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.
Cash management is crucial for any small business. But when it comes to operating in the cannabis sector, inappropriately managing cash can become a severe issue.
This industry is characterized by inaccessible banking services that force many cannabusiness operators to handle transactions in cash. With this in mind, strong cash handling policies can ensure your dispensary’s survival.
For instance, without the right cash handling methods, sales tax can become a serious problem if you don’t correctly pay it. But if you’re dealing with cash transactions, sales tax is money that belongs to the state.
One significant issue is that companies tend to misuse cash that should be put to the side for sales taxes. Instead, they use this money on operating expenses. Then, when incoming cash flow pauses and sales tax bills are due, cannabis business operators have problems with the IRS and other state authorities.
It’s crucial to know which cash belongs to you and how much to set aside to pay your taxes. Understanding your operating capital cash ensures you know what you’re working with and what belongs to the state.
With this in mind, try these tips to manage your cash:
Get Informed on State, Local, and Federal Taxes
If you’re managing cash on your own, stay up to date on the state, local, and federal taxation. But if you’re working with a CPA, make sure they’re experienced in handling cash for cannabis businesses. Your CPA should be able to teach you about the percentages and calculations you’ll need to set aside cash to pay your taxes.
Your CPA will explain whether your taxes are based on gross receipts, the base that your tax rate is calculated on, and other information about your taxes. This information will vary depending on what you do, so speaking with an expert about your situation can shed some light on it.
For example, dispensaries should have some sort of target revenue monthly, quarterly, and annually. This allows you to calculate what you expect your tax bill to be for each period. With this insight, you’ll have a good idea of what you should set aside to cover your taxes.
Set an SOP for Cash Reconciliation
Once each day ends, reconcile your cash on hand using your POS system. This is how you’ll ensure there hasn’t been a theft or diversion.
Your team should have a standard operating procedure for handling cash. Here’s what your procedure should cover:
Where cash is kept
How cash is counted and who is responsible for counting it
If your business has a bank account, the bank’s location
How the cash is to be transported from the business to the bank
Where the safe is located
What type of safe you’re using
Set Aside Cash for Regulating Agencies
Compliance is essential in the cannabis sector, and your business must remain compliant with regulations set by the state, local, and federal agencies. Cash should be put aside for taxes, but also for license renewal fees and potential penalties you might incur.
Handling your cash flow involves putting cash aside to manage every aspect of your business. This should also include an emergency fund that’s capable of covering your company’s operating expenses for at least 60 days. Emergency funds can be a serious blessing in instances when you find yourself dealing with an unexpected expense like a high tax bill or something else.
Use Banking Services for Cannabis
Sometimes, it’s challenging to get a business account for a cannabis endeavor. However, it’s not impossible. If you have a business bank account, make your cash deposits at least two or three times weekly.
If you can, deposit cash into separate accounts to hold your tax money. But if you can’t separate your cash, make sure you have at least 115% of what you estimate your tax bill will be in your account.
Incorporating a Drop Safe
While a drop safe isn’t always a priority, it’s one of the most effective ways to keep your cash safe and ensure you’re allotting money towards everything you need to handle. A drop safe physically separates the cash you have into categories. For instance, you can have a drop safe for taxes, another for operating expenses, one for payroll, etc.
You should only grant access to your drop safes if it’s essential. The fewer people with access, the better. The only people who should have access are the owner, their lawyer, and perhaps a designated cash handler. Recording each drop in a cash log is also recommended because this will help with reconciling your dispensary’s cash at the end of each month.
For Digital Payments, Separate Your Income from Taxes Automatically
Some merchant processors will let you automatically set aside income money from tax money. For example, if you’ve recorded $1,000 through your POS, you can set the system to deposit part of that money into separate accounts automatically. You can set it to send 10% into your sales tax account, 20% into an account designated for state and federal taxes, 10% into a city tax account, and everything else into your main account.
Incorporate Counterfeit Cash Detection Procedures
Your employees likely haven’t been properly trained to spot fake bills. But that won’t stop the government from taxing you based on fake cash your employees have accepted.
