Sometimes, business owners don’t consider their break-even point. But knowing when you’ll become profitable means understanding how to calculate your break-even point. This is also how you’ll bypass the inflated numbers to reveal how long your profitability will take – with expenses in mind.
All too often, we see catchy headlines marketing to the masses. They proclaim how cannabis dispensaries are earning millions of dollars each year. These figures sound too good to be true, and that’s because they’re focused on the gross revenue.
But we need to bypass gross revenue and determine how much your dispensary earns after factoring in expenses. This is the right way to judge your business.
The first step is understanding break-even point meaning and how to calculate it.
Net income and net margins have their roles to play. With this information, you’ll know what you should set aside for taxes. And this ensures you effectively manage your costs.
The value in knowing your costs is knowing when your dispensary will be in a better position to become profitable. In this article, we’re covering what a break-even point in accounting is and the calculations you can do to uncover your dispensary’s break-even point.
What is a Break-Even Point (BEP)?
A break-even point in accounting for cannabis is the point when your costs and total revenue are the same. For instance, if you’ve invested $100,000 in your dispensary, you’ll break even when your total profit reaches $100,000.
But according to Investopedia, conducting a break-even analysis is as easy as dividing the fixed costs by the price per unit minus the variable cost of production. While this is a simplified definition, it highlights that your business’s goal should be to hit this point early on in its lifecycle.
After reaching your break-even point, the next step is to achieve profitability. This is when your revenue grows beyond your costs. Typically, the break-even point for a cannabis dispensary involves:
- People – The wages and benefits for the people working in your dispensary.
- Products – Think about where and how you source your products.
- Space – Real estate regulations mean you have limited options for spaces.
For every break-even analysis example, your expenses won’t always be flexible. However, you can adjust some of them to determine what will work best to achieve profitability. For instance, you can cut the cost of your products by sourcing from somewhere else. You can also hire fewer staff or adjust the hours they work in your dispensary.
Calculating the Break-Even Point for a Cannabis Dispensary
As you calculate your cannabis dispensary break-even point, these are the variables to consider:
- Average Sales Order – To calculate your average sales order, add all of your sales and divide the sum by the number of transactions.
- Average Monthly Contribution Margin – To calculate your average monthly contribution margin, you’ll add your cost of goods sold (this should include shipping and any other direct costs) and divide it by your revenue. Keep in mind that this does not account for your taxes, which will take between 7% and 10% of your margins.
- Average Monthly Fixed Costs – Combine all monthly fixed costs. This should include your bank/merchant fees, licensing fees, office supplies, software subscriptions, total payroll, rent or mortgage, utilities, and any other expenses you pay every month.
With this information on-hand, you can determine your break-even point, as well as how many sales per day or per month you’ll need to make to break-even. While a break-even point calculator will make this easier, some simple math can produce results too.
As a break-even point example, suppose your average sales order is $200 and your average monthly contribution margin is 50%. Your monthly fixed costs are $3,000 and you’ve invested $100,000 in your dispensary. With these numbers, you can calculate the number of sales per month or day to break-even. If you want to break-even in 6 months, you could uncover daily, weekly, and monthly sales targets.
In this break-even analysis formula, you’d multiply the number of months (6) by the monthly expenses ($3,000). Then, you’d add that to what you’ve invested ($100,000). This equals $118,000.
You’d then divide $118,000 by 50% of your average sales order ($200). This shows you’d need 197 orders per month to reach your break-even point in 6 months.
This math can also be applied to calculate how many orders you’d need per day, week, year, etc. However, keep in mind that you’ll need to include local state and federal taxes in your calculations.
What to Do After You Know Your BEP
Once you know your BEP, you know your sales targets to maintain your progress. While sales will fluctuate from day to day, this offers insight that can guide your marketing and management decisions.
Now that you have information contributing to your operation, you should maintain a sales journal. With a sales journal, you’ll track your sales, the number of transactions, and other relevant information. As you continue updating your sales diary with relevant information, you can look back to gain more insight regarding your business’s sustainability and how to maintain and grow it.
A sales journal allows you to look back at the days you’re not breaking even. There could be a trend that reveals when and why certain days aren’t profitable. This will allow you to take action and determine where you can cut costs and increase your chances of making a profit on those days.
You might decide to cut costs. This will involve checking your variable costs. You may be able to cut costs by scheduling fewer hours for your team. Or perhaps you can decrease your marketing costs for the days you’re not profitable.
Another option is to sell more product on those days. This could involve some creativity. For example, you could try hosting events or running a promotion on those days to increase profits and cover your overhead costs.
Most of the time, the best option is to market profitable items. This isn’t always the priciest product you sell. You’d focus on selling the products that offer the best margins. For many dispensaries, this product is pre-rolls.
Running percentage discounts isn’t always the best choice. Some customers will alter when they purchase to ensure they’re buying during times you’re offering a discount. The goal here is to get your customers to spend more and get a better deal simultaneously.
After you know what’s causing your unprofitable days, it’s also important to determine what’s causing your most profitable days. Perhaps some employees are making those days better. Or maybe other external factors are coming into play. Your sales journal should highlight macro-trends you can use to improve your dispensary’s profitability.
While data can be tedious, this is the business end of things. With more in-depth data, you can ensure your dispensary’s long-term and sustainable success as you serve consumers.
Need a financial analysis of your dispensary? Looking for help with your dispensary accounting? Feel free to contact us today.