Maximizing Cannabis Operations with KPIs
CannaBlog by Cory Parnell, COO of Bridge West CPAs
For business owners, Key Performance Indicators (KPIs) provide a critical lens for recognizing growth areas and potential challenges. Companies generally monitor KPIs such as revenue growth, revenue per client, profit margin, client retention, and customer satisfaction.
For cannabis business operators, KPIs are especially significant indicators. This is due to a slim margin for error in operating costs, a limited number of permissible deductions, and a high-performance expectation for every dollar spent. Optimally, cannabis businesses address data tracking through a combination of comprehensive operating procedures and technology, such as Enterprise Resource Planning (ERP) software. Additionally, recognizing the most relevant KPIs for each type of cannabis license is crucial. In this CannaBlog, we explore common KPIs in the cannabis industry and their nuances per license type.
In the cannabis industry, KPIs remain fundamental; however, we also encourage conducting an initial tracking exercise to aid in future data analysis. In addition, a daily operations spreadsheet can help observe and identify factors affecting productivity. Maintaining a historical performance record, including sales data for dispensaries or yield data for cultivation and manufacturing, can help cannabis operators identify business-specific trends. This data should be regularly reviewed — monthly in the first operational year and quarterly after that. Three KPIs that are common across license types include gross margin per product, labor costs, and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
For cultivators in the cannabis industry, it’s critical to closely monitor key metrics such as waste management costs, grow cycle time, yield, and environmental control performance. Each of these metrics holds significant implications for operational efficiency and overall profitability.
Waste management costs, for instance, are an important aspect of sustainable and cost-effective cultivation practices. Monitoring these costs allows cultivators to identify opportunities for cost savings and environmental stewardship, such as composting organic waste or recycling water.
Grow cycle time is another crucial KPI for cultivators. This metric tracks the total time from planting to harvesting. Shortening the growth cycle while maintaining or increasing yield can result in more yearly harvests and potentially higher revenue.
Yield, the total quantity of usable plant material produced per plant or square foot, is a fundamental indicator of a cultivation operation’s efficiency and effectiveness. Increases in yield can directly boost revenues, while decreases could signify problems that need to be addressed.
Lastly, the performance of environmental controls, such as temperature, humidity, light levels, and CO2 concentration, significantly impact plant health and yield. Efficient ecological management can enhance plant growth and prevent disease or pest infestation. Cultivators might track specific KPIs related to their environmental controls, such as energy usage of lighting systems or the effectiveness of their irrigation system, to ensure optimal growing conditions and efficient use of resources.
Processors in the cannabis industry need to pay close attention to key metrics such as cash-to-cash cycle time, manufacturing cycle time, throughput, capacity utilization, and work-in-progress inventory turns, each of which plays a crucial role in shaping operations and profitability. Working closely with operators’ management teams, Bridge West develops KPIs to meet operators’ goals.
For processors, cash-to-cash cycle time is an essential indicator which encompasses the period from the initial cash outlay for raw materials until payment is received from customers. Tracking this KPI allows manufacturers to understand how efficiently they manage their cash flow, which influences their financial stability and potential for growth.
Another vital metric is the manufacturing cycle time, which represents the total time taken from the commencement of the production process to the completion of the final product. By reducing this time, manufacturers can increase productivity and potentially lower costs, improving profitability.
The metric of throughput, which denotes the rate at which a facility produces a product or completes a process, can provide significant insights into the effectiveness of the production process. High throughput can indicate an efficient operation, while low throughput may highlight areas for process improvements.
Capacity utilization measures how effectively a manufacturing plant uses resources, particularly its maximum potential output. Optimizing capacity utilization can lead to more efficient operations and increased profits.
In the manufacturing sector, keeping track of work-in-progress inventory turns is key. This KPI shows how quickly a company can convert its work-in-progress inventory into finished goods. Faster turnover may indicate better efficiency and more effective inventory management, while slower turnover might signal bottlenecks or inefficiencies in the production process.
Bridge West helps processors determine the actual costs that are associated with grams produced or their costs to provide processing services. We ensure operators are not paying too much in sales and use tax related to purchase of equipment or certain supplies.
Dispensaries should concentrate on critical metrics, such as average sales, transaction time, discount usage, and customer retention. These KPIs can greatly influence their operations and
profitability. For instance, assessing average sales by focusing on average transaction value and average units per transaction offers a comprehensive understanding of customer purchasing behaviors. Tracking these aspects enables dispensaries to identify customer trends and adjust their strategies, including pricing modifications, offering bulk discounts, or promoting specific products.
Similarly, evaluating transaction time is essential. This key indicator reflects the efficiency of the sales process from the moment a customer enters the dispensary to the completion of their purchase. Identifying bottlenecks in this process can help dispensaries streamline their operations.
Monitoring discount usage is also valuable as it provides insights into how discounts or promotions affect sales volumes and customer acquisition. If specific deals or promotions contribute significantly to sales or bring in new customers, it’s a sign they are worth retaining.
Customer retention is also a vital KPI. A higher retention rate signifies customer satisfaction and loyalty, while a lower rate may point to areas that need improvement to enhance the overall customer experience.
Vertically integrated cannabis companies, stand-alone businesses, and multistate operators (MSOs) have different data tracking needs. For vertically integrated cannabis companies one fundamental KPI is the Supply Chain Cycle Time. This KPI measures the total time taken from seed to sale, capturing the efficiency of the end-to-end process. Any production, processing, or sales bottlenecks will extend this time and may indicate areas that require improvement.
Another critical KPI for vertically integrated cannabis companies is the Integrated Gross Margin. This measures the combined gross profit from cultivation, manufacturing, and retail operations, before operating costs. This KPI can help identify the profitability of each segment and inform decisions regarding resource allocation.
Inventory Turnover Rate is another relevant KPI, tracking how often the company sells its inventory in a given period. A high turnover rate could signify robust sales and insufficient stock, potentially losing sales. Conversely, a low turnover rate could signal overstocking or sluggish sales.
Vertically integrated cannabis companies should also monitor the Sales per Square Foot KPI. This metric, often used in retail, can be adapted to consider the entire vertical operation, providing insights into efficiently utilizing the business’s physical space.
Measuring Customer Acquisition Cost (CAC) across the different operations is also essential. Given the varied channels through which a vertically integrated company can acquire customers, understanding the CAC helps optimize marketing spend and strategy.
For cannabis operators, identifying, tracking, and measuring KPIs provides insights beyond operational efficiency. KPIs contribute to investor attractiveness by demonstrating business performance and the potential for growth. While cannabis companies might consider handling KPIs independently, engaging industry-savvy ancillary firms like Bridge West CPAs & Advisors can be critical and valuable. Our experienced industry advisors aid cannabis businesses in identifying relevant KPIs, offering solutions for data collection and analysis, and guiding them toward achieving their goals.