With this in mind, avoid paying taxes on fake cash by incorporating counterfeit cash detection procedures. You also have the option to use a device that checks for authenticity.
Hold People Accountable for Their Tills
Cannabis cash handling demands accountability. Someone, whether it’s your general manager or shift manager, should be responsible for counting the cash at the state and end of each workday.
The cashier or budtender responsible for the till should watch as the GM or SM counts the money. They should then sign off on the count in or out. Once this is completed, whoever is in charge should reconcile the cash with the day’s sales. This should all be done in a recorded room that offers clear views from all angles.
Need help determining the best course of action for cash management at your dispensary? Contact us today to learn more about how we can help.
Business operators often can’t help but wonder, “Should we hire a CFO or Controller, or should we try to do it ourselves?” However, there’s another option that’s often overlooked; outsourced cannabis CFO services.
Managing finances is essential for any business. This is especially true for businesses that are growing.
But up until around ten years ago, small business owners had to hire an in-house CFO. Until recently, they didn’t have the option to hire an outsourced team.
Today, business operators across all industries can benefit from outsourced CFO services. And with the cannabis industry experiencing incredible scaling capacity, these services are becoming vital for avoiding finance-related bottlenecks that hinder business growth.
Regardless of the industry, the majority of business owners believe that hiring in-house is the best option to have someone handle paying bills, running payroll, and managing company finances. However, for many cannabusiness operators, an outsourced CFO and accounting department is a better solution.
In this article, we’ll discuss the benefits of outsourced CFO services over hiring in-house and how outsourcing a cannabis CFO is a solution that will help you scale your company.
Outsourced Cannabis CFO vs. Hiring In-House
Hiring a cannabis CFO in-house means you’re assigning the majority of, if not all, of the financial responsibilities of your cannabusiness to a single individual. Now, while this person might be an expert, there’s a good chance that they’ll have more work than they’re capable of handling. This is especially true if your business is in the process of scaling.
Another problem with hiring a cannabis accountant in-house is that while they might be skilled in some aspects of your business, they could lack expertise in other areas. In turn, you could be putting the financial health of your business at risk by hiring one person to do several finance-related jobs.
Outsourcing cannabis accounting and finance functions brings an entire team’s expertise into your business. With this in mind, an outsourced cannabis financial services team will have experts in multiple aspects of your business’s finances on hand to handle each aspect of your cannabusiness’s finances.
With more expertise ready to assist, cannabis business operators improve their financial reporting accuracy. Furthermore, these business owners obtain several layers of oversight, ensuring mistakes and potential fraud are found before they become a severe issue.
Outsourced Cannabis CFO Services More In-Depth
Using an outsourced cannabis financial team also changes your cannabusiness at higher levels. Since many small and medium-sized canna-companies don’t have the financial backing to bring on a full-time CFO, outsourcing is an economical option. The lower levels of most cannabis organizations can benefit from outsourcing financial services too.
Per 280e, plant-touching companies cannot deduct finance and accounting expenses. Therefore, hiring in-house not only can be very costly, but can also harm cash flow by being non-deductible.
Outsourcing also eliminates the overhead, HR, and administrative burdens that come with hiring in-house. When you outsource a cannabis CFO, you’re using efficient and lean structuring that can provide cannabis-specific expertise at a fraction of the cost of an in-house team.
Bringing an outsourced cannabis CFO gives you access to their expertise when you need it too. As a result, you’ll save more when you need fewer services. For instance, your cannabis operation could be going through a period of tremendous growth. In this case, you’d need more financial services to meet your business’s needs.
However, if your business is operating smoothly, you have a financial plan in place, and you’re abiding by annual budgeting that’s already been established, you might not need to have your outsourced accountant working as much. The less your CFO works, the less you have to pay. And this allows you to dedicate that money elsewhere.
Best Practices From Multiple Industries Working for You
Hiring in-house usually means you’re hiring someone who is knowledgeable in specific areas. But working with an outsourced cannabis CFO, you have access to experts who have worked across many industries.
