There are many attention-grabbing news headlines and industry people that like to talk about cannabis dispensaries making $3 million – and even $8 million – each year. While those figures sound impressive, don’t be fooled. That million-dollar number comes from top line, or gross revenue: money earned through sales, without factoring in expenses.
A real business can be judged by its final net income and net margins. Setting aside taxes, the most successful businesses are able to manage their costs. Once you know your costs, you will be in a better position to hit break-even – and even go on to be profitable.
This post will take you through the basics of break-even, as well as some calculations to find your break-even point (BEP) and go on to achieve profitability.
What is break-even?
Break-even is the point at which your total costs and total revenue are even. According to Investopedia, your break-even point is calculated by “dividing the total fixed costs of production by the price of a product per individual unit less the variable costs of production.”
The goal for most businesses is to hit break-even early in their business lifecycle. Once you hit break-even, you can go on to achieve profitability (when your revenue exceeds your costs). The break-even point for cannabis dispensary will usually depend on the following variables:
Obviously, some of these expenses are more flexible than others. For instance, you can source products that move best in your location, cutting down on expensive deadstock. For space, your hands are pretty tied – real estate regulations offer few alternative options. But for your human resources costs, you have the ability to set wages and benefits as well as deploy labor in your store so that you can control the cost more effectively.
Break-even Calculation for a cannabis dispensary
Now that you’re familiar with break-even, check out this quick calculator you can use to analyze your dispensary’s unique position
Here’s what each element of this spreadsheet means.
- Average sales order: add up all of your sales and divide by the number of transactions
- Average monthly contribution margin: add up all cost of goods sold (including shipping and other direct costs) and divide it by your revenue (aka gross margin). Note that this does not account for taxes, which could eat up 7-10% of your margins.
- Average monthly fixed costs: add up all of your other costs for the month, including marketing, bank/merchant fees, licensing fees, office supplies, total payroll, software subscriptions, rent/mortgage, travel, utilities, and any other relevant expenses.
Everything else will compute automatically from what you just added into those three cells.
When you open the spreadsheet, you may see an example with some values already in the cells.
In this example, a business needs 2,123 transactions per month or 71 each day to hit their break-even point. This would come out to just over $5,800 in sales per day for them.
As you go through this exercise, you also need to calculate this daily checkpoint: don’t wait until the end of the month to see how things turned out. You need a daily pulse on your business; some dispensary owners take it further and break down their goal per hour. Of course, there will be slower or faster hours, but at least you will know where you stand at any given time.
Steps to take after uncovering your BEP
Now that you know your cannabis dispensary’s daily sales target, you can keep track of your progress towards profitability. Sales will vary by day, but that’s good information to have. A deeper dive into the cycles of your business can help you make smarter marketing or management decisions.
First, we strongly recommend keeping a sales journal. This sales journal is where you will track your sales number, number of transactions, weather, events in the areas, specific promotions, and headcount for the day and even big news headlines for the day. Over time, analyze your sales diary to get a better picture of your business’s sustainability.
To do an analysis, first look at which days you are not breaking even. When you begin to look at the trends, maybe you will see that it’s that specific day of the week repeatedly. There are two options to remedy unprofitable days (days below your break-even point): cut costs or make more money.
If you prefer to cut costs, start by looking at your variable costs. First, cut or rearrange some variable costs for that day. Can you schedule fewer staff members? Can you lower advertising costs for that specific day (on sites like Weedmaps or Leafly)?
If you prefer to sell more, think of creative ways you could reach new customers. For instance, you could run a specific promotion to that day to help earn more profit to cover your overhead costs. How drastic of a dip in sales you’re trying to overcome will dictate your type of promotion.
In most cases, you will want to promote items that add more penny profit: items that are more profitable, not necessarily the most expensive items. Look for products that give you the biggest margins. These would likely be your pre-rolls or any other product with high mark up.
Note that running a percent discount is not typically advised. Savvy customers will change their buying behavior to purchase only during discount times. You want a customer to spend more money and get a better deal at the same time.
Once you have diagnosed any causes for days you don’t break even, you also want to look at days that you do break even or go higher than break-even. Are there any specific people that work those days? Are they any external factors that make those days better – such as Friday paydays or National Holidays, for example? Don’t ignore seasonality: do you struggle during the winter months but crush it during the summer months? Understanding macro-trends will help you plan how you use your additional cash on hand – and when you need to save for those leaner months.
This is the unsexy part of the cannabis industry. Remember, you’re still running a business. The more data you can use to your advantage, the more long-term, sustainable success your cannabis business will enjoy.
If you need help with accounting or financial analysis for your cannabis business, then please reach out to our team today.