How to Measure Your Cannabis Business’s Financial Health

Oct 24, 2020 | Cannabis Business

Maintaining a financially healthy cannabis business is crucial to success. Without keeping a finger on the pulse of key financial health indicators, your operation becomes susceptible to a plethora of issues.

The cannabis sector’s rules and regulations are continually receiving updates. But between handling all of the other components of your business and staying compliant, you likely have thousands of other things to track. The most important of these is your company’s financials.

For those handling the financial health of a cannabis business on their own, here is how you’ll uncover insights regarding your business’s growth potential, stability, and other essential aspects of operating in this budding industry.

Track Your Financials in a Business Journal

A business journal is easy to use and can be especially useful for cannabis dispensary operators. This will allow you to keep track of the internal and external factors that impact your business.

The simplest way to create a business journal is to use either a Google Sheets spreadsheet or an Excel spreadsheet. Create three columns for the date, day of the week, and a section for notes covering the day’s occurrences.

Include relevant information, like the events in the area, specific promotions you’re running, hiring or firing news, weather insight, big news headlines, and anything else you can think of.

As you continue updating your business journal, you should be able to uncover trends that would’ve otherwise gone unnoticed. Remembering back 30 or 90 days is challenging. But with a journal, it’s as easy as looking back at your notes.

Avoid Overvaluing Certain Statistics

Measuring your business’s financial health in accordance with industry trends can seem like the right move. But trends can be misleading as they typically use data that’s irrelevant to your day-to-day operations.

You can sometimes compare your KPIs to granular data, such as zip code to zip code data. But with so many neighborhoods and kinds of locations, there’s more to consider.

For instance, if your shop is in a tourist area, your shop likely has a lot of volume. But the average spend per transaction is probably low. The products in a neighborhood shop will differ, focusing on selling more flower in lower volumes with higher transaction spends.

This is where historically tracking your cannabis operation’s financial metrics comes into play.

With records of your past performance, you’ll have context to the metrics you’re tracking. This is how you’ll see which parts of your business are thriving and determine if your financial performance is improving or not.

Put Systems in Place to Track Metrics

Collecting data and choosing the metrics that have the most significant impact on your business is essential. But you’ll need the right system in place to college that data.

Without data, there’s nothing to analyze. And when you have a way to measure results, you can effectively manage your business’s financial performance.

But what key performance indicators (KPIs) should you monitor?

Many KPIs exist, and it’s easy to feel overwhelmed by the amount of data you can use to uncover information about your business’s performance. The most important aspect of putting these systems in place is to ensure you’re collecting enough data for an analyst to review.

Incorporate a robust Point of Sale (POS) system and a CRM system to communicate with your POS tool. Software and systems can help you maintain your books. But we recommend using these in conjunction with spreadsheets to keep books in order and make reviewing records as easy as possible.

Some software tools contain pre-packaged metrics. However, even though these are tempting to use, the metrics these tools offer don’t let you run historical or trend analytics. Also, these softwares usually only provide a snapshot of data. We recommend using your own systems to extract your company’s data to put it into a spreadsheet for analyses.

Here are some KPIs you might consider, depending on your operation’s vertical:

  • Cannabis Dispensaries
    • Average spend per transaction
    • Contribution margin of each product
    • Customer frequency
    • EBITDA
    • Gross margin per product
    • Labor %
  • Cannabis Cultivators
    • Waste management costs
    • Grow cycle time
    • Yield
    • Gross margin
    • Product turns
  • Cannabis Manufacturers
    • Cash-to-cash cycle time
    • EBITDA
    • Gross margin
    • Manufacturing cycle time
    • Throughput & capacity utilization
    • WIP inventory/turns
    • Yield
  • Cannabis Delivery Services
    • Distance per delivery
    • Fulfillment turnaround time
    • Time per delivery

Check Lines to Uncover Trends

While you might be tempted to look at certain points in time, a singular moment only offers insight into one data point. To analyze the entire history of your business’s financial performance, connect the dots to form lines.

These lines offer a more complete story of your business’s financial health. You’ll see whether things are improving, getting worse, or remaining the same. Analyze your data once per month during your first year in operation. Then, it’s best to perform analyses quarterly to gain the most insight possible.

Consider Your Metrics to Resolve Problems

While it’s essential to understand your metrics, it’s even more crucial to use the insight you gain as you track your KPIs. This is where you’ll develop your action plan.

For instance, if your average spend decreases, consider what could be causing this metric to drop. You’d look into your metrics and analyze your demographics. By delving into these key audience insights, you could uncover the root of the problem.

Check how demographics impact audience spending habits. Then, you’ll plan a course of action to make adjustments to push your average spend back to where it was. This could be as simple as adjusting who you’re targeting on different social media platforms to reach the group responsible for driving down your average spend.

Looking for assistance monitoring your cannabis business’s financial health? Our outsourced CFO service can help.

We’ll set up systems to track relevant data and provide actionable steps to put your business on the fast-track to success. Contact us today to learn more about how our services will benefit your business.

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