Dispensary Bookkeeping Done Right: Stay Compliant, Maximize Deductions, and Know Your Numbers

The cannabis business may be booming, but profits are always tight—thanks in no small part to the rigors of IRC 280E. Despite cannabis’s legal status in almost every state, it is still classified as an illegal substance, meaning that cannabis companies can’t deduct “normal” business expenses, like payroll, security, and marketing—virtually any expense that can’t be attributed to cost of goods sold (COGS). 

Dispensaries are particularly disadvantaged when it comes to COGS deductions, as these expenses are limited. The only allowable expenses are the cost of the product itself and whatever can be capitalized into inventory, making it doubly important to track these costs accurately, maintain squeaky-clean books, use technology to your advantage, and manage cash flow like a hawk. 

In the interest of prosperity, today we’ll outline the most critical bookkeeping concerns for cannabis dispensaries to help you stay compliant, maximize deductions, and understand your numbers. 

Mastering Inventory Management

As a retail operation, your inventory is your livelihood. It’s also the only thing that can be counted as COGS – and (besides cash) has the biggest potential for loss, theft, and mismanagement. 

Products tend to be high value and fairly easy to pocket, so it’s to your advantage to conduct regular counts and internal audits to catch any discrepancies before they become bigger issues. 

Inventory best practices include:

• Weekly counts. Compare your physical counts to your seed-to-sale data, POS reports, and accounting records. All factions should align. 

• Stay on top of discrepancies. If you notice something amiss in between counts, investigate immediately. For example, if your seed-to-sale system indicates that you have three units of a particular item, but there’s only one on the shelf and none have been sold through the POS, it’s audit time. 

• Optimize inventory based on demand. Use sales data to determine what to stock and how much to keep in stock. Fast-movers are your bread and butter. You might love a product, but if it doesn’t sell, you don’t want to tie up a lot of cash keeping it in stock. 

Optimizing inventory management can reduce shrink and save you tons of cash (and headaches). 

Cash Management Best Practices

Cannabis dispensaries do an awful lot of cash business, presenting yet another complication for operators and their financial teams. Large amounts of cash are tempting, and even the slightest discrepancy can throw your books into chaos. 

Here are a few cash management strategies to implement immediately:

• Use security technology. Security cameras should be placed on all cash registers and in areas where cash is counted. Modern surveillance systems are highly accurate, and some even feature facial recognition technology, allowing you to trace transactions directly to their source. Smart safes are highly recommended in the back office as they can be programmed to detect individual users, identify counterfeit bills, and provide detailed reporting for your audit trail. 

• Physical security is also recommended in areas where cash is handled, adding an extra layer of accountability. 

• Use a multi-person cash handling system. Do not rely on a single person to handle cash. Supervisors should count the till at the end of their shift and have it verified by a second individual. A third person should do the final count before the deposit is prepared. Ideally, this person should not be someone who typically handles cash during the shift. Though people make honest mistakes, implementing multiple layers of accountability greatly deters theft and catches mistakes before they get too far afield.

• Segregate accounting duties. The person handling the cash during a shift should not be the one entering the data into the accounting system. By the same token, the person preparing deposits should not be the one who reconciles bank transactions. This approach makes it very difficult for fraud to occur. 

Tax Compliance for Dispensaries

We’ve already touched on the challenges dispensaries face with IRC 280E, but it bears repeating. Dispensaries are limited in what they can deduct as COGS, so your bookkeeping methods need to be accurate (pun intended). 

Here are a few cannabis dispensary accounting tips that will undoubtedly help. 

• Ensure your inventory valuation is accurate and properly allocated. In addition to the cost of buying and storing inventory, several other expenses can be attributed to COGS. As such, they need to be allocated precisely to maximize deductions. 

For example, payroll costs related to purchasing, handling inventory, stocking, and inventory management can be classed as COGS. The same goes for transportation and storage costs. This may involve determining the percentage of a particular expense that is allocated to inventory. It might seem like a pain, but it’s worthwhile. Every dollar counts! 

• Accurate cost allocation between business activities. Dispensaries that also have manufacturing or cultivation operations must accurately allocate costs between each activity to maximize deductions. 

• Consider adjusting your business structure. Segregating business entities will help you maximize potential deductions. For example, suppose the building and land on which your dispensary is located are owned by a real estate entity and leased to the dispensary. In that case, the real estate company can deduct all related expenses without concern for Section 280E. If the business is also involved in cultivation or manufacturing, separating those entities can reduce the tax burden, as most of those expenses can be attributable to COGS. 

• Keep meticulous books. Clean books are essential for tax and business compliance. You must maintain accurate records of all transactions, expenses, taxes collected, and paid. If and when you are audited, your attention to detail will ease the process and ensure you have everything the auditor wants to see at your fingertips.

Know Your Numbers: The Bottom Line

The various systems you use can provide you with robust financial reporting to inform smarter business decisions. When your books are accurate and up to date, your balance sheets, P&L reports, cash flow reports, and projections will provide you with a precise snapshot of your business’s financial health. 

If you feel like you’re behind the eight-ball when it comes to dispensary profitability, it might be time to give the experts at Growise a call. Our cannabis bookkeepers and CPAs are qualified to advise you on strategies to keep your books clean, healthy, and audit-ready. 

Set up a call today, and let’s talk about growth!