Marijuana Business Magazine April 2020

Marijuana Business Magazine | April 2020 16 K ey performance indicators represent milestone targets for your business, so choosing the right KPIs can be paramount to achieving a level of corporate success.  But because KPIs can influence how management spends its time, short-term KPIs can come at a cost—an opportunity cost. Work Backward to Determine KPIs Michael Armstrong, business professor at Brock University in St. Catharines, Ontario, said the core goal for most cannabis businesses should be to sell legal products that are at least as good as what the illicit market sells, at prices at least as low as what the underground market charges. Among other things, Armstrong says this implies being able to make a profit with dry cannabis priced at CA$5 per gram, including taxes, while selling products that make customers happy. Then, he said, work backward from that to determine KPIs, such as: • Profit: Without a profit, you won’t stay in business. • Consumer satisfaction: Do buyers like—and hopefully love—your products? • Production cost: From planting clones to shipping finished product, what’s the all-in cost per gram? What managers do not spend their time on is just as important as what they do spend their time doing. That especially matters in Canada’s hyper-competitive cannabis industry, where advertising is banned and most legal businesses sell the same kinds of products. Choose the wrong KPIs, and a company risks sending the most influential people in the business down the wrong path for most of the year.  It isn’t a stretch to assume the behavior of executives is tied, to a certain degree, to the KPIs used to award their compensation—especially when that payout can be in the millions of dollars. So how your KPIs are weighted can matter just as much as the actual KPIs themselves. Resetting Priorities Let’s look at one example: A large Canadian cannabis company discloses the KPIs used to measure its executives’ success in meeting corporate objectives. After missing numerous revenue targets, replacing its CEO and mothballing expansive facilities, you could say the company is going through a rough patch. What went wrong? The company uses 19 KPIs to assess individual executive performance and to measure overall corporate objectives. Arguably the most important KPIs for any business are those directly tied to revenue, costs and profit. But becoming EBITA positive—the core of any business—was given a weight of only 2.08% out of 100%. Hitting a gross profit margin of 50% was given the same weight. A specific target was established for revenue, but the company weighted that KPI at only 2.08%. That means factors other than profitability and revenue accounted for 93.76% of the weight this company used to measure the success of its corporate objectives. And no KPIs were directly associated with quality. Today the company— once the largest cannabis business in the world—stands on very thin ice. As more companies go public and shareholders increasingly depend on solid management teams, it’s time for cannabis companies to heed Armstrong’s advice. Rather than set a dozen arbitrary KPIs and reward executives for focusing on goals that don’t move the business forward, companies should double down on KPIs that reflect business fundamentals. Only then will they please shareholders and create long-term stability. Matt Lamers covers international cannabis markets for Marijuana Business Magazine. You can reach him at . Choosing the Wrong KPIs Can Break Your Business Trends & HotTopics | Matt Lamers