Know your cannabis business’ overhead ratio

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Most cannabis entrepreneurs spend every day sweating about overhead. Which makes it hard to throw more money into the business to scale it.

How much is too much overhead?

That’s a trick question. Put your focus on overhead as a ratio, as a percent of revenue, not an absolute, desirable dollar amount.

If you spend money to make money, that’s a win.

Yes, it’s a trite lesson, but it’s easy to lose track of when you are sweating every bill.

Here’s a simple example of why overhead ratio is a better key performance indicator than total overhead:

If you make 100 edibles canisters a month for $1,000 (overhead) and sell them at $20 each for $2,000 (revenue), your overhead is 50% of revenue.

The math is 1,000/2,000 X 100.

Surely that is too high?

How can you hire more staff or invest in automation?

Well, if you spend more on things that increase revenue, which make that denominator grow, maybe you can.

For example, if you hire another staffer – increasing costs but also increasing productivity – you might actually have a lower overhead ratio.

Say you are able to make 200 edibles canisters a month for $1,500 (overhead) and sell them at the same price as before you’ve made $4,000 gross. (1,500/4,000 X 100).

Now your overhead ratio is a healthier 37.5%.

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CEOs in high-growth industries have to focus on the things that matter.

The game is about growth and opportunity, not only expenses.