The exposure to other industries allows your financial experts to spot potential weaknesses or opportunities for your cannabusiness. Thus, you have knowledge and data backing each of your business’s moves.
With knowledge of the best practices across other industries paired with GAAP (Generally Accepted Accounting Principles), your cannabis business receives the right financial services to keep it operating smoothly. Since the cannabis industry is highly regulated, this is essential to ensure your business’s success.
The right outsourced cannabis accountant will introduce efficiencies and organization to your cannabis business’s operations, contributing to your wins and steering you clear from potential losses. As tax season approaches, there’s no need to fret as you’ll know everything is being handled as it should. The experience of an entire team working on your business’s finances ensures you’ll never need to worry about pricey infractions.
Standardized Reporting to Make Documentation Simple
The majority of CFOs have personal preferences for how they’re formatting documents, reports, and files. This is especially true when they’re the person handling all of the documentation for your business. While this can work, it’s possible that they will not adhere to the standard practices within the cannabis industry.
In an industry characterized by strict restrictions and pricey infractions, standardized reporting is crucial for success. With a part-time cannabis CFO, you’re more likely to have someone who will adhere to these accepted reporting standards. Since they already work with several cannabis companies, they already understand the importance of sticking to what works for this industry.
Standardized reports make tax season easier. From handling your taxes to reporting and handling legal issues, a fractional cannabis accountant will keep everything organized with standardized reports and make sure that in the case of an audit, you’re prepared.
Some Problems Outsourced Cannabis CFO Services Help Business Operators Overcome
Outsourced cannabis financial services aren’t for every business. But it can be a valuable change in many canna-company operations.
Bringing outside help could be beneficial in many instances. These are just some of the times an outsourced cannabis accountant is ideal:
Your company is experiencing exponential growth and demands an increase in oversight and financial management.
Your office manager is stuck handling your company’s bookkeeping while scaling your business.
Your in-house bookkeeper quit without giving much notice, requiring a fast solution to your financial management woes.
You’re preparing your business for a sale.
You’re looking for ways to increase your profitability.
You feel your bookkeeping practices are overly complex, and you feel that the accuracy of your financial statements could be in jeopardy.
All of these situations can be alleviated by bringing in an external cannabis accountant. These issues are especially common in cannabis, so don’t worry! You’re not alone in needing some additional assistance handling your cannabusiness’s finances.
Looking to outsource your CFO responsibilities? Feel free to contact us at any time to learn how our cannabis financial services can improve all aspects of your business’s finances.
Then it’s no news to you that cash flow is one of the main, if not the main, issues for a cannabis business. That’s why owners of businesses like marijuana dispensaries, cannabis distributors, and cultivators are always on the lookout for new ways to solve the cash flow issue. What’s an innovative way to raise money for your cannabis businesses? Many are turning to the sale-leaseback.
But let’s take a step back and explore just why it is that cash flow is at the top of every cannabis business owner’s mind.
Lack of Federal Legalization and Limited Cash Influx Options
Because cannabis is still illegal at the federal level, there are many regulations and restrictions that create disproportionate challenges for compliant business. Yes, even for those operating even in state legalized communities. The 280e tax code being a prime example, as well as the restriction on federal banks from providing financing options, or any finance services at all, to cannabis businesses.
Many smaller banks are hesitant to take on cannabis entrepreneurs as clients because of both the legal intricacies and the cultural stigma around the industry. (Though many Americans are starting to view things differently thanks to state legalization.)
This leaves cannabis business owners with the need to be more resourceful than entrepreneurs who are involved in other, less-regulated industries.
Luckily, there are a few investors and investment firms out there who believe in the cannabis industry. They’re willing to take the risks involved with the promise of a national-boom that many believe is to come in the very near future. And, for the time being, those risks are unfortunately quite real.
Unpredictable Performance in the Stock Market
The sad fact is that not enough investment firms are jumping on the bandwagon. And why is that? Because the cannabis industry is still extremely volatile. After the record-breaking stock prices the cannabis industry saw at the start of last year, cannabis stocks plummeted from the second quarter onward, and they haven’t recovered since.
