Understanding and Optimizing Your Cannabis Business Overhead Ratio

Understanding and Optimizing Your Cannabis Business Overhead Ratio

Cannabis retailers often stress about how much money to pour into their business with so much uncertainty shrouding the industry. Might regulations change? For better, or worse?

This leaves many struggling to justify large overheads, even if they sense it would help the business to scale.

What is an optimal cannabis business expense ratio?

So, when are overheads too high as a marijuana business?

This line of questioning is actually misleading though. Rather than focusing on absolute figures, it’s more useful to think of overheads as a ratio. i.e. as a percent of revenue.

This seems intuitive, but it’s a fact that’s often lost on many inexperienced cannabis entrepreneurs who are perhaps setting up shop for the first time, and so who aren’t used to unexpected bills pouring in and expenses cropping up.

Cannabis business expense ratio example

To illustrate, here’s an example demonstrating that a focus on overhead ratio, rather than an absolute amount, is a more accurate key performance indicator.

For the sake of argument, let’s imagine your dispensary produces 1,000 pre-roll joints a month for $5,000 (overhead) then sells them at $10 each for $10,000 (revenue). This means your overhead ratio is 50 percent i.e. 5,000/10,000 x 100.

That seems a little high, which could put you off investing in more staff or equipment even if it could potentially increase total revenues.

With another rolling machine, for example, your costs would increase but so would productivity. As a result, your overhead ratio could become lower.

To illustrate again, if thanks to this new machine, you were now able to produce 2,000 pre-roll joints a month for $7,500 (overhead) but are still able to sell at the same price, your revenues would be $20,000.

This would leave you with a more appealing overhead ratio of 37.5 percent i.e. 7,500/20,000 x 100.

Long-term, this is a much more reliable indicator of the health of your business than simple expenses, especially in a high-growth industry like marijuana.

About Brian Ellis

With 6 years' experience in business journalism, Brian is the person we turn to for anything related to the business of cannabis. His news coverage spans topics including marijuana business and finance. Brian's work features on marijuanareferral.com, marijuanamerchantaccount.com and marijuanainsuranceagent.com.