Variable expenses are highly irregular in the cannabis market – here's how to keep track of them so your business doesn't go under.
- Set aside $200,000 in case of emergencies.
- Make sure your business is 75% ready to open before you even apply for a local license.
- Keep meticulous records to make sure you know what fixed costs are regularly.
Speak to one of our experts to learn more about managing your variable costs.
Every business must factor in variable costs to their financial statements. For cannabis companies, this task can prove difficult: variable costs are often more irregular and difficult to predict than in other industries. Here’s how to prepare your cannabis business for irregular overhead expenses.
Variable Costs for Cannabis Companies
Some background: overhead expenses are the costs of running a business that are not associated with direct labor or the direct materials used to create your product or service. Rent, utilities, and insurance are typical overhead expenses in any business.
For cannabis companies, overhead costs look slightly different. Security, insurance, and license fees are some of the biggest line items on a cannabis business’ expense sheet. Accordingly, cash flow may impacted by your location, local and state regulations, and state and local tax rates.
Some variable overhead expenses, or expenses that are affected by business activity, for cannabis companies include:
- Cost of goods sold (utilities, equipment, supplies)
- Liabilities (Other lending sources, owner equity, debt)
- Payroll, vendor agreements, and insurance costs
- Rent and security
- Accounting and legal costs
- Advertising and marketing
Cannabis cultivators, manufacturers, and distributors will each have specific variable expenses related to their operations.
Irregular Variable Costs: What to Expect
California’s fledgling adult-use cannabis market is still somewhat unpredictable. As more cities come online and emergency regulations are extended, the costs that cannabis companies face will be quite irregular. So, how can you account for irregular overhead expenses in this uncertain business environment?
Budget an emergency fund.
Cannabis companies are expensive to start. By some estimates, opening a cannabis dispensary can run you approximately $150,000-$300,000 in start-up expenses. Here’s a basic rundown of some of the typical costs you can expect in California:
- License and application fees: $12,000
- Operating expenses: $68,000
- Rent: $18,000 for a six-month lease
- Employees: $10,000
- Security: $20,000
- Marketing: $10,000
- Interior and equipment: $10,000
Inventory costs will vary depending on your location, but you can check this site to get a sense of prices in your area. We recommend having $300,000 on hand, with access to another $200,000 as an emergency fund to cover irregular overhead expenses in the California cannabis market.
Understand your timeline.
From working with dozens with cannabis companies, our experts know how competitive California’s cannabis business environment can be. When a new city begins the process of issuing cannabis licenses, we recommend that a business get a jump on their application. Essentially, you should 75% ready to opening your business before you even apply for a local license.
This adds complexity to managing your overhead expenses while a city is going through the vetting process for cannabis permits. It can take anywhere from weeks to a year for a city to finalize their cannabis ordinances. That’s a long time to be paying for rent, insurance, and variable expenses – without any revenue to balance out your costs. We suggest giving yourself a firm timeline for how long you’re willing to wait to come online.
Keep close track of vendor agreements.
No matter what type of cannabis business you are operating, keeping track of vendor agreements will save you a lot of headaches when managing irregular overhead expenses. Use a POS software platform to track incoming and outgoing cash, California state taxes, and outstanding payments. If you’re working with vendors in the cannabis industry, keep in mind that they are also dealing with their own cash flow. You will need to agree on a regular payment schedule and stick to it.
Rely on a historic data to make sure you have cash on hand.
New cannabis companies may have difficulty in understanding how to make financial projections. A good place to start is EDGAR, a research tool that gives you financial data on publicly traded companies. By reviewing balance sheets from other operations, you can begin to project your own financial assumptions. Irregular overhead expenses can be overcome with enough preparation and foresight!
Price your product carefully.
Cannabis companies who are ready to start selling can relieve some of the pressure to manage irregular overhead expenses with a smart pricing strategy. Here are some of the things you might take into account when pricing your cannabis product:
- Direct and indirect costs
- Your breakeven point
- Competitor’s prices
- Industry prices and trends
- Demand and black market competition
Consult with a third-party expert when pricing your cannabis or cannabis product. Variable expenses can be difficult to balance out, so having an expert to consult s a big benefit. If you have questions, please don’t hesitate to reach out to our team.