While businesses in other industries may consider providing more shares to investors, the consensus among financial experts—especially those specializing in the cannabis niche—is that doing so for a cannabis businesses would be a bad idea. Issuing more shares in a cannabis company, especially if the industry has been performing so poorly in the market, waters down the worth of each share, and therefore the networth of the cannabis company.
This leaves the cannabis community with the question of what happens next. Currently, there are two levels of action that are being set in motion: the on-the-ground solution that individual cannabis business owners are turning to, and there’s a more forward-thinking push for change at the legislative level.
The SAFE Banking Act
Introduced last year by Ed Permlutter, Democratic representative from Denver, Colorado, the Secure and Fair Enforcement (SAFE) Banking Act allows for the creation of financial institutions that provide financial services to cannabis businesses in legalized states.
While many similar legislations have been proposed, this was viewed by many as the bill that might actually make it through. It passed in the House of Congress by a landslide, and was largely starting to be regarded as a bipartisan, apolitical concern.
Hype notwithstanding, it will soon be a year since anything has been done with that bill. The more practical-minded are losing hope that it will ever progress in any significant way. After all, say experts in the industry, If progress were to be made, it would have done so already. The fact that it didn’t pass was quite a blow to the cannabis community, which could have greatly used a break, for once. Being able to receive financing options from banks would mean less leg-work, less need for creativity, and somewhat drastic measures… like the sale-leaseback.
Drastic as it is, the sale-leaseback is a viable option for many cannabis entrepreneurs out there.
The Sale-Leaseback: One Of Today’s Most Popular Solutions
Also known as just “leaseback” for short, the sale-leaseback is a process in which you sell the real estate your business is operating out of, then lease that property back as a tenant.
As with all things, there are pros and cons that have to be weighed out before taking the leap, like effects on monthly budgeting. Here’s what you need to know about unlocking funds with a sale-leaseback for your cannabis business:
Some cannabis businesses are selling their properties on a leaseback deal, for quick cash. (Image: freepik)
1. The sale-leaseback provides your cannabis business with a significant influx of cash flow all at once.
True, you’ll still be spending money on renting the space back each month, but whereas that is an expense stretched out over time, the money you get immediately can be used to grow your business in the meantime.
There is also the question of how being a tenant may affect your business. Being the King/Queen of the Castle allows for pride in your space and freedom in your business. But with the right contract and the best terms, there will be very little impact, if any, on the day-to-day operations of your business.
2. Some of the most successful cannabis businesses have negotiated leasebacks for their businesses.
3. To fill this need, there are real estate investment trusts (REITs) that have a niche in the cannabis industry.
The greatest comfort in having to sell your place would be knowing that you can be a tenant with terms that are ideal for your business. Some other landlord who does not understand the needs of, say, a cannabis sativa cultivator, or a producer of CBD oil and edibles, may provide terms that restrict your business’ operations. Not so with a company like GreenAcreage Real Estate that was created for this exact purpose, and has a solid grasp of what’s par for the course when it comes to having a cannabis business as a tenant.
4. It’s not right for every business.
Some businesses found that the sale-leaseback was not right for their cannabis business. Perhaps your mortgage terms won’t allow you to receive enough cash on your property, or the lease would be much higher than monthly-mortgage rates.
These and other valid concerns are why no business should make these decisions without the guidance of a financial professional.
If you would like to explore the idea of a sale-leaseback for your business, or other cashflow solutions, contact us today. Call now: +1.424.274.3188
There’s a lot of material out there exploring why nine out of ten business and startups fail, and plenty case studies done on the businesses that made it. One theory is that entrepreneurs of successful businesses “failed fast.” They got all their mistakes out of the way in the beginning.
Maybe that’ll work for a lemonade stand, or some other business that’s in a more reasonably-regulated industry.
That will not work for, say, a cannabis oil production company or a marijuana dispensary.
