tackling the many challenges that pop up. Furthermore, the CEOs and managers of the businesses you support can (and will) call or email you while they’re upset about the latest hurdle they need to scale. They’ll expect you to have the magic formula that gets all of their systems working. The best thing you can do in those situations is to listen and let them vent to their heart’s content. Afterall, you are probably one of the few people who will be able to understand their pain.
After they’ve vented, calmly walk them back from the brink and remind them that when it comes to the Cannabis industry, software issues are always a problem. But we can stay proactive, compliant, and on top of the numbers.
In the following blog post, we’re first going to explain what the various kinds of software do as their primary function and inform you on what to expect. From there, we’ll discuss common software-related challenges, including those that arise from human error, and not just the technology. Then, we’ll outline a manageable way forward.
Seed-to-Sale Software
Unless you’ve worked in the pharmaceutical industry, seed to sale software is going to be unlike anything you’ve previously worked with. It allows the state to track the entire supply chain of a particular Cannabis plant. In other words, everything from planting to harvesting, lab testing, distribution, and stocked on the shelf at a dispensary and then sale to the consumer is tracked for every single plant. If the final product is not flower but rather a THC-containing product, such as a gummy bear edibles, there will be additional steps in its development from plant to oil or distillate to, ultimately, a gummy bear. Even the testing of Cannabis and all Cannabis-containing products is tracked and regulated via seed-to-sale software.
Preventing the flow of Cannabis into the illegal markets is seed-to-sale software’s most important function. Because the software tracks all legal Cannabis throughout its growth and production cycle, it enables the state to collect taxes, regulate distribution, enforce laws, and even perform a recall in the case of contamination.
Seed to sale tracking software is required for all Cannabis companies in states that have legalized medical and/or adult-use Cannabis. Companies do not have a choice in this software. They are mandated to use the software the state has selected. The most common state-mandated software providers are Metrc, Leaf Data Systems (formerly, MJFreeway), and BioTrack. Newer ones include Trace and Agrisoft.
All of them are buggy, prone to glitches, and susceptible to human error.
Nevertheless, adhering to the respective state’s compliance standards and inputting data correctly is expected of all operators. Ensuring tax is not over or under paid, preventing fines, and correctly performing cost accounting for today’s Cannabis companies very often requires rolling up your sleeves and saying yes to doing the painstaking work of resolving the software issues. Remember: as you gain familiarity with the various seed-to-sale softwares and become proficient at dealing with those common glitches and errors, you’re also adding a valuable tool to your Cannabis accounting toolbox.
What To Expect
- When a state launches sales of Cannabis for the first time, problems are inevitable.
- When a state transitions from medical to adult-use or recreational Cannabis, issues will come up.
- Regular data audits will reveal issues that may have gone unnoticed for months, or even years, so expect some cleanup to always be par for the course.
A Primer on POS & Seed-to-Sale Tracking Software Integration Issues
Almost every state that has legalized Cannabis for medical or adult-use has had issues getting their state-required seed-to-sale software to work effectively with Cannabis POS systems. Integration difficulties are to be expected and we often recommend NOT connecting the systems as it can create more problems than it solves. By establishing workable practices that limit disruption to business and preserve good data, you and your clients can weather the storms. Below are the most common seed-to-sale and POS issues:
- Sync failures.
Data exchange between the point of sale system and seed-to-sale tracking system needs to be seamless. When they fail to properly synchronize, errors in sales, inventory, and compliance or regulatory data can result. - Inventory discrepancy.
Despite operators often lean on the the software to substitute for actual inventory counts, doing so is a mistake. Weekly cycle counts need to be performed and reconciled to the POS, as well as the accounting system, to ensure that the reports are error free and clients are audit ready. - Data transfer glitches.
Glitches are harder to spot than sync failures. By performing regular data audits you can locate errors in how the data is being transmitted. Take accurate notes then reach out to the POS provider to help straighten things out. - User adoption.
All persons with access to the POS and/or seed-to-sale system need to use these tools correctly. As you onboard new clients, expect that some of their employees will be resistant to abiding by new inputting procedures or policies you help to put in place. Their reluctance may be present, at least in part, due to the complexity involved. If that’s the case, see if you can work with management to devise a workable solution that largely gets everyone’s needs met. That being said, getting employees to transition to abiding by correct procedures often requires direct oversight and disciplinary action. Also the fewer employees that have access the better, and any one that accesses any software systems should have zero access to the actual inventory (a Segregation of Duties key control). If users do not abide by procedures, ongoing cleanup will be needed until the issue is resolved.
Because seed-to-sale is notoriously bug-infested, we recommend opting for reliable functionality in POS selection.
Manufacturing Software
Cannabis manufacturers turn Cannabis oil into various products such as edibles, beverages, tinctures, lotions, or other products. Specialized manufacturing software helps them streamline processes, optimize for efficiency, and maintain inventory control. Due to the software’s ability to track batches, manufacturers can retain data and know exactly which ingredients were used in the production of a product and maintain a detailed record of that product’s production history.
Manufacturing software also enables product makers to adhere to compliance requirements, manage and document quality control processes and tests, perform traceability and regulatory reporting, and generate reports on costs, production volume, and inventory levels. And in case you’re wondering, yes, it can integrate with seed-to-sale software, and yes, integration and errors can and do happen pretty regularly.
While the functionality manufacturing software provides may sound impressive, know this—it’s also extremely buggy! Most systems were developed less than a decade ago; Katana MRP, and Canix are the brands you’ll most frequently encounter. Non-Cannabis oriented systems, such as Fishbowl, are sometimes seen but are not tailored to suit Cannabis manufacturers’ many needs.
Despite all of the complexity, keep the following in mind: The Bill of Materials (BOM) that can be generated for every product manufacturers make is your primary tool. With it, you can determine the production costs for every item including raw materials, and allowable direct and indirect costs such as labor, allocated overhead, and assembly costs.
What To Expect
- Manufacturers can have many SKUs, sometimes hundreds or thousands.
- Many of the reports manufacturing software provides will not be sufficient for accounting purposes, so performing lots of reconciliations, counts, and testing will be needed to ensure the system is accurate and complete.
ERP System Software
Enterprise resource planning software, aka ERP, is cloud-based software that serves the function of collecting, centralizing, storing, and integrating data throughout an entire enterprise. While such functionality may sound impressive, ERP systems are still quite new to the Cannabis/CBD industry. Largely for that reason, they tend to have a lot of bugs or errors. Generally, Cannabis-industry ERPs also lack good support and training, take a long time to integrate, and are very expensive.
Accounting professionals who support businesses with Cannabis industry ERP systems need reserves of patience, a knack for problem-solving, and the ability to identify, locate, and resolve syncing and integration issues, data contamination, and more.
Integrating an ERP system with state-mandated seed-to-sale software, as well as a POS system can be toilsome and time-consuming work. Once integration is completed, regular reviews will need to be conducted to verify the software is properly functioning.
What To Expect
- Complexity is the name of the game with ERPs. Know what you need, then execute getting those needs met.
- Big errors in costs or quantities can happen. Data can also be held back by specific departments, creating inaccurate data.
- Inadequate training and user adoption is widespread.
The All-Too-Human Problem of Not Understanding the Tech Stack
One of the biggest software challenges you will face has its roots in good ol’ carbon-based lifeforms. You can always count on well-intentioned humans to gum up the works.
Scenarios like this happen all the time. A CEO, manager, accountant, or bookkeeper attempts to fix something, but instead of fixing that something they mess things up. Bad data contaminates good data. So, you’ll take a look at their POS, seed to sale, and books. Slowly but surely, things start coming into focus and the numbers start to make sense. That’s great but know this: the errors, bad data, and headaches will continue again and again unless you take this crucial action—educate them and ensure proper controls are in place.
When key individuals don’t understand the tech stack they’re working with, major headaches and a lot of cleanup are the inevitable result. As their Cannabis accountant or CFO, you need to delicately communicate the big picture importance of maintaining clean data and ensuring proper permissions are enforced. Draw a straight line from good data hygiene and maintenance to potential loss of licensure. Here’s that line: good data makes proper accounting possible. Conducting proper accounting practices is a requirement for maintaining licensure and compliance in the industry. What you’re aiming for is getting their buy-in on instituting best practices and setting (or reinforcing) appropriate internal controls. Here are just a few of the policies that can be enforced:
- Persons with access to the accounting and software systems have zero access to assets (inventory and cash).
- The Cannabis CFO or accountant has access to input and update data in the accounting system. (The CEO, partners, and board members can have view-only access.)
- Only on-the-clock floor managers have the access and authority to correct misrung sales. For example: a cashier rings up the wrong item and completes the sale before they realize their error. An effective SOD gives the floor manager sole access and authority to correct the transaction in both the POS and seed-to-sale system.
A challenge that comes up from time to time is this: the CEO, manager, or accountant believes performing regular inventory count to software reconciliations is unnecessary because their expensive software is supposed to handle all of that for them, and it delivers really pretty reports too! Be gentle in how you proceed. Chances are, they paid a substantial amount of money for that software. The fact is the software currently on the market isn’t good enough. Tread lightly as you proceed. Show them that doing actual physical counts of inventory is the industry standard—and is required to support their tax returns. Verifying correct counts is still necessary. Get the access you need to get good, usable data, then use your accounting tools and expertise to perform the accounting.
Inventory: The Only Way to Know What’s What
Inventory cost accounting requires tight controls and weekly reconciliation to ALL of the various software systems your clients use. It’s the only way to ensure reports are error free and that your clients are audit ready. So, whether you’re working with a grower, dispensary, or manufacturer/processor, plan on doing a lot of inventory counts so that you can tie out the accounts to the seed-to-sale system, the POS or manufacturing system, and the accounting system too. Failing to do this basically guarantees that they are going to be out of whack. We recommend a permanent audit trail each month for all clients.
Consider this all-too-common scenario. At your client’s dispensary, there are twelve cookies on the shelf, ten in the POS system, and thirteen in the seed-to-sale system. First, some good old fashioned problem solving and investigative work needs to happen. Whomever is working with you needs to physically look for a misplaced cookie. Maybe it’s in a display case, or maybe it’s in transit in a delivery that’s due to arrive. Once you’ve taken the time to troubleshoot inconsistencies in the POS and seed-to-sale system, an adjusted journal entry needs to be made to reconcile the number of cookies to equal the physical count. The physical count is always the one that we treat as the true figure.
The only way to help prevent inaccuracies is to perform cycle counts on a regular basis, with them happening even more frequently with newer clients. Regular physical inventory counts are what enables you and the management to determine when inconsistencies occur and whether they’re happening due to human error, software issues, theft, or a combination of those factors. For dispensaries, inventory cycle counts should be performed weekly. Cultivators and manufacturers should take inventory at least once per month. So count, reconcile, rinse, and repeat!
The Road Ahead
While complexity abounds in Cannabis accounting, the path forward does not need to be full of second guesses and setbacks. Providing today’s Cannabis industry businesses with world-class accounting is possible with DOPE CFO. With us you can get the education and knowledge you need to confidently serve the niche in less than ninety days. Learn on your own time, and on your own schedule too! We provide you with every last tool, workpaper, system, and document you need to transition into supporting an industry that’s poised to be worth $72 billion by the year 2030 (Forbes). Get everything you need to provide GAAP-level cost accounting for every vertical in the industry.
The DOPE CFO network is the nation’s leader in GAAP-compliant accounting education for the licensed Cannabis industry. We have over 500 CPAs, EAs, CFOs, attorneys, bookkeepers—and even an expert marketing team. With our help, you can get answers when you need them, make connections, and be part of a fun, thriving community across the nation.
Learn more about how you can learn Cannabis accounting and quickly build a career (and your own firm) with DOPE CFO.