It’s that time of the year:
budget season!
When developing a budget for
your business, there are a lot of factors to consider, such as revenues,
expenses, build-out costs, industry- and inflation-related trends, and much
more.
© Courtesy of Granger
Here, Naomi Granger, founder
of the NationalAssociation of Cannabis Accounting and Tax Professionals, shares critical factors cannabis businesses should consider
when building their budget for 2023 and how they can plan for the potential
impacts of even greater inflation in the new year.
REVENUES
When creating a budget,
Granger says one of the first factors owners need to consider is their
revenues.
Retailers: Retailers should track existing data to access revenue
numbers.
“They should be looking
in their POS (point of sale) system,” Granger says. “They should be able to see
how many transactions they’re doing on a weekly basis and what their average
basket price is per transaction. If you multiply the total transactions times
the average ticket price or average basket price per transaction, you can get
how much you should expect to earn on a weekly, monthly, or annual basis.”
Cultivators: Granger says cultivators need to determine how much their
yield is in pounds after harvest and how many times they will be able to
produce that in a year.
“Once they figured out
how much they’re able to yield and how many times they can do that in a year,
now they have to look at the market and figure out the price per pound they’re
able to get,” Granger says. “They should be keeping track of that and
knowing what price per pound they’re getting. And if they’re new, they can ask
other cultivators in that market.”
Cultivators should also
factor in inflation-related costs.
“What we’re experiencing
right now is price compression. So, for the price per pound, we’re seeing
significant declines this year and as markets mature,” she says. “At
the very beginning, it’s like everything flies off the shelves. Whoever’s the
first cultivator, all their product is going to sell. … But as the market
matures and there’s more cultivators in the market and there’s more choices for
retail dispensaries, then price compression happens, and you’ve got to start
marketing and thinking about other things.”
With all these factors
included, Granger says cultivators can ultimately determine their revenue
numbers by figuring out how much they can yield and how much they can sell it
for.
COST
OF GOODS SOLD
Granger says operators need
to evaluate the cost of goods sold (COGS).
Retailers: Retailers must determine how much it costs for them to
buy the product from the cultivator, which depends on the wholesale price per
pound in that market, she says. “A lot of times … maybe 50% to 60% of your
revenue is probably going to be your cost of that product.”
Cultivators: Cultivators need to determine how much it costs to grow
that product, which includes electricity, utilities, rent, payroll, and more,
she says.
This COGS calculation is also
vital for allowabletax adjustments under IRS Code 280E.
PAYROLL
Cultivators and retailers
need to consider how many employees they need to staff, and the costs
associated with it.
For example, retailers will
need to determine their hours of operation and how many full-time staff members
they’ll need to fulfill those hours. They’ll also need to hire employees based
on the location size, so they can adequately service the volume of customers,
Granger says.
Operators must also consider
employer taxes and regulatory requirements such as minimum wage, employee
rights, and full-time equivalents.
“You have to look at
what the total cost of that [employee] will be,” Granger says. “For
example, if an employee’s salary is $60,000, employer taxes may be another 12
to 15 percent on top of that. … You have to think about how much you’re paying
out. And if you’re going to offer benefits, factor those in as well. How much
is that going to cost per employee per month?”
Owners also need to look at
onboarding costs.
“There is a lot of
turnover in cannabis, and it costs a lot,” she says. “I think the
average report I saw was [around] $4,000 to bring on a new person. Like the
onboarding, training, and opportunity cost because they’re not fully up to
speed, you might miss some sales.”
ployee Turnover Is the Norm in the Cannabis Retail Industry
Granger also suggests owners
keep their annual payroll between 15% and 30% of their revenue.
“If the payroll number
is above that threshold, then [they] need to think about whether [they] need to
be in there doing more work, if a family member needs to be in there doing more
work, or if [they] need to reduce your open hours,” she says.
UNDERSTAND
THE MARKET
Granger suggests operators maintain
a good understanding of the market they reside.
Retailers: Retailers should understand where their market is as far
as maturity. “As more cultivators come on board, they have more choices,
and they can be a little bit more competitive with the vendors they
choose,” she says.
Granger also suggests
retailers leverage data sources like Headset or BDSA to understand market
trends and make better purchasing decisions.
