As a liquor and retail cannabis consultant, I’ve learned over the years that any business, including cannabis retailers have a greater chance of success by performing an active review of their business finances.
While the day-in and day-out review is important to see if annual goals are being met, an annual review that looks to the future of the business is critical for planning how funds should be spent or saved for the long-term viability of the business. Below are some quick tools to help you better understand your business when reviewing and analyzing your financial statements.
There are two ways a review should occur. An annual analysis can reveal whether budget projections were realistic, what failed to support long-term goals, and reveal trends from the 30,000-foot view. Monthly analysis exposes more immediate shortcomings, so you can make quick changes to operations to meet annual projections and long-term goals.
| Monthly and Annual Financial Reviews Compared |
| Monthly Review | Annual Review |
| Based on actuals from past month | Based on actuals from past year |
| Diagnostic (a short-term health checkup) | Prognostic (a long-term health checkup) |
| Reveals what’s happening now | Reveals a company’s health from a zoomed-out view |
| Prevents short-term ailments | Prevents long-term, chronic ailments |
| Determines likelihood of meeting projections | Foundation of next year’s plan and monthly budgets |
| Reactive. Identifies current shortcomings and strategies to correct them | Strategic. Identifies opportunities and long- term strategies for increasing profit |
| Allows you to make changes to meet projections for following months | Allows you to make business plan changes to meet long-term goals |
Monthly Financial Review
A monthly review identifies issues that may prevent your business from meeting annual projections.
Review financial statements including profit and loss statement, balance sheet, and statement of cash flow. Your accounting software or your accountant can provide you with these key reports.
1. Profit & Loss Statement:
Review each of these categories on your income statement and ask some key questions:
Ø Gross Revenue: Compare to prior months. Identify the company’s trajectory. Take note of what occurred in the previous month to cause the trend.
Ø Cost of Goods: How much did your store spend on inventory in the month? How long does inventory sit on the shelf before it sells? If it’s sitting for more than two weeks, correct ordering.
Ø Review Prices: Are price adjustments at the wholesale level being reflected in your retail price? Price adaptations can have a huge effect on profitability. Keep an eye on competitors’ pricing to understand where your store sits in the marketplace.
Ø Payroll Expenses: Did you spend more on wages, employee acquisition, and training in the past month than in prior months? Should schedules be adapted to compensate for a bump or decline in sales?
Ø Other Expenses: Identify changes in categories and decide if a change in operations needs to occur, e.g., an increase to office supplies due to inflation. Are there ways your store could go paperless or use reusable bags and charge for them?
Ø Net Profit: Review whether low sales, higher than usual expenses, or a combination of both were responsible for missing profit targets.
Ø Marketing Costs: Track each campaign to see if it produces sales, and more importantly, whether it has a return on investment attributed to it.
2. Balance Sheet: Review to see what is owed and what’s owned. Key ratios such as debt to equity calculations are based off this report. If your operations are being funded by debt rather than the company’s own funds, then there could be an underlying analysis that needs to occur.
3. Cash Flow: This statement shows owners the movement of money. A company can show profits on an income statement but run out of cash to fund business activities, such buying inventory, if cash is not properly managed.
Annual Financial Reviews
Check in with your accountant a few months before your fiscal year-end to schedule a financial review. This is extremely helpful not only to develop budgets but to plan for tax and possible changes to CRA rules you simply may not know.
Like the monthly review, the same statements are involved; however, their period will be for the entire fiscal year of your company rather than one month at a time.
1. Financial Statements
Review balance sheet, income statement, and cash flow statement. Annual trends and company trajectory can be compared to prior years to help plan.
2. Business Activities
What products are selling or struggling and why? Which expenses have increased? Is there a way to cut costs? Are there enough profits for new opportunities: think delivery, website, or new store acquisitions. Do an annual review of:
a. Product Mix: Review reports for bottom and top sellers. Clear out inventory that is not producing sales and ask customers what they are seeking in trending categories.
b. Store Layout to Optimize Sales: Consider small layout changes. Keeping a store fresh and dynamic will impact customer experience, keeping guests in the store longer and will lead to increased spending.
3. Building, Property, Equipment
Examine lease costs, location advantages and disadvantages, equipment costs, and whether equipment is generating revenue or has reached its end of life and needs replacement, e.g., delivery vehicles and refrigeration). Review sales per sq. ft. (SPSF). SPSF provides a more accurate idea of the size of store to lease. If monthly revenue or store size are overestimated, you may wind up in a large-format store that doesn’t pay for itself. Considering the relatively small size of cannabis products and accessories, many cannabis retailers have learned how to maximize the SPSF. If it needs a correction, review your lease and speak with your landlord. There could be a need for relocation or construction if lease costs are killing your business. Though disruptive in the short-term, reduction in lease expense can drastically increase profit and SPSF.
4. Employees, Payroll Benefits, Rightsizing
What are true payroll costs? Factor in tax payments as well as employee acquisition, retention, and training costs. If you plan on increasing sales, you might need to hire a few more people for the increase or bring on a website or marketing person. According to Statistics Canada, retail stores pay about 22.75% of gross revenue toward payroll (including WCB, employer’s portion of tax, and benefits). If payroll costs are much above this benchmark, find out why and right-size. Rightsizing is not necessarily downsizing. It often entails resizing the company, its structure, and job roles to reduce expenses and increase profit. Answering the following questions are the foundation of a rightsizing strategy. Are you tracking revenue per sales associate? Do employees perform tasks efficiently and if not, why not? Do some employees have more duties than others in the same position? Do you need to revise job descriptions and make onboarding practices more efficient? Could customer service or sales training increase revenue per sales associate? With the current labour shortage, labour efficiency and effectiveness is more important than ever.
After all the above analysis has been done, create a budget estimating next year’s costs, revenue, profit margins, and cash flow. This will help you set goals and objectives for your company and further solidify its future in the industry.
Rebecca Hardin is President of Thrive Liquor & Cannabis Advisors www.thriveadvisors.ca.