Many cannabis operators may have millions in revenue coming in, but in the end they are running a loss position.
Why?
There’s likely many things causing this issue. You could be profiting huge numbers during a few months throughout the year and the others you’re losing your shirt. You could also have multiple locations, which can cause skewed data or the issue to be amplified across your locations.
Although, the most common factor our financial experts see when reviewing these financials is not keeping track of cash. They also see operators who lack general management to lead their storefront as well as issues with CoGS and operators not looking for ways to save.
In order to identify which issues are causing your business to implode, we’re going to be reviewing financial ratios. This is another step beyond the base financial analysis. Specifically, we’ll be looking at the liquidity and solvency ratios.
But first, let’s focus on common operational mistakes.
What are you doing wrong operationally?
These are common issues that could be adversely affecting your business:
1. Not keeping track of cash
Are you too trusting? Although, your employees and your company may feel like you’re working with family, the truth is you’re not.
This is your business and while it’s important to build a strong community for employee experience and engagement, you still need to hold people accountable and perform cash audit checks.
2. Mis-Managed Marketing
Another issue area we often come across is operators spending money on their marketing initiatives and not measuring the success of their campaigns.
For example, check out our recent video, where we show how measuring your marketing results can impact your bottom line. Keep in mind that none of these general business costs are deductible under IRC 280E, so you want to make sure your initiatives are making a big impact.
3. Problems with CoGS
CoGS is a whole beast on its own! Many cannabis operators try to stuff costs into CoGS in order to try and reduce their taxes. Another common mistake is not marking up your product properly to account for indirect, non-deductible costs. Other issues can consist of poor bookkeeping procedure or lack of direction from ownership.
But here’s some things you may not be noticing that are impacting your CoGS.
Are you negotiating with vendors? Maybe there are opportunities for discounts for purchasing in bulk? Or maybe, you just haven’t asked for a discount. Whatever the reason, try to decrease some of those operating costs by negotiating with your vendors and checking out the local competition to see if you can save with anyone else.
Are you able to recapture margins by vertically integrating? Measuring how you can improve your revenue and combine forces with another company may help you stay financially healthy in ultra-competitive markets.
4. Lack of Management and Delegation
Are you doing it all on your own? Running a business is not a one-man show, it’s a team effort. And although you may think you can, you cannot do it all on your own! We recommend delegating specific activities and tasks to staff, including store management and bookkeeping.
By not having a store manager, you are spreading yourself too thin. There is not enough division of duties and cross-training happening. And there’s probably not enough people working for you.
Yes, you need to be making revenue to pay for them, but the headcount should have been accounted for in your initial projections and capital raise.
It also sounds like it may be a great time to hire a bookkeeper, give them the responsibility of tracking the financials and hold them accountable. Your GreenGrowth accountants can watch to make sure they are doing things right and can alert you of any sudden changes or problems that arise.
Oftentimes, operators can rectify some of these issues by hiring employees with strong management and financial skills. For more information on hiring people with strong transferable skills, check out this segment of our latest roundtable discussion.
Analyzing the Financial Problem
At the end of the day, it’s difficult to guess the problem, and best to analyze the results to identify your true issue areas. The first step is to analyze your financial statements to see where your cash is going.
Schedule a consultation with our team today to see how we can help you better understand your cannabis business financials!
You can further dissect the information specific financial ratios which can help you keep a pulse on the business without needing to constantly review entire financial statements.
Liquidity Ratios
Quick Ratio
The quick ratio is also commonly referred to as the “acid test” since it produces instant results on the company’s short-term position.
This ratio shows your ability to pay off all your current liabilities from your liquid assets.
A result of 1 is common and shows the company is financially stable to pay all their current liabilities.
A ratio under 1 means that the company is unable to pay their current liabilities with their current assets.
And a ratio over 1, for instance 1.5 means the company has $1.50 of liquid assets to cover each $1 of their current liabilities.
Watch how this ratio changes over time so you can identify trends and catch yourself before you become insolvent.
Current ratio
The current ratio shows your ability to pay off your current liabilities with your current assets. This can show how safe your company is and if it can strongly hold up during emergencies.
Days of Sales Outstanding
The next ratio, days of sales outstanding, is great for wholesalers.
It shows how much time it’s taking for you to turn your sales into cash.
This is great for you to know if you are over extending your business and have low working capital.
Need Help?
Even if you’re making millions in revenue, your cannabis business could still be struggling. To learn more about analyzing your cannabis business, then please contact our team of financial experts at GreenGrowth CPAs. We are here to help your cannabis venture through any level of the accounting, tax filing, or business cycle.
We employ several financial programs to assist the company with its fiscal responsibilities, including tax planning and compliance, outsourced CFO support, audit preparation, tax controversy support, and much more.
For recommendations and assistance with tax planning and accounting services, schedule a free consultation or contact us at 1-800-674-9050.
