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Measuring the Financial Health of Your Cannabis Business

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July 12, 2019

As a cannabis business owner, you know that you have a lot on your plate.

Between running a business, making sure inventory is high-quality, and staying compliant with the industry’s many regulations, there are about 10,000 things to keep track of – including your venture’s financials. 

And one way to alleviate some of the burden of keeping your business healthy and growing is to outsource some of the aspects of running your business to experts in the industry.

Consider allowing a CPA firm with experience in the cannabis market take on the CFO function. This will give you more time to focus on what you do best. 

In the meantime, check on the financial health of your cannabis business by taking these steps to evaluate your growth potential, stability, and more. 

Tip #1: Create Systems & Select Metrics

First things first, set up systems to collect data about your business and choose the metrics most important to your business. With no data, you have nothing to analyze; and what gets measured gets managed.

There are many key performance indicators (KPIs) to keep tabs on when monitoring the health of your cannabis business. As a result, it’s easy to get lost in the overwhelming amount of data that tells you different things about your venture. 

Perhaps the most important thing you can do as a business owner is to make sure you’re collecting enough data so an analyst can review it for you at a later date.

It’s critical to have a robust POS/Sales system, as well as a CRM system that communicates with your point-of-sales tool.  The most profitable and efficient cannabis businesses use software and systems to keep their books in order and make it easy for their CPA or financial analyst to review their records. 

Many software tools come with pre-packaged metrics; and for cannabis operators new to the market, it’s tempting to simply use the metrics that come loaded in the software tool. These metrics, in reality, aren’t that useful.

They usually don’t allow you to run historical or trend analytics, and often, the software doesn’t offer you more than a snapshot. It’s better to input raw data from your company to Excel and run your own analysis.

If this sounds intimidating, engage a financial analyst at Green Growth CPAs for help understanding your data and metrics.

Here are a few of the KPIs we would look at together, depending on your vertical in the industry: 

  • For cannabis dispensaries: 
    • Average spend per transaction
    • Customer Frequency
    • Gross margin per product
    • Contribution Margin of each product
    • Labor %
    • EBITDA
  • For cannabis manufacturers:
    • Manufacturing Cycle Time
    • Yield
    • Throughput & Capacity Utilization
    • WIP Inventory/Turns
    • Gross Margin
    • Cash-to-Cash Cycle Time
    • EBITDA
  • For cannabis delivery services: (Dispensary metrics as outlined above plus)
    • Time per delivery
    • Distance per delivery
    • Fulfillment turnaround time

Tip #2: Look at Lines, Not Dots

Dots are what investors and analysts consider discrete points in time.

A dot offers a snapshot of a singular moment, one data point rather than the full history of how your business is performing.

With many dots, you can begin to connect trends and discover a more complete story about your business. Lines can tell you a bit more: are things going up, down, or sideways?

Take a look at the trends on a regular basis to avoid falling into the dot-trap.

Our experts recommend analyzing your data once per month in the first year of running your business, then quarterly for the second year and beyond. 

Tip #3: Keep a Business Journal

A business journal is a simple tool that’s especially helpful for cannabis dispensary owners. A journal can help you understand the internal and external factors that drive your business. 

The best business journal is a simple Excel spreadsheet with three columns: date, day of the week, and some notes about what happened that day.

Include information such as the weather, events in the area, specific promotions happening at your business, any hiring or firing news, and big news headlines from the day.

Over time, you’ll be able to parse out trends you may not have otherwise seen. It’s hard to remember back 30 or 90 days, which is why a business journal is such a powerful tool. 

Tip #4: Don’t Overvalue Aggregate Statistics

It’s easy to get caught up in measuring your business’s financial health against industry trends.

For example, a dispensary owner may compare their performance against high level, Los Angeles dispensary trends. That’s a mistake, as these trends can be misleading. 

Unless the data you are comparing is as granular as zip code to zip code, then avoid measuring your KPIs against macro trends. There are many, many types of neighborhoods and types of locations.

A tourist area may have tons of volume, but low average spend per transaction, for example. Their product mix will be different from a neighborhood shop, which is likely to sell more flower and sell at a lower volume with a higher average spend per transaction. 

The best strategy?

Track your company’s financial metrics historically.

Look at your current performance relative to your past performance to give context to the metrics you are analyzing. Only by looking at your own financial history can you see whether you’re becoming a better or worse operator, as well as which parts of your business are thriving.

Tip #5: Leverage Metrics to Tackle Problems

Last but not least, it’s not enough to simply understand your metrics. The insight you gain from tracking your KPIs needs to translate into action. 

For example, imagine a scenario where you notice average spend is trending down. Beyond observing this metric impacting your business, take a moment to slice your metrics by demographics to go deeper. Look at age, gender, and other key audience insights.

As age goes up, what does spend do? Accordingly, take action to adjust your marketing message or reach out through different communication channels to help get average spend back on track for whichever particular group you found that is driving down average spend. 

Want help setting up a financial dashboard with quarterly reporting? Get started with our outsourced CFO service.

We can set up data collection, run your numbers, and give you insights and actionable steps to improve your business every quarter. Click the button below to get started. 

Get Started

Post Tags: Business, Finance

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