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CANNABIS ANALYSTS

The authority when it comes to analyzing the cannabis industry

How to Start A Dispensary Series Part II: Income Statement and COGS

This is part of an ongoing series where we explore detailed costs for starting a dispensary, from the equipment costs you should expect to the financial metrics that go into the income statement.

We base this on information we have as we come across many business plans and dispensary applications. Today, we explore the cost side (COGS which are variable costs and SG&A which is more of fixed costs).

This analysis is independent of the size of the business and mainly is a checklist of all the important income statement costs that goes into a fully functioning dispensary. To be sure, these are based on actual figures in business plans and what some dispensaries have spent.

Cost of Goods Sold (or COGS): These are items tied directly to the cultivation, processing, and manufacturing (in case of edibles) of your final product. COGS do not involve salaries paid to management, insurance, and other fixed costs mentioned in the next section, and is commonly called variable costs as these are more a function of sales volumes (like cost of cultivated plants is proportional to cost of seeds).

  1. Third-party quality testing and lab quality control (QC) testing
  2. Rent for cultivation/processing square footage
  3. Production costs and inputs such as nutrients, fertilizer, seeds, etc.
  4. Other professional services
  5. Security monitoring for cultivation/processing area
  6. Sanitation/janitorial services
  7. Cannabis supplies: used/consumed in growing and for retail sales, includes packaging, sales, cultivation supplies
  8. Inventory tracking (if annual subscription based)
  9. Transportation
  10. Utilities tied to growth/processing
  11. Insurance (general liability) for cultivation area

Aside from payroll, you will need to spend on the following items which are broadly classified as sales, general and administrative costs (known as SG&A, estimates are annual amounts): these costs are exactly as the term suggests and relate to the overhead necessary to run a business such as marketing and administrative, and not tied to the actual production of the goods sold. SG&A are also more commonly associated with fixed costs, which do not change much as business scales (to a degree).

  1. Consultants for operational support/training
  2. Office supplies/expenses
  3. Utilities for non-cultivation/processing areas, includes waste disposal and other contract services, water, telecom, etc. ($40k-$200k)
  4. Insurance: general liability ($35k-$45k), director and officers (legal action brought for alleged wrongful acts from directors/officers of company), automobile insurance, and general product liability and property insurance
  5. Ongoing security systems/personnel/monitoring costs ($40k-$70k). May include recurring seed-to-sale tracking costs not included in COGS
  6. Rent per square foot can range from $5-$15 per foot with pricing escalators
  7. Charitable contributions/community donations for goodwill (discretionary)
  8. Legal and accounting:  bookkeeping, tax payment and proper accounting
  9. Compliance and annual inspection/license renewal costs
  10. Training and onboarding new employees (there will be some attrition among budtenders and staff)
  11. Advertising and marketing (~1-2% of revenues)

In a retail or start-up environment, some of these costs may overlap. For example a store manager may be involved with retail sales and also perform administrative functions or help with advertising/marketing and wear other hats, so the cost categorization is not iron-clad, especially for small entrepreneurial businesses. That said, COGS and SG&A are well known and well used financial terms (for example, the profit after you subtract COGS from revenues is known as the gross profit or gross margin) that any business owner needs to understand and be fluent in.

A proper understanding of costs is especially if you want to compare profitability across stores/geographies of your business and determining where the highest returns are. This allows for more apples-to-apples comparisons by ensuring you are comparing profitability according to the same defined yardstick.

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