Digitally Transforming Systems for Cannabis Companies

By Joseph Nguyen and Pim Tongchai

The landscape of the cannabis industry is often compared to the Gold Rush of the late 1840s and 1850s -- hence the phrase “the Green Rush.” Sharing similarities such as the trend originating in California, widespread interest/investment opportunities and multitude of risks in the area, it’s no wonder why the name stuck.

In 2018, legal marijuana sales reached an estimated $9.7 billion across North America; that number is set to more than double in 2023. With any emerging market, there are inherent risks, and the cannabis industry is not immune to this. As the industry grows, it becomes more susceptible to risks such as financial risk rooted in lack of safe banking protocols, inventory/product management issues and fraud. Considering regulations the government is imposing -- in addition to the slow movement to de-schedule cannabis -- it could be some time before companies can operate more freely, if at all. In the meantime, there are ways to protect your company, prepare for regulations and prevent losses.

Leveraging Digital Transformation in the Cannabis industry:

Fraud

With financial institutions still hesitant to bank the cannabis business, fraud has become one of the biggest risks in the cannabis industry. This is especially true when also considering some of the recent failures of major banks. Many of these customers are new to compliance with taxes and regulations. It is critical for them to have guidance on how to run their businesses, maintain adequate books and records and make decisions based on their performance and capabilities. The cannabis industry is still highly cash-oriented, which lends itself to fraud. And many banks are reluctant to become involved with the cash as they consider it to be a high-risk business due to the continued illegality of the industry at the federal level. There is a concern about losing federal insurance on accounts as a result of the difference in legality between state and federal laws.

One of the most common types of financial fraud in the cannabis industry is financial statement fraud. This can include inflating revenues and/or underreporting expenses to make the company appear more profitable than it actually is. This type of fraud can be especially tempting in the cannabis industry, where companies may be eager to demonstrate profitability to investors and lenders. Another type of financial fraud that can occur in the cannabis industry is labor/payroll fraud. This can involve hiring undocumented workers, paying workers off-the-books, or otherwise failing to accurately report payroll and taxes. This can be particularly tempting in the cannabis industry, where businesses may face additional legal and regulatory hurdles that make compliance more difficult. Finally, tax fraud can also be a concern in the cannabis industry, particularly with regard to the federal tax code provision known as 280E. This provision prohibits cannabis businesses from deducting certain business expenses, which can create an incentive for businesses to underreport revenue in order to minimize their tax liability. To combat financial fraud in the cannabis industry, it is important for businesses to establish strong internal controls, hire experienced accounting and legal professionals, and conduct regular audits and compliance reviews. Regulatory agencies and law enforcement also play a critical role in investigating and prosecuting financial fraud in the industry.

To minimize the risk of fraud in your business, it is important to carefully analyze the adjustments made to the cash accounts and review the receipts. All documentation associated with sales or money spent needs to be examined. It will be critical to have controls in place, including segregation of duties to prevent larceny and determine whether money spent is authorized.

Data Cleanup

Cannabis legalization in the digital age is resulting in massive amounts of consumer data, enabling companies to optimize operations through cannabis data analytics. Data analytics and artificial intelligence (“AI”) help process raw data and enhance knowledge. Many technology companies see the importance of data analytics and are utilizing analytical tools that specifically target process owners at each step of the cannabis supply chain, including clinical researchers, cultivators, distributors, retailers and consumers.

Legalization of cannabis is spreading widely. As the market grows and sees new opportunities for automation, extensive amounts of data are being generated in the supply chain process. “As the industry grows, it tends to consolidate, and it’s the larger companies that have a greater demand for data,” said Roy Bingham, co-founder and CEO of BDS Analytics, to Marijuana Business Magazine.

Advanced data analytical tools have become invaluable in mining consumer data to demonstrate insights and visualization that can improve business performance and consumer experience.

ERP

Enterprise resource planning (“ERP”) systems were originally used to centralize manufacturing processes but have come to incorporate back-office processes too. Cannabis operators who are looking for ways to improve the flow of information and data between departments may consider a cannabis ERP system as a possible solution. ERP systems can help save time and money by automating tasks and improving performance and communication between departments. A good cannabis business ERP system will also provide insights like reports/dashboards and visualization that inform the business leaders about the business performance, which can help with their decision-making process. These systems can integrate operations, manufacturing and compliance into one spot. Properly implemented ERP solutions can provide the competitive edge recreational and medicinal marijuana companies require, including seed-to-sale traceability for regulatory compliance and R&D functionality to adapt to a changing business climate as well.

Cannabis businesses are required to be compliant with regulations such as accurate and detailed tracking, measurement, documentation and reporting from seed to sale. Another alternative is to utilize barcode scanning and tracking technologies where an ERP system also provides the ability to track and manage each individual plant through the growth stages with a unique identifier for recording activity costs and quality checks throughout the cultivation cycle.

Top features to look for in a cannabis ERP platform include:

• Inventory control: The system should be able to track inventory levels and help you manage your stock.
• Sales tracking: To document/record sales data and provide insights into sales performance.
• Cannabis manufacturing: if you are processing or manufacturing cannabis products at your facility, you’ll need specific functionality to support your recipes and track the inputs and outputs.
• Customer relationship management: To manage your customer relationships and provide insights into your customer base.
• Financial management: To track your financial data and help manage cash flow and reporting.
• Reporting: To offer a variety of analytics and business intelligence reports that can help you make more informed business decisions.
  

Summation

With the continuous, accelerated growth of the cannabis industry, it is in the hands of its leaders to pioneer change and innovation. Digital transformation is inevitable. To stay competitive, companies must leverage not only their products, but also their digital efficiency to win over consumers.