Small Cannabis Store

Are You Capturing Your Costs? Do You Know Your Margins?

You can excuse cannabis entrepreneurs for focusing on regulation and taxation. But to understand their productivity and profitability, they need to focus more on cost accounting—that is, on understanding their actual costs in real time.

You can’t make money if you don’t know your costs. And if you don’t know your actual margins, you don’t know the value of your business. Manufacturers need a cost accounting model that gives them a precise understanding of all the elements involved in their manufacturing process. But most are incorrectly reporting their costs to manufacture their products on their financial statements.

Understanding your costs comprehensively is critical. If you don’t know how much it costs to make your product, you can’t know how to price it. Cannabis manufacturers must be able to compile all costs, starting at the beginning of their process, from buying the raw material, and walking through every step of their process. But many tend to overlook costs, such as overhead, including the costs associated with operating their facilities, and the cost of labor, including idle and down time. To ensure you are including all relevant costs, you need a cost accounting model. Only then can you determine your actual margins and profitability.

A cost accounting model will also reveal anomalies and inconsistencies. Once your standards are established and implemented in a model or system, you can identify variances from those standards—resulting from more employee hours than predicted, a change in the process, etc.—allowing you to determine reasons for inefficiencies that can then be addressed and resolved.

Understanding your true costs and margins in real time is critical to your valuation should you decide to sell or if you are applying for credit. A buyer wants first to know what they can expect in return on their investment (ROI). In the manufacturing space, gross margin, or gross profit, is the most critical component for determining ROI. Many cannabis manufacturers have been determining gross profit by estimating their gross margins. But if they inappropriately allocated costs to their cost-of-goods-sold, they sacrifice their margins, and therefore their valuations. It is another call for a viable, comprehensive, and expertly developed cost accounting system.

A cannabis entrepreneur must be able sit with a buyer or, if you’re borrowing, a creditor, and explain how your business makes money. Too often manufacturers don’t know their actual margins until well after their year-end accounting. Investors want to know your margins in real time, and with a cost accounting model established for your business, you can produce real-time financial statements.

There are no standardized cost accounting models for the cannabis industry. Given the federal legal status of our industry and the hesitancy of some banks to do business with our companies, many of the major accounting software providers have chosen not to accommodate the cannabis industry; some are treating the industry with hostility. HBK Cannabis Solutions is building customized cost accounting models for our cannabis clients. We detail the client’s manufacturing process and every cost component in that process for the client to enter their numbers into their model each month. The models are detailed to the point of individual SKUs, so the manufacturer can make decisions about production based on real-time knowledge of the margins for each of their products.

Cost accounting is critical to your profitability and your valuation. For more information or to schedule a meeting an HBK Cannabis Solutions professional, call us at (239) 263-2111 or email me at cmarrie@hbkcpa.com.

About the Author(s)
Chris is a Principal in the Naples, Florida office of HBK CPAs & Consultants and has been with the firm since 1998. He is also Director of the firm's Cannabis Solutions Group in the southern tier of the firm's service region. Chris has been instrumental in the growth of HBK’s Cannabis Solutions Group. He has worked extensively with clients in all facets of the cannabis industry. Among his credits:
  • Understanding of “care-giver” and licensing requirements for the State of Michigan from compliance and administrative standpoints, and engaged in prospect meetings with Michigan-based “care-givers” on the grandfather clause and their responsibilities for future licensing
  • Understanding of the State of New Jersey licensing requirements from compliance and administrative standpoints
  • Structuring agreed-upon procedures engagements for licensing requirements of the State of Michigan, which have been used successfully in the licensing process
  • Structuring of agreed-upon procedures engagements for licensing requirements for Canadian citizens in the State of Michigan, which have been used successfully in the licensing process
  • Review and analysis of corporate structures common in the industry to maximize efficiency and minimize administrative and regulatory issues
  • Review and analysis of licensing and intellectual property agreements for genetics-based cannabis businesses developing and marketing new plant strains
  • Consultation with oil pen cartridge manufacturers to refer supply chain agreements to legal counsel with industry knowledge and review tax implications and application of 280E to businesses indirectly supporting the cannabis industry
Chris also has extensive experience in auditing and business consulting. Chris provides a variety of accounting and assurance services to clients including individuals, businesses and non-profits. He is a member of HBK’s Construction Solutions Group and received the designation of Certified Construction Industry Professional (CCIFP) from the Institute of Certified Construction Industry Professionals, Inc. (ICCIFP). ICCIFP is a not-for-profit corporation established to promote the highest standards of construction financial management through the credentialing of construction financial professionals. He also serves as a member of the Quality Control Group reviewing audits as well as serving as Audit Principal on accounts in HBK’s southwest Florida offices.
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

RECOMMENDED ARTICLES