How to Make Cannabis Inventory Decisions That Drive Profit

Managing cash flow while optimizing inventory is no easy task in an industry marked by tight margins and regulatory hurdles. Dispensaries and vertically integrated operators alike are caught between financial constraints and the need for efficient systems, processes, and people to drive profitability.

Flipping the Mindset: From Seed-to-Sale to Sale-to-Seed
Traditionally, the cannabis industry has operated on a “seed-to-sale” model, focusing on tracking product from cultivation to final sale. This model ensures compliance with regulatory requirements and helps maintain product quality and safety. However, flipping this mindset to a “sale-to-seed” strategy could be the key to unlocking sustainable growth and profitability. By putting data-driven procurement at the forefront, operators can make smarter inventory decisions that protect margins and improve cash flow.

Leveraging Point-of-Sale Analytics
One of the critical steps in adopting a sale-to-seed approach is leveraging Point-of-Sale (POS) analytics to understand purchasing patterns and margins. By analyzing sales data, dispensaries can identify which products are not only best-selling but also those driving the largest margins. This information is crucial for making informed decisions about what to stock and in what quantities. For example, if a particular cannabis strain is consistently selling out, it may be worth increasing the order quantity or even considering cultivating it in-house if the margins can support that approach. It can also assist with vendor coordination, discounting management and menu components.

Analysis of a particular product type may be revealing. For example, compare sales, traction rate, and margin for 3.5g hybrid small-bud flower.  It may be surprising that, although one brand may have higher sell-through, the margins may be lower than another product in the same category. Action items could be to negotiate a better cost with the vendor, test various pricing changes, and/or promote the higher-margin product more extensively.

For high-volume, low-margin products, there may be specific circumstances that led to the higher sales and/or lower margins. Before making any decisions about purchasing volume, identify possible reasons. Was there a specific promotion?  Bundle? Sometimes, products on promotion from vendors might sell quickly but offer lower margins. POS analytics can help dispensaries identify if these promotions are truly beneficial. Did it lead to buyer loyalty, even when pricing is returned to market value?

POS analytics tools can provide insights into customer preferences, peak purchasing times, and seasonal trends. By understanding these patterns, businesses can optimize their inventory levels, reduce stockouts, and minimize excess inventory. Additionally, POS analytics can help identify slow-moving products that may need to be discounted or removed from the inventory altogether. 

Forecasting Demand Based on Market Trends and Consumer Behavior
Another essential component of the sale-to-seed strategy is forecasting demand based on market trends, historical sales data and consumer behavior. This involves looking at broader industry trends, such as the increasing popularity of certain product types (e.g., edibles, infused prerolls) and seasonal variations in demand. For example, if data shows a spike in demand for edibles during the holiday season, businesses can plan their inventory accordingly to meet this demand.

By understanding these trends, operators can better anticipate which products will be in high demand and adjust their inventory accordingly. This proactive approach helps prevent stockouts and overstock situations, both of which can negatively impact cash flow.

Evaluating Make-or-Buy Decisions
Evaluating make-or-buy decisions is another critical step in the sale-to-seed strategy for vertically integrated businesses. This involves determining whether it is more cost-effective to produce a product in-house or to purchase it from a third-party supplier. For example, if a dispensary finds that it can buy a particular product from a vendor at a lower cost than it would take to produce it in-house, it may make sense to outsource that product. Conversely, if the margins are better for in-house production, the dispensary may choose to invest in the necessary equipment and resources to produce the product themselves.

Make-or-buy decisions should be based on a thorough analysis of costs, quality, and capacity. Businesses need to consider factors such as production costs, lead times, and the availability of raw materials. Additionally, they should evaluate the potential risks associated with outsourcing, such as supply chain disruptions and quality control issues.

Implementing Just-in-Time Inventory Practices
Implementing just-in-time (JIT) inventory practices is another way to optimize inventory and improve cash flow. JIT inventory management involves ordering and receiving inventory only as it is needed, rather than keeping large quantities of stock on hand. This approach helps minimize carrying costs and reduces the risk of product expiration, which is particularly important given the limited shelf life of cannabis product. By keeping inventory levels lean, dispensaries can free up cash that would otherwise be tied up in excess stock.

JIT inventory practices require close coordination with suppliers and vendors and a robust inventory management system. Businesses need to have real-time visibility into their inventory levels and demand forecasts to ensure they can meet customer needs without overstocking. Additionally, they should establish strong relationships with reliable suppliers and vendors who can deliver products quickly and consistently.

Technology and Tools for Inventory Management
The cannabis industry has access to a wide range of technologies and tools that can help optimize inventory management and cash flow. Inventory management software, POS systems, and advanced analytics tools are just a few examples. These technologies can provide real-time insights into inventory levels, sales trends, and customer preferences, enabling businesses to make data-driven decisions.

For example, inventory management software can automate the tracking of stock levels, generate reorder alerts, and provide detailed reports on inventory performance. POS systems can capture sales data and, through various tools or dashboards, can integrate with inventory management software to provide a comprehensive view of the business. Advanced analytics tools can analyze this data to identify trends, forecast demand, and optimize inventory levels.

Sale-to-Seed Is Gaining Traction
While perhaps not yet formally dubbed “sale-to-seed,” the industry is firmly pointed in the direction of effective inventory management and cash flow optimization.

Flipping the traditional seed-to-sale mindset to a sale-to-seed strategy can help cannabis operators make smarter inventory decisions that protect margins and improve cash flow. By leveraging POS analytics, forecasting demand based on market trends and consumer behavior, evaluating make-or-buy decisions, and implementing JIT inventory practices, dispensaries and vertically integrated businesses can navigate the financial constraints and regulatory hurdles of the industry more effectively. This data-driven approach not only helps optimize inventory but also drives profitability and sustainable growth in the competitive cannabis market.

Janice O’Reilly, CPA, CGMA, is a leader in AAFCPAs’ Cannabis practice and its CannCount data intelligence advisory services, providing financial leadership and strategic guidance to cannabis operators at every stage of growth. She has extensive experience advising operators on strategies to improve cash flow management and profitability—all tailored to the unique complexities of the cannabis industry. Additionally, O’Reilly plays a key role in the firm’s Business Transaction Advisory practice, helping clients navigate buy-side, sell-side, and internal transactions with informed decision-making and execution throughout the deal cycle.