Four Cash Flow KPIs Dispensaries Must Track
Running a successful, profitable dispensary is no small feat. Operators need to be on top of every aspect of operations and documentation to ensure financial, tax, and regulatory compliance. Oh, and let’s not forget cash flow.
Cash flow is the lifeblood of dispensaries. Tracking cash flow and cash flow KPIs can help you stay on top of your shop’s performance. You’ll always know how much cash you have on hand and will be able to recognize red flags before they start to impact other aspects of your business.
What is Cash Flow?
In simple terms, cash flow is the cash that flows in and out of your business. Cash received is inflow and cash spent is outflow.
Cash flow keeps the lights on. Without it, you wouldn’t have a business for long.
We can categorize cash flow into three containers:
· Operating cash flow is the money your shop brings in from sales minus your expenses. Expenses include rent, utilities, payroll, inventory, etc.
· Financing cash flow comes from lenders, investors, and creditors.
· Investing cash flow includes long-term capital investments, like equipment or property, and stock or other investments.
Tracking cash flow KPIs is critical for dispensaries because—and we probably don’t need to say this—in the cannabis industry, it’s not easy to stay in the black. With such small margins, every dollar counts. Tracking your cash flow will get you through the rough spots and ensure you always have enough funds to float the business in any circumstance.
Four Cash Flow KPIs You Need to Track
There are tons of KPIs you can track, but let’s stick to the basics. Here are our top four cash flow KPIs.
1. Net operating cash flow (NOCF)
NOCF is the cash that’s left after expenses are paid. If your NOCF is negative, you’re losing money; it’s that simple. It also lets you know if you can afford to pay your suppliers, staff, and bills. Tracking NOCF allows you to forecast future earnings and helps you quantify your dispensary’s profitability. It also may alert you to upcoming issues or help you take advantage of any opportunities that come your way.
To calculate your NOCF, subtract your total operating expenses (including depreciation, amortization, and interest) from your income.
2. Cash runway
Cash runway indicates how many months your business can stay afloat until it runs out of cash. This KPI is one of the most essential to track as it helps you identify cash flow issues before they blow up. It can also help you make better long-range decisions about your capital and put you in a good position when speaking to potential investors or lenders. Because, trust us, this is a metric they’ll want to know about.
Cash runway is measured in months. Monitor this KPI monthly if your cash runway is consistently less than a year. You’re doing great if you have a cash runway of a year or more. Check it quarterly to keep it on track.
3. Free cash flow (FCF)
Free cash flow is what’s left over after meeting investment obligations. Tracking your FCF provides insights into long-term growth potential.
To calculate FCF, start with your income, add back depreciation and amortization, subtract working capital (current assets minus current liabilities), and then subtract capital expenditures.
Including free cash flow in your cash flow analysis lets you know how much capital is available for debt repayment, paying out dividends, or business expansion.
Why is this important? If your FCF shows you can meet your operational needs and have capital to put back into the business, investors will see that you’re on solid financial ground. Growing companies with a high FCF show strong profitability potential.
Checking in with your FCF monthly and comparing it against total sales will help you understand your current cash flow situation and reveal trends you can leverage.
4. Cash conversion cycle
The cash conversion cycle (CCC) KPI is highly relevant for dispensaries as it relates to how quickly you turn over inventory. Also known as the cash cycle, CCC looks at inventory turnover in set periods, i.e., how much cash you have tied up in inventory. A short CCC is ideal as it shows liquidity, indicating you’re successfully moving through stock. If you can sell through stock, collect payments, and pay your suppliers quickly, it’s a strong indicator of efficiency and financial health.
The cash conversion cycle metric is an excellent liquidity indicator, much more than a working capital ratio.
To calculate CCC, add the number of days with inventory outstanding (DIO: average days you hold inventory before it sells) and days sales outstanding (DSO: days to get paid following a sale), then subtract days payable outstanding (DPO: days it takes to pay the supplier).
How Cash Flow Analysis Leads to Better Business Decisions
Analyzing your dispensary’s cash flow helps you understand your business’s liquidity, growth capacity, and operational efficiency. Tracking the metrics we’ve shared today will keep you abreast of your financial outlook now and in the future.
Here are just a few of the benefits you can look forward to:
· Sound decision-making regarding investment, expansion, debt repayment, and resource management.
· Illuminating opportunities for business growth. Strong cash flow indicates the ability to fund new initiatives, expand, hire new staff, etc.
· More accurate forecasting enables you to predict cash shortfalls and get proactive about preparing for them.
Lastly, your diligence in tracking cash flow KPIs will support you when seeking investment or financing, showing prospective partners or lenders that you understand your business and its challenges and have the insight and impetus to thrive despite the challenges inherent in the cannabis industry.
If you’re challenged for time or unsure where to start, speak to the cannabis finance experts at Growise today. We provide fractional and outsourced accounting services to cannabis operators in all niches, and we’d love to show you how we can help.
Book a call today, and let’s get started.