5 Workaround Tools to Manage Essential (But Frustrating) Seed to Sale Compliance

Cannabis accounting is a complex, ever-changing niche due to the plant’s federally illegal status (regulations and rules vary from state to state). One key (but extremely complicated) aspect of Cannabis accounting is seed to sale tracking and compliance. Cannabis business owners can easily flub these complex accounting and compliance processes without the help of a trained Cannabis accountant on board. Even worse, inaccurately inputting seed to sale data can lead to significant penalties or even loss of license.

Because the seed to sale processes are complex, difficult to understand, involve several sub niches, and are a veritable maze for Cannabis CEOs and accountants, it takes some skill and understanding to fulfill state and federal accounting and tax requirements. As an accountant, you are in a powerful position to add significant value to a client’s company by expertly navigating the seed to sale process.

The good news is that with a few key tools, and by studying niche-specific requirements, you can quickly up your seed to sale tracking and reporting skills and help Cannabis companies stay compliant.

What Is Seed to Sale and Why Is It Imperative to Cannabis Compliance?

Seed to sale is the system states use to track a Cannabis plant. The tracking begins when a seed is planted and ends with final consumer product delivery. The reporting requirements also change from state to state, and if license holders don’t follow state-mandated seed to sale specifications, they risk license revocation.

Seed to sale knowledge is also essential to cost accounting, which must be done to correctly calculate Cannabis tax. Cost accounting is necessary for preparing returns and determining correct COGS (cost of goods sold). Without understanding the seed to sale process, inevitably you can’t properly do cost accounting, which can result in overpayment of tax liabilities, massive tax penalties if you improperly take deductions, shut downs, and/or jail time for CEOs.

Being properly trained and prepared to manage the seed to sale system for your Cannabis clients will save them the major headaches involved, and you just might also save them a huge amount of money. With the IRS breathing down the necks of Cannabis businesses (and winning almost every case when Cannabis CEOs screw up their accounting), CEOs can’t afford to not have seed to sale accounting done right.

Seed to Sale Challenges for the Accountant and the CEO

CEOs and accountants are both better off managing seed to sale correctly from the beginning; yet, even the most informed CEOs and accountants face many challenges related to seed to sale.

For CEOs, seed to sale and accounting challenges include:

• Lack of inventory and cash controls, which can trigger an audit and/or investigation
• Dealing with massive amounts of cash and needing controls they may not understand
• Using POS systems that aren’t compatible with other necessary software
• Lack of reliable seed to sale integration with accounting software (Metrc/MJ Freeway/Biotrack)
• Merchant services solutions that are new, don’t work well, and have complex and difficult-to-reconcile reporting
• Tricky monthly, quarterly, and yearly reporting requirements for banking, the state, investors, etc.
• Payroll issues and lack of knowledge around HR and compliance that could lead to investigations and fines

Accountants also face a wide variety of issues that make it difficult to properly serve their Cannabis clients. Accountant issues include:

• Many vendors (accounting, POS, merchant services, payroll) will not service the Cannabis industry
• Lack of accounting tools, workpapers, industry guides, GAAP guidance, COAs
• Struggling with messy (and inevitable) cleanup
• Not understanding how to properly meet monthly, quarterly, and yearly reporting requirements
• Mishandling entity issues such as consolidations, complex legal entity structures, multiple verticals, and Cannabis versus non-Cannabis divisions
• Not understanding that workarounds, as well as daily reconciliations of cash and inventory, are required to reconcile seed to sale 

5 Tools Every Cannabis Accountant Must Know to Get a Handle on Seed to Sale 

Seed to sale problems can be resolved when you have a few key industry tools in your tool kit. Once you have these tools in place and have studied seed to sale, you can add immense value to the accounting services you offer CEOs.

Start with these five tools to level-up your seed to sale proficiency.

Onboarding Documents

Each of these documents must be tailored to the Cannabis niche and used with every client during the onboarding process:

• Engagement letter
• PBC (“Prepared By Client”) detailed list
• Action plan
• Internal control documents and accounting policies and procedures
• Perpetual data room
• Clean-up documents and process

Clean-up is different and a little more complicated for Cannabis companies (for more information on the clean-up process, check out Cannabis Accounting Cleanup: How to Get Clients Compliant). The number one issue that accounting professionals face in clean-up is not obtaining access to, or receiving, proper documents from the client. To help you get started with the clean-up, we’re including these steps:

• Get your engagement letter signed and retainer collected up front. You also want to always bill at higher hourly rates for clean-up because you don’t know long the process will take. ($100/hour or more).
• Next, create an action plan with your client, detailing what the client needs to deliver and when. You’ll also want to write out the penalty risk if these requirements are not met.
• Finally, deliver your PBC list, including due dates for each item.

Cannabis Niche-Tailored Chart of Accounts

These charts of accounts (COA) must be tailored to the Cannabis niche. They also must be easy to use and positioned to allow for cost accounting:

• Cultivation COA
• Processing (chemical manufacture) COA
• Food and product manufacturing COA
• Retail COA
• Non-Cannabis division COA, labs COA, and delivery company COA (as they are also common to the niche)

Cannabis Grow Template

This template will collect key information from the client to help you conduct correct cost accounting:

• Inventory counts and weights (plants, dry flower, etc.)
• Seed to sale reports and reconcile to counts
• Flower calendar, which collects key information for the grow, including the full grow cycle (plant, grow, harvest, dry, cure, trim, lab, ready for sale), locations, plant dates by strain, estimated yield-per-strain, and percentage complete at report date
• Summary template that will calculate equivalent units for WIP, FG, and COGS

Cost Accounting Templates

Invest in, or create, pre-built templates that will allow you to process monthly cost accounting easily and accurately. The purpose of these templates is to:

• Utilize the client operational data (counts, yields, etc.)
• Establish processes to allocate each trial balance account (i.e., rent, labor, electricity, etc.) in the appropriate way using measures such as square footage, employee hours, and other allocation methods
• Summarize your monthly AJE
• Allow for a clear audit trail, and also for “normal” reporting of the key accounts above. (For example, you will allocate some of rent to WIP, FG, and COGS, but the CEO still will want to see rent expense on the P&L at the normal amount)

Month-End System

Your month-end template and system must:

• Be very robust and allow for a permanent audit trail, from transaction to source document to general ledger to trial balance to financials to value-add reports
• Include tabs for every key balance sheet account (with full account reconciliations)
• Be fully tied out and tick-marked, backwards and forwards
• Have all AJEs clearly documented
• Have all cost accounting amounts clearly supported and reconciled to cost accounting files
• Show clear tie out to financials

Finding the Tools to Smoothly Manage Seed to Sale

All of the key tools that we use to work around the inherent bugginess of the seed to sale tracking process can be found in our program.

The fastest way to amass all these tools and quickly boost your value as a Cannabis accountant is to join the DOPE CFO Cannabis Accounting 5.0 program. We provide over 100 workpapers, templates, month-end report documents, flower calendar, and more to help you smoothly manage seed to sale and become a rock star in your client’s eyes. The Cannabis Accounting 3.0 program also includes email and offer letter templates, a startup capital checklist, a delivery business chart of accounts, and much more to help you offer invaluable services to your clients.

For more information about accessing these seed to sale tools and on our DOPE CFO training program, book a meeting with us today.