In a past post, we identified that one of the main reasons licensed cannabis businesses don’t invest in their data systems and reporting is because they’re not sure what they would do with it.

In this post, we’ll cover the top 3 reports that we believe every licensed Cannabis business (and really every business in every industry) should be watching like a hawk.  It doesn’t matter if you’re a dispensary, grow, or infused producer working the recreational or the medical markets, you absolutely need to be tracking these reports!

As we’re going through each report, if this seems like it’s involved or complicated, well that’s because it used to be!  With the modules we provide, you simply plug in your software(s) or upload your files and days later we send you intuitive reports as well as insights & strategies specific to your business.  Doesn’t get any easier than that!

Top 3 reports for all licensed cannabis businesses

The top 3 reports that every owner or manager should review are:

1. Gross Profit Margins
2. Net Profit Margins
3. Customer / Patient Lifetime Value

1) Gross profit margins for cultivators, manufacturers, distributors, and retailers

Every business needs to be profitable to survive, and on a very basic level, that means that people pay you more money for your product than it costs you to sell it. The ratio of cost of goods sold (COGS) to the revenue is referred to as the gross margin.  In other words, this report answers the question, “How much money did I make on this transaction?”

In more mathematical terms, this condition can be defined as [Gross Profit] = [Revenue from product] – [Cost of that product] and [Gross Profit Margin] = [Gross Profit] / [Revenue]

It’s important to remember that the COGS for a given sale are more than just the product itself.  Specifically, if you are selling flower then you probably have to put it in a bottle or other container.  The cost of the container should be included in the COGS for that sale, along with any labels, packaging, or other elements that are included as well.  Things like the electricity & labor will be captured in other areas, so a good rule of thumb here is “anything in the bag” that the customer walks away with counts towards COGS.

Report Inputs:

• Product costs (usually from purchase orders, batches, invoices, or Quickbooks)
• Line item sales (including any discounts and each product sold on each transaction)

Report Analysis:

• Margins by date range (day, week, month, quarter)
• Margins by product category (flower, concentrate, edibles, etc.)
• Margins by grower / vendor / supplier
• Margins by budtender / register

Report actionable insights:

• Decrease discounting strategy on low-margin items
• Incentivize more high-margin purchases with sales & marketing campaigns
• Renegotiate supply contracts with outlier vendors
• Develop performance-based bonuses for employees

Expected report outcomes:

• Improve margins across product categories & vendors
• Improve bottom line by selling more high-margin products
• Empower employees to directly benefit the business

2) Net profit margins for cultivators, manufacturers, distributors, and retailers

After you can confidently say, to the penny, how much you are earning on any given transaction, it’s important to zoom out a little bit and fold in the costs of staying in business above and beyond the product costs.  Typically, these are costs you pay every month and don’t depend on sales volume (i.e. space rental) or is loosely related with sales volume (payroll goes up in chunks as sales grow).  Practically speaking, it’s all other costs outside what we already counted in our first report, and the ratio of all costs to the revenue is known as the net margin.  In other words, this report answers the question, “How much money did I make overall?”

In more mathematical terms, this condition can be defined as [Net Profit] = [Gross Profit] – [Overhead] – [Payroll] – [Services] – [Amortized Capital Investments] and [Net Profit Margin] = [Net Profit] / [Revenue]

Overhead includes things like rent & utilities as well as other general office expenses such as the paper in your printer.  Payroll includes any W2 employees or 1099 contractors while services are things you pay other companies to do for you such as cleaning or marketing.  Lastly, capital investments are usually big purchases such as equipment or construction that get used for a long time and whose cost is spread out (=amortized) for the length of the investment period.

Report Inputs:

• Gross profits (from first report analysis)
• Overhead costs (location rent, water, gas, telephone, internet – usually as PDF or spreadsheets)
• Payroll costs (employees & contractors  – usually in HR software or spreadsheets)
• Service costs (accounting, legal, marketing, janitorial – usually as bank statements, invoices, PDFs or spreadsheets)
• Capital investment costs (financing, construction costs, fixed assets, computers + IT – usually as spreadsheet)

Report Analysis:

• Cost categories by date range (day, week, month, quarter)
• Fixed asset amortization schedule
• Payroll to profit & employee utilization
• Net positive / negative profit trends

Report actionable insights:

• Cost categories that are over-represented and can be reduced
• Total cost of all the build outs and gear in the space
• Days when employees managed customer flow better or worse
• Identify days you lost money and why

Expected report outcomes:

• Reduce costs for categories that are out of balance
• Develop a “payback” plan that accounts for all investments
• Identify areas for increasing employee efficiency
• Increase net margins by understanding, and managing, the core drivers

3) Customer / patient / buyer lifetime value (LTV)

Now that you can answer how much money the company is making overall, it’s time to turn your attention to your customers, patients or buyers.  If you have any more than 1 person or business that pays you money, it’s critical to keep track of how much they have purchased from you overall.  More often than not, there is a distribution of high- , mid- , and low-value customers, and each one often has a different set of needs and desires.  In the first stages of learning about your customers, this report answers the question, “How much money did each customer spend with us so far?”

In more mathematical terms, this condition can be defined as [Customer Lifetime Value] = [Total Product Purchases] – [Total Discounts] – [Cost of Customer Acquisition]

The product purchases less discounts is the total on the receipt (not including taxes that go to the state) and the cost of customer acquisition (COCA) refers to any marketing or sales efforts.  Technically, a “sale” or “deal” that brings in a new or returning customer should be counted as the COCA for that transaction and represent lost revenue.

Report Inputs:

• Patient demographics
• Gross margins
• Net margins
• Sales

Report Analysis:

• Total sales since inception = # and $ of orders logged under any given patient / customer
• Total coupons / discounts = # of coupons utilized and % of discounted orders
• Total discounting = lost revenue from discounting
• Net & gross margins = bottomline earned by patient / customer
• Averaged stats = raw stats + comparison to other patients / customers

Report actionable insights:

• Average order frequency (how many transactions per month?)
• Average order totals (how much do they buy in any given transaction?)
• Discount totals (how often and how much do they get discounted?)
• Average lifetime (how many times do they come back before they stop coming back?)
• Total lifetime value (how much does an incremental customer buy?)
• Buckets of low-, medium-, and high-value patients / customers

Expected report outcomes:

• Set cost threshold for new patient / customer acquisition via marketing / sales campaigns
• Develop campaigns to retain & increase value of frequent patients / customers
• Develop campaigns to incentivize one-time patients / customers to return
• Empower employees to drive patients / customers to more profitable campaigns
• Improve the portfolio of campaigns & ratio of discounted to non-discounted orders
• Incentivize high value patients / customers to keep coming back

These 3 reports set a strong foundation and have clear, far-reaching implications for any organization smart enough to use them.

Now its your turn – do you currently track gross and net margin?  How closely do you track those reports?  Do you have a lifetime value set for your new and returning customers?  Do you see the direct positive impact having these three reports will have on your business?

Feel free to drop us a line on our contact page and we’re always happy to hear from you!