Guide to Cannabis Inventory Audits: Cycle Counts

May 22, 2024
September 5, 2020
| Updated
May 22, 2024
By
Angie Penuela
ACCESS NOW: Distru’s Free Cannabis Cycle Count Template
cannabis cycle counts

Auditing inventory is one of the most important aspects of inventory control in a cannabis operation. This process, also known as a ‘cycle count’, consists of checking the inventory level of each product in possession at the warehouse and recording it in a sheet, after which adjustments are made to reconcile physical inventory with the track and trace system and any cannabis software you may be using.

According to the regulations, a licensee is required to reconcile the physical inventory of cannabis goods at the licensed premises with the records in the California Cannabis Track-and-Trace system at least once every 30 calendar day, but for your business’ sake you will want to conduct these audits more often, as we discuss below.

In this post we propose a methodology that we have found beneficial to operators. There are different ways to conduct a cycle count, so feel free to adjust this process to suit your particular needs. This method entails getting an unbiased inventory count with notes, along with detailed explanations regarding any required adjustments. We’re confident that your audit team will find this beneficial so let’s get started.

UNDERSTAND THE REGULATORY GUIDELINES

Before getting started we highly recommend getting on the same page with your team on what discrepancies are. According to the regulations Section § 5034 of the BCC Guidelines:

Significant Discrepancy in Inventory. A determination by a licensee on whether a discrepancy in inventory is significant shall be made in accordance with the following:

(a) A significant discrepancy in inventory means a difference in actual inventory compared to records pertaining to inventory of at least 3 percent of the average monthly sales of the licensee.

(b) For the purposes of this section, average monthly sales shall be calculated by taking a per month average of the total sales for the previous 6 months. If the licensee has not been in operation for at least 6 months, only the months in which the licensee was operating shall be used in determining average monthly sales.

(c) For the purposes of this section, the licensee’s acquisition price shall be used to determine the value of cannabis goods in a licensee’s inventory. Authority: Section 26013, Business and Professions Code. Reference: Section 26070, Bureau of Cannabis Control Order of Adoption - 33 of 138 Business and Professions Code.

ALIGN WITH YOUR TEAM ON INVENTORY CONVENTIONS AND SCHEDULES

While the regulatory guidelines around discrepancies are there to help you stay within the boundaries of compliance, they are not there to help you run your business, which is why we propose doing more regular cycle counts. But before you do, it is vital to internally define what is important to your team. Is it just the dollar value? Is it also the units? Do discrepancies become more or less important for your business by category? By unit type?

For example, a small sample unit of a vape cart that’s missing is significantly less critical than a lb of flower that is missing, the latter being considerably more costly. Thus it’s important to have a nuanced view of your inventory instead of treating each package as equal to another due to innate differences.

SELECT YOUR SOURCE FOR INVENTORY DATA

There are two places you can get your inventory information:

  1. Metrc package export
  2. Cannabis software

Ultimately, you may need to compare your inventory count between Metrc and your cannabis software as well, although most software offers a way to reconcile with Metrc automatically, but in case it doesn’t then you will have to align the inventory in your software with the record of truth.

In this post we focus on an export from Metrc.

PRINT THE ADJUSTMENT REASONS FOR YOUR TEAM

Next, print and share the available Metrc Adjustment Reasons with your team (individual or multiple team members) who will be conducting the audit. This will help them better understand the available reasons and the type of notes needed to add to the package detail. Note that adjustment reasons for manufacturers and distributors differ.

Adjustment reasons for manufacturers include:

  • Enforcement Testing
  • Incorrect Quantity
  • Mandated Destruction
  • Onsite Testing
  • Over Pulled
  • Research & Development
  • Sample Tested
  • Scale Variance
  • Spoilage
  • State-Authorized Adjustment
  • Theft
  • Under Pulled
  • Voluntary Surrender
  • Waste (Unusable Product)
  • Weight Change Due to Moisture

Adjustment reasons for distributors include:

  • Damage (BCC)
  • Incorrect Quantity
  • Mandated Destruction
  • Over Pulled
  • Public Safety / Recall
  • QA Test Sample
  • Scale Variance
  • State-Authorized Adjustment
  • Theft
  • Under Pulled
  • Voluntary Surrender
  • Waste (Unusable Product)
  • Weight Change Due To Moisture

SETUP YOUR TEMPLATE FOR USE

ACCESS NOW: Distru’s Free Cannabis Cycle Count Template

To carry out the cycle count, your team will need to enter data into a template. To make this process easier, we’ve created a free Cannabis Cycle Count Template in Google Sheets that you can access and copy for use in your own cycle count. As you do this, keep in mind that your business may have unique needs and the data you need may differ from another operation.

Once you are ready to start the cycle count, access the pre-configured template above, ensuring that the following column headers (at a minimum) are present:

  • Name
  • SKU
  • Vendor
  • Category
  • Package Tag
  • Active Quantity
  • Pricing

Feel free to add columns depending on your situation. Next, hide the quantity column, which you can also lock for others to see. The reason for doing this is because you will want your auditor to do a blind cycle count where you remove any biases which we talk about in the next section. Check out this page for instructions on how to lock columns in Google Sheets. Once this is done, you will export your data from Metrc or your 3rd party software, add it to this template, and then lock the quantity column.

Once the template is set, duplicate the tab and share it with your team to use (do not share the original as it will need to be duplicated every time for use). Everyone has their own style or preferred way of doing the audit: some like to carry a tablet while others like to push their laptop in a cart around the warehouse. Either way shouldn’t be an issue and you can leave it to them to decide how they wish to do it.