To say that the idea of making big mistakes in business is worrisome to the founder of a cannabis startup would be an understatement. With the marijuana legalization process so temperamental on the federal, state and municipal levels, there’s a lot on the line, and it’s not so simple to just pick yourself back up and try again tomorrow. In fact, the “fail fast” theory is being marked as a fallacy by some who are vocal in the business world.
It’s clear that the main concern of any cannabis business, big or small, is to not make mistakes. That’s particularly so in the area of cash flow. Indeed, Chicago-based Cresco terminating its acquisition of Florida-based VidaCann is just one of the latest well known instances where cash flow took precedence over growth of a cannabis business.
Given that cash flow is a top priority and challenge in the cannabis industry, it’s a good idea to scrutinize the production and sale of your product, and identify how you can increase your cash flow.
From day one of production to the moment you receive payment from the customer or a retailer, there are challenges that can either trip up your business or become points of opportunity for greater cash flow.
Here are 3 ways that you can increase your cash flow starting today:
1. Manage Your Inventory Restocking Cycle Well
Effective management of your stock is not only a crucial part of managing cash flow, it’s the key component of maintaining transparency. And it’s the law.
From a financial or marketing perspective, if you produce or stock too little product, you’ll risk disappointing your customer base. For example, the cannabis dispensary you source to might start looking for a producer who provides an ample amount of CBD oil, and can therefore meet their market demands.
On the other hand, produce or stock too much, and you run into costly storage issues, and risk the product going bad. That’s a lot of money down the drain! Luckily, there are ways of staying on top of weekly or monthly consumer trends, so that, if you’re a marijuana dispensary, you know how much cannabis tincture or recreational marijuana products to have on hand.
Given the delicate nature of the production process, the legal implications of having transparency, and the immense importance of keeping up good ties between cultivators, producers, retailers and customers, there’s a lot weighing on the ability to track your stock well. There are now new platforms out there that are trying to solve this, in line with municipal quotas, so that cannabis startups can succeed in this area.
Remember, as well, that a clear account of your current stock, and general restocking cycles, should be clearly outlined in your business plan.
2. Minimize Order Rejection With Rock Solid Standard Operating Procedures (SOPs)
This can be a frustrating one.
You’ve spent a month getting those cannabis seeds to take form under the led grow lights, and creating a batch of some much needed medical cannabis tinctures by those in your community. You’ve overseen the packaging of your product, and you’ve got it hauled onto a rented delivery truck. You get it to the retailer and…they don’t accept the delivery.
This happens all too often. Because cultivators, producers, and retailers all have their share of regulations to adhere to, each sector has to be wary of the compliance of the other.
In this chart, you’ll see the main reasons that deliveries get rejected: miscommunication, issues in the compliance documentation, issues in the labeling or packaging, or a retailer’s downright inability to pay for the order in that window of time.
This is where having clear SOPs in place, from your annual plan, to your day-to-day operations, becomes crucial. True, you can’t control everything. You certainly can’t control the cultivator you source from, the retailer you provide to, or the producer you buy from. But you can have a system of vetting out the business you work with to ensure that they are compliant, and a way to communicate with them clearly regarding orders, and minimize bottlenecks in every transaction.
3. Factor in Payment Terms
We all know about the 280e law that prohibits cannabis startups from opening a bank account at any federally-backed bank. It means more leg-work in simply opening a bank account to keep your cash. This also means more difficulty in getting approved for bank loans. As a cannabis startup, you rely heavily on investors who make it their business to focus on the cannabis space.
Not only is initial funding a challenge, but payment terms can be difficult to keep up with, as well.
There’s the logistics of receiving payment, there’s the need for a system for tracking outstanding accounts receivable, and there’s having to deal with the cost of having produced, without the immediate means to pay for things like rental fees, utilities, and payroll.
Cash flow is a prevalent concern in the cannabis industry. Luckily, there are services, like outsourced CFOs, and platforms like Point of Sale technology, that are filling in those gaps as the legalization process inches forward.
Know your options. Know your regulations. Know your market and your community, and you can realize your dream of owning a successful and profitable cannabis business.
Need help getting your cash flowing? Contact us today for your free consultation. Call now: 1.424.274.3188