Cannabis Entrepreneurship 101: How well do you know your costs?

A key part of any solid cannabis business plan is a thorough and thoughtful examination of costs. Mismanagement or failure to account for costs upfront can be a fatal mistake for any cannabis start-up, and is often the reason why so many good ideas never get off the ground. 

“Understanding your costs is important because there's so many players in this space that in order to differentiate yourself, you will need a solid budget to even have a seat at the table,” explains Andra Taylor, founder and CEO of Refine Group, a management consulting firm catering to small and medium-sized North American businesses that are looking to scale. “Without that understanding you can't really expect to be successful.”

Break your cost management into steps

Taylor says that once you know that what you’re bringing to market has a competitive advantage, you can then break your cost management down into steps. “You can't really expect to have a successful venture start-up unless you have a good understanding of the expenditures that are required,” emphasized Taylor. “Not just the costs in terms of dollar amount, but also the resources required to set up your idea for success.” 

At a glance, your initial cost management break down may look like this:

• The way forward varies depending on the kind of start-up you’d like to establish. Requirements and costs are different if you want to offer a service versus deliver a product— in either case, your “cost object.” Within those choices, a multitude of factors can affect your overall costs. For example, there are major differences between choosing to white label a product rather than researching, growing, or developing your own. The more detail you can flesh out at this juncture, the better.  

• Once you’ve defined what your “cost object” is, you can begin to outline which costs are your direct costs and indirect costs. Direct costs are the costs incurred directly through the providing of a good or a service, for instance labour, materials, and supplies. Indirect costs are basically everything else: costs that apply to the business’ activity as a whole, like rent, utilities, salaries and expenses.

• From there you can work to identify the key drivers of costs. These key drivers represent the operational activities of the start-up. These include any activity that's involved in the production, selling or administration of your product/service, including advertising, marketing, manufacturing. Isolating costs in this way will allow you to build out measures for efficiency and allocate funds appropriately. 

• Consider hiring a professional CFO or consultant for the role of cost management early on in your growth period. It may save you money and potentially protect you from disaster in the long run. 

Know the difference between fixed and variable costs

One way to break your costs down is to understand which costs are fixed and which are variable. “The first phase will be for you to develop something to bring to market,” says Taylor. At the outset of developing your cannabis product or service, she says you will predominantly incur variable costs—such as direct labour, raw materials, packaging supplies, and shipping—which all fluctuate depending on your output. Fixed costs exist regardless of output—rent, equipment leases, professional fees (like accounting or legal), or your interest on loans. Taylor says that the moment of product launch is typically the point in time when start-ups begin incurring more in the way of fixed costs. 

It’s important to consider all of your costs within the context of whether they’re fixed or variable because it will help you to allocate your money to the right places and to prepare for surprises which are common for many cannabis-related business ventures.  

Research the existing cannabis start-ups in your specific market

When planning to start a cannabis company, research the start-up costs typical to your field. As mentioned earlier, the costs related to a start-up vary depending on the business idea and segment of the industry it belongs to. For example, Taylor says opening a marketing firm will require different kinds of costs than if you were to cultivate your own product, which could mean lab and testing fees, as well as Canadian licensing fees (which also vary depending on the size of your operation). 

In some cases, like when opening a dispensary, there's quite a bit of information available online about the costs associated with starting that kind of business. In others, you might have to do a bit more work. If for instance, you're developing an app, break your research down into steps: look into the costs associated with developing an app broadly, since much of the expense of development is directly proportional to the functionality of the app itself. Then depending on what service the app delivers, there might be industry-specific costs associated, like legal or licensing fees that you'll have to factor in, which can be found on most government websites. 

This research phase is also a good opportunity for networking. If you're not already involved in the industry in some way, connecting with fellow entrepreneurs is a good way to get a lay of the land, not only in terms of anticipating your costs, but getting sage advice on how to strategize your approach.

Taylor cautions that one mistake start-ups often make is not accounting for inventory when costing out the development of a product. “You're going to have to plan your inventory,” she explained. “In the case of a product, you at least want to have a two month inventory turnover on hand, so you're going to have to be able to afford to buy that inventory and hold it for two months.” Estimating your inventory costs can be one of the trickiest aspects of starting a business, but there are ways to plot them out in predictable ways. 

Think of inventory in terms of each distinct product, how many items of each you anticipate having ready for launch, the Manufacturer’s Suggested Retail Price (MSRP) and factor in retail markup. 

Costs like rent might vary depending on your location, and your location may again be informed by your business type, as there are many restrictions around where cultivation can even take place versus a dispensary.

Regardless of the direction you take, prepare to spend more than what you researched. Over planning is always better than not preparing enough. 

Proper costing can be a time consuming and research-intensive endeavour, but doing it at the outset of your cannabis business can not only prepare your start-up for many possible outcomes and surprises, it may also help save you money outright. 

This is not an offer to sell or a recommendation to trade in any securities. This information is provided as of the date hereof. This document contains data obtained from third parties that Canopy Rivers has not independently verified. This document also contains forward-looking information within the meaning of Canadian securities law, which is based on certain assumptions. While management believes these assumptions are reasonable based on information available as of the current date, they may prove to be incorrect. Many assumptions are based on factors outside of Canopy Rivers’ control and actual results may differ materially from current expectations. Forward-looking information involves risks, including, but not limited to, the risk factors set out in Canopy Rivers’ most recent Management’s Discussion and Analysis and Annual Information Form. You should not place undue reliance on forward-looking information. Except as required by applicable law, Canopy Rivers assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances.