Imagine taking a job as an internal auditor in a rapidly-expanding, highly-lucrative business, with the best intentions to help stakeholders identify and manage risks, prevent unnecessary losses and improve business processes.
The job requires you to haul cardboard boxes of cash from stores to business vaults in your (unarmored) car. Inventory must be packaged, labeled and tracked at every phase, from seed to sale. Each item purchased to support the business from a tiny bag to a greenhouse building must be hand-entered into QuickBooks because there are no purpose-built tools available – at least none that work as intended.
Oh…and there is a 100% chance the company you work for will be audited every year by both the IRS and the state. Welcome to the brave auditors and accountants working in the legal cannabis industry.
The legalization of marijuana for both recreational and medical use has become one of the fastest and most profitable industries in the U.S. Sales are expected to reach $13 billion in 2018 and grow to $32 billion in the next five years.
Despite federal prohibition, the marijuana industry continues to grow for both recreational and medical use. Canada legalized marijuana on Oct. 17, 2018, and both the UK and Mexico governments are set to legalize medical marijuana in the near future. There are nearly 10,000 active licenses for marijuana businesses in the U.S., a number that continues to grow as more states legalize the business.
Legal cannabis is an all-cash business, which brings its own unique set of risks. Businesses must adhere to Section 280E of the Federal Income Tax Code, which prevents cannabis producers, processors and retailers from deducting expenses from their income except for those considered a Cost of Goods Sold (COGS). Without the usual perks that most businesses use to write off about 70-80% their expenses, cannabis companies operate within tight margins. It is imperative they maximize profitability and prevent waste.
Like any manufacturing business producing a series of products, inventory is a critical part of the business – with an added twist. Due to strict regulatory oversight and reporting requirements, every single seed must be tagged, tracked and followed through the growth and harvesting process, which is often done using barcodes.
Experienced auditor and data analytics enthusiast Theresa Gruppo entered the legal cannabis business hoping her work as a controller and accountant helping struggling companies with low margins tighten up processes and maintain profitability would easily translate. She quickly discovered that while the cannabis industry is booming and ripe with opportunities, it is also plagued with risks, inefficiencies and mismanaged business practices.
Cannabis companies must select a valid seed-to-sale software, yet she found the key players did not easily integrate with QuickBooks. Transaction details were stored in a software that was antiquated and lacked a table catalog, which she needed to produce reports – some of which the company was required to produce daily. She tested out the few software solutions available at the time and found one that provided better accounts receivable (AR) visibility and CRM reporting, but that only covered the AR and sales needs. While LeafLink bridged the gap to set up QuickBooks by deploying and utilizing inventory, bill of materials, inventory, purchasing, etc., she still needed a tool to help her prepare tax data including excise tax, personal property taxes, use tax, etc. Theresa turned to CaseWare IDEA to help bridge the remaining gaps.
Some cannabis businesses are required to be vertically integrated, from cultivation to production and dispensary. To understand the business and underlying risks, Theresa had to learn all aspects of these operations. She researched, read, attended conferences and reached out to an agribusiness expert. She began putting data analytics to work.
Using IDEA, she was able to scan and read print reports, format the data and prepare it for analysis. She pulled in data from different systems and file types including QuickBooks, inventory tracking systems and CRM information to help give her a bird’s-eye view of the entire business. Using the inventory tracking features within IDEA, she was able to identify which plants sold best to increase inventory based on demand.
Analyzing costs and overproduction helped the company achieve higher levels of productivity. Sales transactions, cash flow, and invoice tracking data was also analyzed on a regular basis, giving stakeholders the information they didn’t have previously to make better decisions. Daily, monthly and annual reporting was simplified, and even automated, which significantly reduced the amount of manual work required to meet the state requirements and prepare for the inevitable audits.
Tight margins, risk of inventory and cash theft, complicated tracking and reporting requirements, the threat of lost revenue potential due to overproduction of products, excessive manual work with limited resources are all excellent cases for using data analytics.
Businesses that embrace data analytics technology to strengthen internal controls, comply with state reporting requirements and maintain profitability will gain a distinct competitive advantage over the thousands of emerging providers.
Data analytics can be infused into any business, financial or operational process to search for cost-saving opportunities, produce better reports and prevent fraud, waste and abuse. It starts by working with good data and the right tools. Audimation Services provides both, plus experts to guide you through data preparation, analytics development and visual reporting. Let us help you put analytics to work!
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