How to Manage Your Cannabis Inventory Losses

If you are working in the cannabis industry, you need to manage your inventory effectively, because you cannot write off your inventory losses due to IRC 280e. 

IRC 280e disallows cannabis businesses to deduct inventory losses – here’s how you can stay ahead of the tax.

Inventory is one of the most valuable assets of any company, and inventory management must be taken seriously. Inventory management starts with effective business processes around customer invoicing and ordering, vendor and order management, record keeping and tagging, inventory counting and storage, and employee training. Effective inventory management allows business owners to meet sales and customer demands while reducing unnecessary overhead costs such as excessive inventory storage or obsolete inventory. Inventory management requires businesses to maintain up to date accounting, perform physical inventories, and reconcile physical inventories to the accounting records.

The importance of frequent inventory counts and inventory reconciliations cannot be over emphasized. Without performing these two critical internal controls, a business can quickly lose sight and control of one of its most valuable assets – inventory.

Physical Inventory Counts

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.

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 Reconciliation

When you perform a physical inventory count, you have counted inventory that is on-site. However, this number might not be what is included in your books or records. An inventory reconciliation, reconciles the results of your physical inventory count to what is included in your books and records. The purpose of an inventory reconciliation is to gain clarity on the amount of inventory your business has on a certain date and ensure what is on-hand is accurately recorded.

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 what the source of the variance, it may indicate shrinkage.

If you want to learn more about building a solid strategy for managing cash flow, inventory, and cannabis business operations, THC Accounting is perfect for you.

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