Baseball’s leadoff batters measure their “on-base percentage” – the number of times they get on base as a percentage of the number of times they get the chance to try.
Similarly, doctors in the developing world measure their progress not by the aggregate number of children who die in childbirth but by the infant mortality rate, a ratio of the number of births to deaths.
Investors and potential acquirers (if that’s a direction you might be headed in the future) also like tracking ratios. And the more ratios (or KPIs) you can provide, the more comfortable they will get with the idea of being involved in your business.
Better than the blunt measuring stick of an aggregate number, a ratio expresses the relationship between two values, which is really what gives them their power.
And, that power by the way can be harnessed by you for your cannabusiness even if you want to run it forever.
So, here’s a list of seven KPIs to start tracking in your cannabis business now:
Revenue per employee
What: Net revenues divided by the number of “full-time” equivalent employees (“FTEs”). The resulting ratio will be listed as a dollar value.
Why important: Payroll is the number-one expense of most every cannabis business. And, maximizing your revenue per employee can translate quickly to the bottom line.
Business Insider estimates that Craigslist enjoys one of the highest revenue-per-employee ratios, at $3,300,000 per employee, followed by Google at $1,190,000 per bum in a seat. Amazon was at $1,010,000. Facebook at $920,000. And, eBay rounded out the top five at $530,000.
What these mainstream businesses have done to measure and increase their revenue per employee can provide the same value to you, the cannapreneur.
Employees per square foot
What: Calculate the number of square feet of office space you rent and divide it by the number of “full-time” equivalent employees (“FTEs”)
Why important: You can judge how efficiently you have designed your space, which is especially important for dispensary operations. Commercial real estate agents use a general rule of 175–250 square feet of usable office space per employee. And, post-pandemic, this ratio will likely become even more important.
Sales per square foot
What: Gross sales divided by the square footage of all your operating locations.
Why important: By measuring your annual sales per square foot, you can get a sense of how efficiently you are translating your real estate into sales. Most industry associations have a benchmark. And, with real estate usually ranking just behind payroll as a business’s largest expenses, the more sales you can generate per square foot of real estate, the more profitable you are likely to be.
Gross margin per product
What: The individual gross margin, sales price minus cost divided by the sales price, tells you what products are most profitable and which ones have tight margins.
Why important: The adage of the 80/20 rules is super important: 80% of your sales come from 20% of your product lines or services regardless of the vertical you operate in. We recommend optimizing your offerings to the most profitable. You can only do that if you know and track your grow margin by product.
Customers per account manager
What: How many customers do you ask your account managers to manage?
Why important: Finding a balance can be tricky. Some bankers are forced to juggle more than 400 accounts and therefore do not know each of their customers, whereas some high-end wealth managers may have just 50 clients to stay in contact with.
It’s hard to say what the right ratio is because it is so highly dependent on each industry. But in our industry, if you’re a cannabis brand selling to dispensaries, for example, slowly increase your ratio of customers per account manager until you see the first signs of deterioration (slowing sales, drop in customer satisfaction).
That’s when you know you have probably pushed it a little too far.
Prospects per visitor
What: The proportion of your website’s visitors who “opt in” by giving you permission to e-mail them in the future.
Why important: Now, we all know we can’t sell most cannabis products on-line. But, your customers are checking out your website and you definitely want to develop a relationship with them.
Dr. Karl Blanks and Ben Jesson are the cofounders of Conversion Rate Experts, which advises companies like Google, Apple and Sony how to convert more of their website traffic into customers.
Dr. Blanks and Mr. Jesson state that there is no such thing as a typical opt-in rate, because so much depends on the source of traffic.
They recommend that rather than benchmarking yourself against a competitor, benchmark against yourself. You can do so by carrying out tests to beat your site’s current opt-in rate.
The easiest way of increasing opt-in rate is to reward visitors for submitting their e-mail addresses by offering them a gift they’d find valuable.
Information products (such as online white papers, e-books, videos or calculators) make ideal gifts, because their cost per unit can be almost zero. Discount “club member” cards for dispensaries are also a great idea.
What: Earnings before interest, taxes, depreciation and amortization. This is a mainstream financial concept, but it’s also the financial concept for the past 50 years.
Why important: EBITDA, and in our industry, EBITDA adjusted for the effects of IRC 280E, helps every business owner understand how truly valuable and profitable your company is.
EBITDA is a measure of past profitability and an indication of future profitability. It’s that tried-and-true “acid test” to determine what companies are worth and it’s increasingly being applied to cannabis business too.
► Pro Tip:EBITDA is one of the best KPIs you can share with investors because it’s so powerful to understanding the business and their investment.
Producing Good KPIs Is Important
Now with so many KPIs, it’s easy to feel overwhelmed by the amount of data you can use to uncover information about your business’s performance.
The trick here is really ensuring you’re collecting enough data to produce good KPIs.
If you haven’t already, consider incorporating a robust Point of Sale (POS) system and a CRM system to communicate with your POS tool.
Using these in conjunction with spreadsheets to keep your books in order and make producing management reports easier.
While you might be tempted to look at certain points in time, a singular moment only offers insight into one data point.
To analyze the entire history of your business’s financial performance, connect the dots to form lines.
These lines offer a more complete story of your business’s financial health. You’ll see whether things are improving, getting worse, or remaining the same. Analyze your data once per month during your first year in operation. Then, it’s best to perform analyses quarterly to gain the most insight possible.
While it’s essential to understand your metrics, it’s even more crucial to use the insight you gain as you track your KPIs. This is where you’ll develop your action plan.
“To analyze the entire history of your business’s financial performance, connect the dots to form lines.”
For instance, if your average spend decreases, consider what could be causing this metric to drop. Look into your metrics and analyze your demographics. And, maybe look at the competitive environment around you. By delving into these key audience insights, you could uncover the root of the problem.
Check how demographics impact audience spending habits. Then, you’ll plan a course of action to push your average spend back to where it was.
This could be as simple as adjusting who you’re targeting on different social media platforms to reach the group responsible for driving down your average spend.
Let’s break down specific KPIs depending on your operation’s vertical:
Average spend per transaction
Sales per square foot, and revenue per employee
You might look at customer frequency. Remember those “club member’ cards we talked about before?
Definitely EBITDA, and
Gross margin per product
For cannabis cultivators
Waste management costs are important, as well as
Grow cycle time and
Gross margin (and again by product, or really by strain). We all have our personal favorite strains, but you want to sell more of the ones that are also profitable. And popularity and profitability are not always the same.
For cannabis manufacturers
Gross margin by product
Manufacturing cycle time – how long from start to finish
For delivery companies
Distance per delivery
Fulfillment turnaround time
Time per delivery, and
Revenue per employee or per driver
To sum it all up, if you can develop a healthy appetite for data, you’ll make your business more valuable. And, you’ll also make your business more attractive. KPIs are exceptional tools large corporations use to increase profitability. The same tools are available to you.
Want to learn more? Speak with us about how we can help you with improving EBITDA and other key KPI’s while staying compliant with the myriad rules and regulations of the cannabis industry.
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