Build a Better Budget

Budgets can get a bad rap—they’re often compared to diets from which you are destined to deviate; however, businesses that fail to budget ultimately fail themselves. Budgets are living documents that define the relationships between your customers, your employees and your business, and they provide context for how your business operates. Budgets not only connect these groups, they also place values on these relationships.

The first step in building a budget is to collect the information you will need to build your budget. This should include:

• how many customers (if any) you have served;
• the number of patients registered for your state’s program, and the monthly change in that number;
• your service area’s population (county/metropolitan area, etc.);
• the number of dispensaries that service that area;
• products you sell, the retail price for those products and how much they cost you;
• a list of accounts from your accounting software;
• the amount spent last fiscal year per vendor (if available); and
• competitive pay rates in your area.

A budget that includes this information becomes an opportunity to incorporate forecasting and identify tools available to you to not just survive, but to thrive. There is a way to build a budget that will serve as a roadmap to your dispensary’s success, and it has four components:

1. Revenue Model: Visibility to revenues, margins and growth.

2. Staffing Model: Who is necessary for your business to deliver on this?

3. Operating Budget: What resources are needed to make it actionable?

4. Projected Profit & Loss Statement: What does it all mean for your business?

1. Revenue Model:

What do you sell, to how many people, at what price and at what growth rate?

Understand the level of demand for cannabis products to determine what you will spend on people, materials and services. Spending, which is the bulk of a traditional budget, is highly dependent on other factors being accurate. If “content is king,” context is the kingdom, and your customer volume is that context.

Initial customers: Your baseline of volume. Consider that the total addressable market is likely to be 2 percent to 3 percent of your local population.

Increase in volume per month: The growth in your volume. In general, consider how many new customers you can expect less any customers you won’t retain. For perspective, look at the monthly increase in registrants for your state’s program. (Note: If your retention rate is lower than 80 percent, there is an opportunity for organic growth through tools such as loyalty programs, pricing, customer service and product selection.)

Spend per customer per month: How much does a typical customer spend per month in your dispensary? While $180 to $220 is a good benchmark, it will vary based on local demographics.

Sale price and cost per product: This is the space to segment your product lines: flower, oil, extracts, edibles, etc. What are typical market prices in your area? Also, make baseline calculations for your gross profit margins (retail sale price minus the cost).

Calculate monthly projected revenue using the formula: customers x monthly spend.

2. Staffing Model:

Who maintains your business and services your customers?

Reviewing your revenue model, consider how many customers you will have each month, how long each transaction will take, how many shifts will be needed and how many employees each shift will require. Research competitive pay rates for your market so you can retain your top employees.

Next, build an employee list organized by department and role that includes each employees’ monthly gross wage.

If your market allows for processing and packaging of bulk product at the dispensary, separate employees participating in these activities from employees who aren’t, as there may be tax advantages. Consult with your accounting and legal resources on what is, and is not, allowable as a deduction.

3. Operating Budget:

What infrastructure is required, and what tools will make operations more efficient?

This is a more traditional budget view, and an opportunity to be creative in where you put money to work in growing your business.

Volume-based/Consumables: This is the space to include everything that goes with each transaction, including labels, other printed customer materials, child-resistant bags, other packaging, etc. Examine the per-unit costs for each of these items and multiply by your projected monthly volume.Tip: If you are packaging flower at the time of purchase, multiply the projected number of monthly prepackaged flower sales by the per-unit packaging cost.

Building, upkeep and utilities: These are often fixed or overhead costs associated with having and maintaining your brick-and-mortar storefront.

Operations: What goes into making the day-to-day happen? Security monitoring, seed-to-sale and point-of-sale (POS) software, paper, ink and even sticky notes.

Corporate and professional services: This section includes everything else to make the company run. If you have multiple dispensary locations, this section would be universal to all of them. This is also where you can consider the return on your investment for certain line items, like: Is it less expensive to outsource your accounting and legal services? How are your customers finding you? Should you invest in websites such as Leafly and Weedmaps, or printed brochures at certifying physician offices? Where can you invest in your employees? Educational opportunities such as industry conferences and continuing education can pay big dividends down the road.

Payroll budget: The sum of your monthly wages, payroll tax (roughly 9.5 percent) and cost to provide benefits.

Capital expense budget: Any construction, equipment or big-ticket/one-time purchases typically go here. The most common are: build-out costs, furniture, security cameras and computer hardware. Plan to replace about 20 percent of your computer hardware in any given year, given that they depreciate on a five-year schedule.

Before moving on from this section, review all your expenses and vendors used in previous years. If they were not one-time purchases, ensure they are accounted for in your operating budget.

4. Projected Profit & Loss (PP&L) Statement:

What is the bottom line?

This is a summary page suitable for investors and executive management. It also serves as an overall barometer for your company’s health. Tally all expenses from the operating budget to calculate the Run Rate of the business.

Your Burn Rate equals your projected revenues minus that expense total (Run Rate). It will provide you with a good indication of any cash requirements to float your business until you reach a cash flow-positive status.

By adjusting variables in the revenue model, staffing model and operating budget, you can quickly understand how this impacts your bottom line and the overall success of your business. Include your key managers in this process to enroll everyone in the plan. Motivate your employees by sharing monthly statistics like sales relative to forecast, and expenses relative to operating budget. The more transparency to this level of information, the more invested employees will be in the dispensary’s success.

Colin Kelley is a member of the board of governors for LeafLine Labs.