One caveat to do this is that if you use an export from Metrc, you will see all Active packages, including any that might be reserved for sales in another part of your warehouse. Make sure to account for any inventory that may be reserved as it may not be with the rest of your inventory on the shelves depending on your order fulfillment process.

SELECTING AN INVENTORY AUDIT SCHEDULE AND FORMAT

Once your adjustment reasons are printed and your data is exported, you need to select a cadence and process of conducting the cycle counts. Your audit team can conduct cycle counts either weekly, biweekly, or monthly. We recommend doing them weekly so that you are on top of any issues as they arise, such as missing inventory etc.

Next, select a process. You can audit your inventory in the following ways:

  • By Metrc Category
  • By Location
  • By Subcategory

Auditing by Metrc Category would mean that you filter packages on your data export by a particular category such as Flower categories, and doing it by sub-category would be doing it by Flower (weight - each) for example. There isn’t actually a concept of a ‘sub-category’ in Metrc but you get the point. Your team would then check the quantity for each item per category, which should all be situated in proximity to each other in the warehouse.

Lastly, auditing by location would mean that you do it by shelf / area within the room (Metrc doesn’t offer this so you will have to access this in your cannabis software).

RELATED: 7 Metrc Mistakes Cannabis Distributors Make

START A BLIND CYCLE COUNT

The purpose of doing a blind cycle count is to restrict the ability to make changes to the counted results. Blind counts are performed without knowledge of the quantity that is listed in the accounting records. If blind counts are not performed, the person performing the count may see the system quantity on the count sheet and simply match its count to the system quantity to avoid the hassle and additional time of investigating variances.

The audit process will depend on the format of the cycle count selected. In the case where the cycle count will be based on categories, the auditor will need to filter the products on the auditing worksheet by categories etc. In addition counting each product by category, it is critical that notes are tracked, especially for anything that looks suspicious: broken pieces, missing pieces, packages with 0 quantity and so on.


INVESTIGATE THE OUTCOME

After the completion of the cycle count, it’s time to dive in. You as the manager will need to review each line item after unhiding the columns, calculating discrepancies between what is showing in Metrc and what the audit team reported, and reading the notes. As per the regulations, use the following steps to determine if you have a significant discrepancy as you would need to report that within 24 hours of discovery:

  1. Determine the average monthly sales of the licensee by taking a per-month average of the total sales for the previous 6 months. If the licensee has not been in operation for at least 6 months, only the months in which the licensee was operating shall be used in determining average monthly sales. Take 3% of this average dollar sales number.
  2. Compare the value of actual inventory with the value listed in records pertaining to inventory. The licensee’s acquisition price shall be used to determine the value of cannabis goods in a licensee’s inventory. Take the difference between the dollar amount of the actual inventory value and the value listed in records pertaining to inventory.
  3. Is the number determined in Step 2 larger than the number determined in Step 1? If so, a significant discrepancy exists. If the number from Step 2 is less than the number from Step 1, a significant discrepancy does not exist. A licensee must notify the Bureau and local law enforcement within 24 hours of discovery of a significant discrepancy.

Next, you will want to look at all the discrepancies and figure out why they are occurring. Think of this as an investigative process where you connect with various members on your team and look for patterns to prevent these from happening in the future. Some adjustments such as moisture loss are unavoidable, but spoilage and theft should be at a very minimal.

Lastly, you can carry out your adjustments in your cannabis software, entering in the reason for each!

ADJUSTMENTS AUDIT

In addition to your regular cycle count that you perform, we recommend you have your compliance officer conduct an adjustments audit. If you don’t have a compliance officer, you should get one for reasons described here. The adjustments report can be accessed from the reports section in your Metrc account and review it thoroughly (better to use the CSV than the PDF so that you can filter data in a way that is valuable for your operation).

Things to keep an eye out for:

  • Adjustments without Notes
  • Recurring Adjustments from specific users (why do they adjust so frequently?)
  • Adjustment Date vs Package Date (infer reasoning for adjustments)

If there are any notable adjustments, investigate further to ensure that it is not a significant discrepancy, and if it was that it was reported to the BCC in a timely manner.

RELATED: Cannabis Naming Conventions Guide

METRC ITEM + STRAIN AUDIT (MONTHLY)

As a bonus item, we suggest doing a monthly audit of your strains and items in Metrc to get rid of unused strains and items. There is a limitation to this wherein you cannot remove strains that have items with packages associated to them. Thus only when the packages are transferred out can you remove the strain.

In addition to removing unused strains, it is important to ensure your items follow a standardized naming convention and that the associated category and unit type is correct.

metrc items.png
ITEMS PAGE

metrc strains.png
STRAINS PAGE

ACCESS NOW: Distru’s Free Cannabis Cycle Count Template

Distru is a no-bullsh*t software solution for cannabis manufacturers and distributors. Consider us the central hub for your whole operation, from inventory management and order fulfillment to sales and distribution, all while keeping you compliant with Metrc. Ditch the spreadsheets, keep your teams aligned (pro tip: accountants love us) and focus on growing your market share.


Curious About What Distru Can Do for You?

speeding handtruck icon

Free Order Fulfillment Template!

Organize your deliveries, optimize your route plan, and log returns

Cannabis inventory with an exclamation mark icon

Free Cannabis Cycle Count Template!

Standardize your SOP across multiple warehouses or locations