When developing a budget for your business, there are a lot of factors to consider, such as revenues, expenses, build-out costs, the industry, inflation-related trends, and much more.
Here, Naomi Granger, founder of the National Association of Cannabis Accounting and Tax Professionals, shares critical factors for cannabis businesses to consider when building their budget for 2023 and how they can plan for the potential impacts of inflation in the new year.
1. Track existing data to access revenue numbers.
The first place to start is the dispensary point-of-sale system. “[Retailers] should be able to see how many transactions they’re doing on a weekly basis and what their average basket price is per transaction,” Granger says. “If you multiply the total transactions times the average ticket price or average basket price per transaction, you can get how much you should expect to earn on a weekly, monthly, or annual basis.”
2. Evaluate the cost of goods sold (COGS).
Retailers must determine how much it costs for them to buy product from cultivators, Granger says, which depends on the fluctuating wholesale price per pound in that market. “A lot of times … maybe 50% to 60% of your revenue is probably going to be your cost of that product,” she says.
This COGS calculation is also vital for allowable tax adjustments under IRS Code Section 280E.
3. Consider pay, benefits and other employee costs.
Determine hours of operation and how many full-time staff members are needed to fulfill those hours, Granger advises, and hire employees based on the location size to cater to customer volume.
Consider employer taxes and regulations such as minimum wage, employee rights, and full-time equivalents when determining these costs.
“You have to look at what the total cost of that [employee] will be,” Granger says. “For example, if an employee’s salary is $60,000, employer taxes may be another 12 to 15 percent on top of that. … You have to think about how much you’re paying out. And if you’re going to offer benefits, factor those in as well. How much is that going to cost per employee per month?”
Granger suggests owners keep their annual payroll between 15% and 30% of their revenue.
4. Evaluate utility costs.
Although utilities run much higher for cultivation businesses, retailers also need to factor in electricity, water and more into their 2023 budgets.
5. Factor in state-specific cannabis tax requirements.
Aside from federal and state income tax and license registration requirements, “there’s also marijuana retail tax and marijuana cultivation taxes, which are reports that you file on a monthly or quarterly basis and pay to the state on your sales, on top of just your income tax reports,” Granger says. “So, depending on their state and their vertical, they need to be budgeting their license renewal fees, their excise tax, sales tax and income tax.”
6. Look at security spend.
Some states may require businesses to have on-site security guards, a specific number of cameras, key fobs, and so on, and these costs can add up quickly.
7. Plan for inflation to continue.
“Price compression is also a huge thing that’s happening. Because of inflation, people are trying to demand lower prices down the line from the vendors so that they can turn a profit,” she says. “So, with the price compression, they need to … scale down.”
8. Monitor budgets and conduct a budget-vs.-actuals analysis monthly or weekly.
“If [retailers are] looking at their average weekly transactions and their average cost per transaction and they’re seeing that the volume is dropping, like if they expected 200 transactions a week and they’re only getting 180, ... they need to start actively making adjustments for that decrease in revenue,” Granger says. CD
