Key Performance Indicators in Cannabis Business Operations
Key performance indicators (KPIs) help business operators identify areas of growth and concern within their business operations. In the cannabis industry, this is especially important given the slight margin for error that cannabis companies have when dealing with operating costs. Cannabis companies are limited in the deductions they can take and every dollar spent has to perform far and above dollars spent by traditional businesses. Therefore, it is essential for a cannabis business to identify the KPIs that matter most for their license type. Vertically integrated companies have more data types to track versus stand-alone operations, and multistate operators (MSOs) have the significant task of tracking data points across multiple states and markets. This undertaking is best realized through clear operating procedures that outline data collection and use technology like enterprise resource planning (ERP) software. In this CannaBlog, we discuss some KPIs that cannabis businesses have in common and where they may diverge by license type.
Across Cannabis License Types
In general, when companies look at KPIs they track revenue growth, revenue per client, profit margin, client retention, and customer satisfaction. In the cannabis industry, many essential KPIs are the same; however, we recommend performing initial tracking to aid in future data collection and analysis. We also recommend maintaining a spreadsheet of daily operations to track statistics such as activities that cover personnel and events that contributed to or impacted productivity. Although these steps may seem tedious, they can help identify crucial factors affecting productivity in a timely enough manner. This allows owners opportunities to make corrections before they become too costly.
Maintaining historical performance records, whether it is sales data for dispensaries or yield data for cultivation and manufacturing, helps identify trends specific to cannabis business operations and locations. During the first year of operation, this type of data should be reviewed monthly to identify trends specific to the company. Once the first year of operation has passed, these reviews can move to a quarterly schedule. There are at least three indicators that are common throughout the three main license types:
- Gross margin per product, which refers to the amount of money made from the production and sale of a product;
- Labor costs; and
- EBITDA, which represents earnings before interest, taxes, depreciation, and amortization.
Cannabis business owners need to be aware of these KPIs, although they may look a little different for each license type. Some cannabis license holders need to focus on different KPIs to make the adjustments necessary to improve performance.
- Dispensaries should consider the following KPIs to measure their performance:
- Average sales both in dollar amount and number of units. This helps determine the following:
- Sales team performance;
- Opportunities to increase sales;
- Consumer trends;
- Ideal price points;
- The impact of any changes to store layout or display design; and
- The potential impact of the dispensary location.
- Average time for each transaction to identify areas for improvement in the sales process and/or store workflow. If transactions take too long, customers may become frustrated and this can impact customer retention and sales. Common issues that increase transaction times include:
- Insufficient or problematic point-of-sale (POS) software;
- Staff training issues;
- Labeling issues;
- Lack of inventory;
- Lack of trained personnel to assist customers; and
- Store layout or size.
- The use of discounts and types may help or harm product sales. Monitoring and tracking help determine which discounts are beneficial to sales and which ones are not.
- Customer retention and frequency impact the dispensary’s performance and profitability. Dispensaries that don’t receive a lot of new foot traffic should consider opportunities to entice and encourage new customers. Such strategies include incentive programs for current customers and specials for first-timers. Dispensaries that receive greater numbers of new versus returning customers may want to investigate factors that may be discouraging consumer loyalty, such as:
- Sales by category
- Sales by vendor
- Par level
Cultivators should consider the following KPIs to measure their performance:
- Waste management costs
- Grow cycle time
- Environmental control performance
For example, cultivators may want to track the performance of their lighting. This feedback is used to determine product outcomes and ensure proper predictive maintenance. Such best practices can prevent unnecessary downtime in the grow room or changes to the growing environment.
Manufacturing facilities should track the following KPIs as a measure of their performance:
- Cash to cash cycle time;
- Manufacturing cycle time;
- Throughput and capacity utilization;
- WIP inventory slash turns;
The Benefits of an Experienced Ancillary Firm
For cannabis businesses, identifying, tracking, and measuring KPIs does more than just increase efficiency within operations. It is essential to understand how well the business is operating and identify areas for improvement. These tools can aid in attracting investors and provide the information they need to decide whether to invest or not. Although a cannabis company may be tempted to identify KPIs on their own, it is important to consider relying upon the industry expertise of ancillary firms that are experienced in these types of evaluations. A cannabis industry expert, like Bridge West CPAs & Advisors, can help a cannabis business identify the KPIs that will provide the data needed to measure growth toward the company’s goals. Our experienced team of advisors can also help to identify and select software and resources to alleviate the headache of data collection and analysis. We invite you to contact Bridge West and learn more about how our industry-specific accounting, tax, and advisory services help cannabis business owners meet and exceed their goals.
Cory Parnell, CPA, is the Chief Operating Officer of Bridge West LLC, CPAs & Advisors to the cannabis industry. For more information about KPIs or to schedule a confidential consultation, contact Cory at email@example.com or 651-287-6327.