If you want to run your cannabis business rather than having it run you, you should look at the ratios we call key performance indicators or KPIs. Just like baseball’s leadoff batters who measure their “on-base percentage” or doctors who measure their progress in curing diseases by improving the infant mortality rate, you can harness the power of these KPIs in your cannabusiness. And, the more valuable and profitable your cannabis operation becomes.
So in this week's episode, Chip talks about the seven KPIs you should start tracking in your cannabis business.
What to listen to next:
Episode 01 - The 10 Reasons Investors Say No to Your Cannabis Business
Episode 03 - The Secrets of Raising Capital for Your Marijuana, Hemp or CBD Business
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Hi there and welcome to this week’s episode of The Business of Kush podcast!
If you’re a new listener, a hearty welcome to what we think is quickly becoming one of the best business podcast for cannabis entrepreneurs. And, if you’re a regular listener and subscriber, thanks for joining us again this week. Really happy you’re here.
So, I’m Chip Schweiger, The Green Leaf CPA, and a 27-year veteran of public accounting and corporate finance, and also the founder and managing member of a CPA firm that helps marijuana, hemp and CBD businesses stay on the right side of tax, accounting, and compliance rules so you can focus on growth.
And, because we’re a firm that solely caters to the complex compliance needs of the cannabis community, we understand the unique challenges you’re facing.
So, this week let’s talk about something (actually, some things) that are very important if you want to run your cannabis business rather than having it run you, and that’s what we call key performance indicators or KPIs.
Baseball’s leadoff batters measure their “on-base percentage” – the number of times they get on base as a percentage of the number of times they get the chance to try.
Similarly, doctors in the developing world measure their progress not by the aggregate number of children who die in childbirth but by the infant mortality rate, a ratio of the number of births to deaths.
Investors and potential acquirers (if that’s a direction you might be headed in the future) also like tracking ratios and the more ratios (or KPIs) you can provide, the more comfortable they will get with the idea of being involved in your business.
Better than the blunt measuring stick of an aggregate number, a ratio expresses the relationship between two values, which is really what gives them their power.
And, that power by the way can be harnessed by you for your cannabusiness even if you want to run it forever.
So, here’s a list of seven KPIs to start tracking in your cannabis business now:
1. Revenue per employee
What: Net revenues divided by the number of “full-time” equivalent employees (“FTEs”). The resulting ratio will be listed as a dollar value.
Why important: Payroll is the number-one expense of most every cannabis business, which explains why maximizing your revenue per employee can translate quickly to the bottom line.
Business Insider estimated that Craigslist enjoys one of the highest revenue-per-employee ratios, at $3,300,000 per employee, followed by Google at $1,190,000 per bum in a seat. Amazon was at $1,010,000, Facebook at $920,000, and eBay rounded out the top five at $530,000.
What these mainstream businesses have done to measure and increase their revenue per employee can provide the same value to you, the cannapreneur.
2. Employees per square foot
What: Calculate the number of square feet of office space you rent and divide it by the number of “full-time” equivalent employees (“FTEs”)
Why important: You can judge how efficiently you have designed your space, which is especially important for dispensary operations. Commercial real estate agents use a general rule of 175–250 square feet of usable office space per employee. And, post-pandemic, this ratio will likely become even more important.
3. Sales per square foot
What: Gross sales divided by the square footage of all your operating locations.
Why important: By measuring your annual sales per square foot, you can get a sense of how efficiently you are translating your real estate into sales. Most industry associations have a benchmark and with real estate usually ranking just behind payroll as a business’s largest expenses, the more sales you can generate per square foot of real estate, the more profitable you are likely to be.
4. Gross margin per product
What: The individual gross margin, sales price minus cost divided by the sales price, tells you what products are most profitable and which ones have tight margins.
Why important: The adage of the 80/20 rules is super important: 80% of your sales come from 20% of your product lines or services regardless of the vertical you operate in. We recommend optimizing your offerings to the most profitable, and you can only do that if you know and track your grow margin by product.
5. Customers per account manager
What: How many customers do you ask your account managers to manage?
Why important: Finding a balance can be tricky. Some bankers are forced to juggle more than 400 accounts and therefore do not know each of their customers, whereas some high-end wealth managers may have just 50 clients to stay in contact with.