“For mature markets,
retailers need to understand who their customer is,” she says. “So,
when they’re buying their product, they want to make sure that they’re buying
what their customers want [and that] they’re fulfilling their customer’s wants
and needs.”
Cultivators: Cultivators also need to understand where their market is
regarding maturity. For example, as businesses come onboard in New York, they
will be able to demand a higher price, she says. “The reason why that is
an issue is because there is no interstate commerce in cannabis yet. So, you
can’t just go to Oregon and buy cheap product and sell it in New York. The
entire supply chain has to be maintained within that state.”
As the market matures, prices
tend to go down. For example, “Nevada is a tourist town, so we were able
to demand a much higher price per pound, but now the novelty is dying down, and
more states are opening up, so people don’t have to travel to Nevada. … That’s
going to impact the prices these cultivators can get as well,” she adds.
Cultivators should also
consider the costs associated with growing in specific states, as cultivating
in a place like Oregon may be cheaper than Nevada, she says.
UTILITY
She says that operators must
also evaluate utility costs when budgeting for 2023, including lighting,
electricity, water, etc.
“Especially for
cultivators. Electricity and utility bills are the biggest things because these
cultivation facilities require a lot,” Granger says. “It’s just
higher for cultivation because the plants require certain types of lighting and
a certain climate which you have to control with air conditions and humidifiers
and things like that.”
BUILD-OUT
COSTS
New and existing businesses
should also consider expansion plans and build-out costs, she says.
“Depending on your grow,
if you’re a startup, you’ve got to factor in all the store build-out costs to
get it up and running,” Granger says. “So, in order to create a
budget for a new facility, you need to start going out there and getting quotes
from architects, from construction companies, understanding what the utility is
going to be, and understanding professional service providers. Getting all
these different types of quotes so that you can have a clear understanding of
what it’s really going to take.”
TAXES
When creating a budget, Granger
says operators should also consider state-specific cannabis tax requirements.
Aside from federal and state
income tax, “there’s also marijuana retail tax and marijuana cultivation
taxes, which are reports that you file on a monthly or quarterly basis and pay
to the state on your sales, on top of just your income tax reports,” Granger
says. “So, they’ve got to make sure that they understand what their marijuana
taxes requirements are for that state, as well as their license and
registration requirements. … So, depending on their state and their vertical,
they need to be budgeting their license renewal fees, their excise tax, sales
tax and income tax.”
SECURITY
Security is also a
significant cost. For example, some states may require businesses to have
security guards on-site or a specific number of cameras.
“There are certain
cities in California that require businesses to have two security officers. And
some of the jurisdictions require that the security officer hired by the
cannabis operator patrols the neighborhood around the dispensary,” Granger
says.
Technology is another
essential cost to consider.
“Understanding the
regulations and knowing how much you need to spend on security, cameras, and all
those different things,” Granger says. “Technology is a big piece of
getting that up and running. POS systems, cameras, [key fobs,] and all that
type of stuff.”
INFLATION
Operators should also examine
potential inflation-related costs when creating a budget.
For example, businesses
looking to expand should factor in product and building material costs, delays
that might occur due to inflation, and more.
“Price compression is
also a huge thing that’s happening. Because of the inflation, people are trying
to demand lower prices down the line from the vendors so that they can turn a
profit,” she says. “So, with the price compression, they need to
budget in, ‘I might not get as much as I thought I was getting,’ and they …
need to scale down.”
Granger also suggests
businesses monitor their budgets and conduct a budget-vs.-actuals analysis
monthly or weekly.
“If they’re looking at
their average weekly transactions and their average cost per transaction and
they’re seeing that the volume is dropping, like if they expected 200
transactions a week and they’re only getting 180, … they need to start
actively making adjustments for that decrease in revenue.”
Editor’s Note: Granger spoke at the 2022 Cannabis Conference on the session “Is Your Budget Leading Your Business to Profitability?”
Granger is the only CPA to have been featured in The Wall Street Journal for her unique approach to helping accounting professionals expand their practice to support the legal cannabis industry. She’s provided her support, consulting, and business development skills to over 600 accounting professionals across the United States. Granger entered the cannabis industry in 2017 and went from start-up to exceeding $3 million in revenue in just over two years. She’ll guide you to your own solid revenue gains in the highly regulated cannabis industry with a strong foothold in the market.
