Reduce Cannabis Business Expenses: Know your burn rate
In this post, Quantum 9 marijuana consultants discuss simple methods to reduce your cannabis business expenses: review your books and take action from what you see reflected. “Understanding your daily, weekly and monthly burn rate is vital to keeping expenses in check. Knowing your numbers also allows you to understand what you need to sell to keep the lights on.” Michael Mayes, CEO and Founder of Quantum 9, Inc., in an interview with Forbes.
Is your cannabis business losing money over the past few months, years? Are your capital reserves dwindling? Are your profits just covering base operating costs, or do you see your cash intake and profits growing?
Do you have a high burn rate?
Understand your burn rate
What is burn rate? Burn rate is the rate at which your business spends its supply of cash over time. It is the rate at which your business is losing money. It is a key factor in determining the viability of your company. If your cash flow rate is negative, you need to turn this around so that you have capital available to invest and advance your firm.
Cannabis business expenses can add up quickly. It is crucial to track the output of all your expenses and evaluate what is working for you right now. Evaluate what you should keep from your business model, and eliminate that which no longer serves your needs.
Review your business’s current core activities. Are they running smoothly? Are they efficient? Do you see glitches in expenses, and within what parameters?
A high burn rate in your cannabis business is usually a sign that something is amiss. By reviewing your cash flow statements regularly, you will be able to recognize monthly patterns and even seasonal and quarterly patterns. You can then readjust and make minor tweaks in your business planning for the coming months. And readjust.
Some business owners can take minor steps to eliminate expenses to reduce their burn rate and put their business back on the right track to positive cash flow. Other business owners need to take major steps, impacted by pandemic cost increases and stresses on the global market. They may decide to alter the direction of their company on a larger scale.
Reduce your cannabis business expenses
The first place a cannabis business owner might look for improvement opportunities is in their sales process or workflow. A very necessary but also a very large expense for many cannabis companies is payroll. No business owner wants to lay off personnel; however, staffing is one place to look for when trying to greatly reduce cannabis business expenses.
“In times of uncertainty or lack of business, one of the hardest pivots is in staffing. The emotions on both sides of the table are almost insurmountable, but the mature thing to do is make the necessary cuts to save the company. A middle-of-the-road solution would be to move staff to 1099 employees and bill hours as needed.” Michael Mayes, in Forbes article on critical considerations in business planning.
When you’ve come to the decision that payroll costs are a burden bigger than your company can sustain at its current burn rate, you must weigh the long-term costs. Your employees are vital to the growth, longevity, memory and purpose of achieving your company goals. Their productivity provides great community benefits, a classic component of most marijuana license application reviews.
Payroll costs are cash out, but happy, productive and creative employees bring cash back into your company and the community and sustain mutual vitality. When making necessary reductions in costs, choose wisely.
Business savings are found in the details
When analyzing your cash flow statements, you may find other less drastic expense cuts to make than payroll. Such expenses, although they may be small, will certainly add up. Cannabis business owners often pay attention to the cost of shipping due to product inventory, but neglect to track the ongoing costs for facility and office equipment, supplies and packaging. Quantum 9 has years of experience with cannabis consulting since its inception with the push for access to medical marijuana, to current times where recreational marijuana is being legalized across the nation. Our cannabis consulting firm focuses on the minute yet crucial details and will help you eliminate waste in your business strategies so that you can achieve your aspirations!
It may seem to go without saying, but taking simple steps does a world of good for your cannabis business. Review small monthly expenses that may have been vital at one time in your business plans. These may include outdated inventory tracking software and subscriptions to any software you no longer use. Such expenses eat up capital in small increments. Do you need these expenses? If they are not crucial to the health and vitality of your business, weed them out so you can devote your cash to more vital expenses, such as payroll, equipment improvements, and marketing.
Unless your cannabis company is in a start-up phase, a high burn rate is usually a signal that something is amiss. Your core business activities may have settled into a routine in which an ongoing expense is no longer valid for your current operations. Such expenses may be holdovers from earlier periods in the evolution of your business. Cut them out.
