It’s that time of year: budget season!
When developing a budget for your business, there are many factors to consider, such as income, expenses, construction costs, industry and inflation trends, and more. Moreover.
Here, Naomi Granger, founder of the National Association of Cannabis Accounting and Tax Professionalsshares the critical factors cannabis companies should consider when budgeting for 2023 and how they can plan for the potential impacts of even higher inflation in the new year.
When creating a budget, Granger says one of the first factors homeowners should consider is their income.
Retailers: Retailers need to track existing data to access revenue numbers.
“They should be looking into their POS (point of sale) system,” says Granger. “They should be able to see how many trades they make each week and what their average cart price is per trade. If you multiply the total trades times the average ticket price or the average cart price per trade, you can get how much you should expect to earn on a weekly, monthly or yearly basis.”
Farmers: Granger says growers need to figure out how many pounds their yield is after harvest and how many times they will be able to produce that in a year.
“Once they have figured out how much they are able to produce and how many times they can do it in a year, they now need to look at the market and figure out what price per pound they can get,” says Granger. . “They should keep track of that and know what price per pound they’re getting. And if they’re new, they can ask other growers in that market.”
Growers should also factor in inflationary 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 the markets mature,” she says. “At the very beginning, it’s like everything is flying off the shelves. Whoever the first grower is, their whole product is going to sell. … But as the market matures and there are more growers in the market and there are more choices for retail dispensaries, then the price squeeze happens, and you have to start marketing and think about other things.”
With all of these factors included, Granger says growers can ultimately determine their revenue numbers by determining how much they can produce and how much they can sell.
COST OF GOODS SOLD
Granger says operators need to assess the cost of goods sold (COGS).
Retailers: Retailers need to figure out how much it costs them to buy the grower’s product, which depends on the wholesale price per pound in that market, she says. “A lot of times…maybe 50-60% of your income will probably be the cost of this product.”
Farmers: Growers need to figure out how much it costs to grow this product, which includes electricity, utilities, rent, payroll, etc., she says.
This COGS calculation is also essential for qualifying tax adjustments under IRS Code 280E.
Growers and retailers need to consider the number of employees they need and the associated costs.
For example, retailers will need to determine their hours of operation and the number of full-time employees they will need to fill those hours. They will also need to hire employees based on the size of the location, so they can adequately service the volume of customers, says Granger.
Operators must also consider employer taxes and regulatory requirements such as minimum wage, employee rights and full-time equivalents.
“You have to see what the total cost of this is [employee] will,” says Granger. “For example, if an employee’s salary is $60,000, the employer’s taxes may be an additional 12 to 15 percent on top of that. … You have to think about how much you’re paying. And if you’re going to offer perks, consider that as well. How much will it cost per employee per month? »
Owners should also consider integration costs.
“There’s a lot of turnover in cannabis, and it’s expensive,” she says. “I think the average report I saw was [around] $4,000 to bring in a new person. Like onboarding, training, and opportunity cost because they’re not completely up to date, you risk missing out on sales.”
Employee turnover is the norm in the cannabis retail industry
Granger also suggests owners keep their annual payroll between 15% and 30% of their income.
“If the payroll number is above this threshold, then [they] you have to ask yourself if [they] needs to be there to do more work, if a family member needs to be there to do more work, or if [they] need to reduce your opening hours,” she says.
UNDERSTANDING THE MARKET
Granger suggests traders maintain a good understanding of the market in which they reside.
Retailers: Retailers need to understand where their market is in terms of maturity. “As more growers join, they have more choices and they can be a bit more competitive with the vendors they choose,” she says.
Granger also suggests retailers use data sources like Headset or BDSA to understand market trends and make better buying 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 they’re buying what their customers want. [and that] they respond to the wants and needs of their customers.”
Farmers: Growers also need to understand where their market is in terms of maturity. For example, as companies move into New York, they may charge a higher price, she says. “The reason this is a problem is that there is no interstate cannabis trade yet. So you can’t just go to Oregon and buy a cheap product and sell it in New York. the supply chain must be maintained in this state.”
As the market matures, prices tend to fall. For example, “Nevada is a tourist town, so we were able to charge a much higher price per pound, but now the novelty is fading and more states are opening up, so people don’t have to travel to Nevada. … It’s also going to have an impact on the prices these growers can get,” she adds.
Growers also need to consider the costs associated with growing in specific states, as growing in a place like Oregon can be cheaper than Nevada, she says.
She says operators must also assess utility costs when budgeting for 2023, including lighting, electricity, water, etc.
“Especially for growers. Electricity and utility bills are the biggest because these grow facilities are very demanding,” says Granger. “It’s just higher for growing because the plants require certain types of lighting and a certain climate that you have to control with air conditions and humidifiers and things like that.”
New and existing businesses should also consider expansion plans and construction costs, she says.
“Depending on your growth, if you’re a startup, you have to factor in all the costs of building the store to get it up and running,” says Granger. “So in order to create a budget for a new facility, you need to start getting quotes from architects, construction companies, understanding what the utility will be, and understanding professional service providers. Getting all these different types of quotes so you can get a clear idea of what it’s really going to take.”
When creating a budget, Granger says operators should also consider state-specific cannabis tax requirements.
In addition to federal and state income tax, “there is also a marijuana retail sales tax and marijuana cultivation taxes, which are reports that you file on a monthly or quarterly basis and that you pay to the state on your sales, in addition to your income tax declarations”. said Granger. “So they need to make sure they understand what their marijuana tax requirements are for that state, as well as their licensing and registration requirements. … So depending on their state and their vertical , they should be budgeting for their license renewal fees, excise tax, sales tax, and income tax.
Security is also a significant cost. For example, some states may require businesses to have on-site security guards or a specific number of cameras.
“Some cities in California require businesses to have two security guards. And some jurisdictions require the security guard hired by the cannabis operator to patrol the neighborhood around the dispensary,” says Granger.
Technology is another critical cost to consider.
“Understanding the regulations and knowing how much you have to spend on security, cameras and all these different things,” says Granger. “Technology is an important part of setting up and running. Point of sale systems, cameras, [key fobs,] and all that kind of stuff.”
Operators should also consider potential inflation costs when creating a budget.
For example, businesses looking to expand must consider the costs of building products and materials, delays that may occur due to inflation, and more.
“Price compression is also a huge thing that happens. Due to inflation, people try to demand lower prices from sellers so they can make a profit,” she says. “So with the price squeeze, they have to budget, ‘I may not get as much as I thought I would get,’ and they…have to cut back.”
Granger also suggests companies monitor their budgets and perform a monthly or weekly analysis of budget versus actuals.
“If they look at their average weekly trades and their average cost per trade and they see volume going down, like they expect 200 trades a week and they only get 180, .. They need to actively start making adjustments for this drop in revenue.
Editor’s Note: Granger spoke at the Cannabis Conference 2022 on the session “Does your budget drive 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 has provided her support, consulting and business development skills to more than 600 accounting professionals across the United States. Biger entered the cannabis industry in 2017 and grew from start-up to over $3 million in revenue in just over two years. She will guide you to your own solid income gains in the highly regulated cannabis industry with a strong market presence.