It’s hard to say what the right ratio is because it is so highly dependent on each industry, but in our industry if you’re a cannabis brand, for example selling to dispensaries, slowly increase your ratio of customers per account manager until you see the first signs of deterioration (slowing sales, drop in customer satisfaction).
That’s when you know you have probably pushed it a little too far.
6. Prospects per visitor
What: The proportion of your website’s visitors who “opt in” by giving you permission to e-mail them in the future.
Why important: Now, we all know we can’t sell most cannabis products on-line. But, your customers are checking out your website and you definitely want to develop a relationship with them.
Dr. Karl Blanks and Ben Jesson are the cofounders of Conversion Rate Experts, which advises companies like Google, Apple and Sony how to convert more of their website traffic into customers.
Dr. Blanks and Mr. Jesson state that there is no such thing as a typical opt-in rate, because so much depends on the source of traffic.
They recommend that rather than benchmarking yourself against a competitor, you benchmark against yourself by carrying out tests to beat your site’s current opt-in rate.
The easiest way of increasing opt-in rate is to reward visitors for submitting their e-mail addresses by offering them a gift they’d find valuable.
Information products (such as online white papers, e-books, videos or calculators) make ideal gifts, because their cost per unit can be almost zero. Discount “club member” cards for dispensaries are also a great idea.
What: Earnings before interest, taxes, depreciation and amortization. This is a mainstream financial concept, but it’s also THE financial concept for like the past 50 years.
Why important: EBITDA, and in our industry, EBITDA adjusted for the effects of IRC 280E, helps every business owner understand how truly valuable and profitable your company is.
And, because EBITDA it’s a measure of past profitability and an indication of future profitability. It’s that tried-and-true “acid test” to determine what companies are worth and it’s increasingly being applied to cannabis business too.
And, pro tip, we talk a lot about having regular communications with investors. EBITDA is one of the best KPIs you can share with investors because it’s so powerful to understanding the business and their investment.
Now with so many KPIs, it’s easy to feel overwhelmed by the amount of data you can use to uncover information about your business’s performance. I get it.
I think the trick here is really ensuring you’re collecting enough data to produce good KPIs.
If you haven’t already, consider incorporating a robust Point of Sale (POS) system and a CRM system to communicate with your POS tool.
Software and systems can help you maintain your books, think QuickBooks, but other more canna-friendly systems like XERO also include CRM modules.
Using these in conjunction with spreadsheets to keep your books in order and make producing management reports easier.
While you might be tempted to look at certain points in time, a singular moment only offers insight into one data point.
To analyze the entire history of your business’s financial performance, connect the dots to form lines.
These lines offer a more complete story of your business’s financial health. You’ll see whether things are improving, getting worse, or remaining the same. Analyze your data once per month during your first year in operation. Then, it’s best to perform analyses quarterly to gain the most insight possible.
While it’s essential to understand your metrics, it’s even more crucial to use the insight you gain as you track your KPIs. This is where you’ll develop your action plan.
For instance, if your average spend decreases, consider what could be causing this metric to drop. Look into your metrics and analyze your demographics. And, maybe look at the competitive environment around you. By diving into these key insights, you can uncover the root of the problem.
Check how demographics impact audience spending habits. Then, you can plan a course of action to push your average spend back to where it was.
This could be as simple as adjusting who you’re targeting on different social media platforms to reach the group responsible for driving down your average spend.
And, you know what, let’s do this.
Before we go, how about I break down for you some specific KPIs depending on your operation’s vertical? I think this could be helpful.
For cannabis manufacturers, I think it’s really:
Let’s say you have a cannabis delivery service, I’d track:
To sum it all up, if you can develop a healthy appetite for data, the more valuable you are able to make your business, and the more attractive your business will be.
KPIs are the tools large corporations use to increase profitability and the same tools are available to you.
Well, before we finish for this week, one last thing, and you know what it is, that’s a segment we call “news of the day”
And, there ya have it for this week’s episode.
And, just a reminder that if you have specific questions, please drop us a note at TheGreenLeafCPA.com/Listen.
There’s a form there for you to submit questions, or you can do it on social media with the hashtag bizofkush and I and my guests will give you our thoughts, live in future episodes.
And with that, we’re done for this week. Hope you’ll join us again. And, until then, have a great week.