Analyze your cannabis business expenses
You might think you have a good handle on the day-to-day running of your business, but it’s essential to look at the long-term picture and plan accordingly. Two ways to do so are to examine your financial statements. Two types, in particular, are useful:
1. The profit and loss statement (P&L) summarizes your revenues, costs, and expenses during a specific period of time, typically monthly and annually. It is an accounting tool that shows you what your sources of income are versus your expenses. It is an excellent long-term view of your business’s financial health.
The P&L will allow you to compare your profit and loss margins over months or years. However, it does not include important expense details, such as business loan payments, business credit card payments or any cash draws you make as the owner. For accounting purposes, these types of outflows are not tracked in a P&L.
The P&L may show your business is consistently making a profit, but it won’t reflect the amount of cash passing through your business. In other words, it cannot show whether you have good cash flow.
2. The cash flow statement will do that. It shows how cash moves through all operating, investing, and financing activities of your company. Do you have positive cash flow coming in this week to pay the invoices that came in last week, or are you juggling expenses? Do you have a negative cash flow?
A cash flow statement should be updated weekly and is best for analyzing the short-term health of your cannabis business. After all, you want your cannabis business to thrive, not just exist!
Where do you reduce cannabis business expenses?
Profitable companies can rest upon their laurels or choose to improve their business model and streamline their operations. They walk a fine line between changing too much or just enough. Where can you fine-tune your business to reduce expenses to that which is necessary and working well? Ultimately, you want to nurture that which brings joy and growth to your business. Nurture that which is just right to uphold the aims of your business model.
First, examine how your cannabis company is doing in each of the prime factors at play for success:
- customer engagement
You may not want to make any cuts in expenditures where you are witnessing excellence in these areas. If the major divisions of your company are operating smoothly, you may be able to find weaker points in your business operations where you can reduce expenses.
The options vary widely, depending on the stage of your company’s growth. Weaker points may be seen in the day-to-day, week-to-week operations, or they may lie in a top-heavy managerial-focused strategy. Quantum 9 marijuana consulting will help you precisely adjust your cannabis business strategies to bring your company to its highest level of performance and effectiveness!
Did you initially intend to have a fully staffed dispensary 12 hours a day? Can the hours be cut, or the personnel? Are your customers raving about your 24 hours available service? Did you just hire three new regional assistant managers? Are you considering a potential maintenance contract for an innovative piece of manufacturing equipment?
Address questions such as these as you determine what is working best for your company’s direction and what is not working well. Our cannabis business planning consultants welcome your questions about refining expenses and are happy to discuss detailed strategies to fit your specific needs.
Typical start-up costs and ongoing expenses for cannabis businesses
Classic start-up cannabis business expenses come in several stages.
Initially, there are application fees, license fees, annual registrations and renewal fees. None of these expenses can be reduced. There are also taxation costs, real estate costs, equipment and facility build-out costs. Extensive renovations may be needed. Everything from landscaping to security and camera installation is up-front costs, but will also require ongoing maintenance costs.
In the initial stage, expenses must also be allocated for professional service providers, including:
- security advisors
- technical operations advisors (quality assurance, cultivation, production, information technology, inventory and marketing)
- general contractors
Ongoing expenses for a cannabis business
The typical largest expenses for a cannabis business that has already received its cannabis licensing and is in full operation include the following:
- rental lease or mortgage/facility and property costs, including taxes
- information technology
- general staffing (quality assurance, head cultivators, production, dispensary managers, sales, customer service, etc)
These are the most common expenditures in cannabis businesses. To break them down further to reduce unnecessary expenses, you will need to take a look at your books. As Michael Mayes of Quantum 9 says, “You can’t optimize what you can’t track.”
Simple tools for you in marijuana consulting
Whether your cannabis company is in the start-up full-steam-ahead stage, or mature and established in its operations, there are simple tools to reduce cannabis business expenses. Quantum 9 cannabis consulting connects your business with the professionals necessary to execute your cannabis business goals, including expert lawyers and accountants who have specialized in cannabis consulting through its various manifestations on the path to legalization.
In summary, a cash flow statement is one of the best tools to examine your burn rate. The quickest way to track and get a strong handle on your start-up and ongoing business expenses is by looking at your cash flow statements to understand your burn rate. If you know your company’s burn rate day in and day out, you may not need to sell assets to keep the lights on!
Contact our expert cannabis consultants at Quantum 9 to discuss your business planning and licensing strategies for a lean and thriving marijuana business!