Manufacturing KPIs to Track for Financial Success

Efficiency is the bedrock of cannabis manufacturing success. Costs are rising, regulatory frameworks are evolving, and supply chains are becoming more fragmented. Overcoming these challenges requires meticulous planning, tracking, and analysis of key performance indicators (KPIs).

Do cannabis manufacturers need to pay attention to the same KPIs as other manufacturers? Absolutely. Despite the product’s unique nature, the overarching metrics are the same.

With an accurate tracking strategy, cannabis manufacturers can optimize their operations, stay compliant, and gain efficiencies that drive value and increase profitability. And isn’t that the bottom line?

Cannabis Manufacturing KPIs

While manufacturing sector KPIs also apply to the cannabis industry, there are specific metrics that hold particular significance. Here are a few basic KPIs cannabis manufacturers should track

Yield percentage

Yield percentage measures the efficiency of the cultivation process. It evaluates the amount of usable product obtained from a crop compared to the expected yield:

Yield percentage = actual yield ÷ expected yield

The results will help you pinpoint issues in the production process and challenge the efficiency of your process.

Cycle time

The time it takes to complete the entire production cycle, from seed to sale, is the cycle time. Reducing cycle time can lead to faster time-to-market entry and inventory turnover,

Production cost-per-gram

Understanding the cost to produce each gram of product is vital to your pricing strategy and profitability. This KPI considers all production costs, including labor, materials, utilities, and overheads.

Cost per gram = (total fixed costs + total variable costs) ÷ number of grams produced

Compliance rate

Considering the cannabis regulatory frameworks, tracking compliance is essential. This KPI tracks alignment with local, state, and federal laws to ensure all aspects of production, packaging, and distribution meet the required standards.

Waste percentage

This KPI measures waste generated during manufacturing, highlighting processes that can be improved to reduce waste and improve efficiency.

Customer return rate

When customers return products for any reason, it provides insights into quality control and customer satisfaction. A low return rate indicates high product quality and efficient quality control processes.

Inventory turnover

Your inventory turnover rate is the rate at which inventory is sold and replaced over a given period. High turnover rates show that sales and inventory management are adequately managed, which can reduce costs and ensure you’re moving through product at a reasonable pace.

To calculate turnover, you must first calculate COGS and your average inventory. Once you have these numbers, the calculation is:

 Inventory turnover = COGS ÷ average inventory

Let’s say the resulting number is 2.5. That would mean you have sold and replaced your inventory 2.5 times during the period in question. Higher numbers indicate efficiency, while lower numbers may imply overstocking or less-than-stellar sales. You can calculate turnover for specific products, product lines, or for your entire portfolio of products.

General Manufacturing KPIs

KPIs can also be applied to the financial health of your manufacturing operation. Here are a few high notes you’ll want to track and evaluate regularly.

Current ratio

The current ratio measures current assets vs. current liabilities. Tracking this KPI helps you assess your organization’s ability to meet short-term commitments. You’ll need to know this during busy production cycles as it will help you avoid disruption, assess liquidity, and make vital financial decisions.

To calculate current ratio, divide current assets by current liabilities.  

A ratio between 1.2 and 2 indicates the ability to cover short-term liabilities. Lower numbers may suggest inadequate liquidity, while higher numbers may show that your company is not leveraging its assets efficiently.

Operating profit margin (OPM)

Profitability is an essential indicator of a company’s financial health. Since cannabis operations have such challenged margins, this is one of the most critical KPIs to track, as it will tell you how much is left once you’ve paid expenses and accounted for depreciation. Monitoring this KPI over time helps you adapt to market fluctuations and enables strategic planning. To calculate OPM, divide your operating profit by total revenue.

Return on assets (ROA)

Understanding how efficiently you are using your assets is what ROA is all about. For example, you can measure for your entire operation or an individual piece of equipment. The ROA evaluates performance and tells you whether you should expand, reduce, or maintain the use of the assets under review. High ROA shows you are using your assets efficiently. Low ROA may indicate underutilized assets or operational inefficiency.

ROA = net income ÷ average assets

Gross profit margin ratio (GPR)

GP ratio can be calculated for the whole company or individual products. Calculating the GP ratio for each product will reveal which items are most profitable and which are underperforming. By eliminating products with poor margins, you’ll be able to increase production on more profitable items.

GPR = ((net revenue – direct expenses) / net revenue) x 100%

High numbers mean you are managing your costs and pricing strategies well. Low numbers indicate the need to review costs and pricing.

Cash conversion cycle

Cash flow efficiency is a vital KPI, and that’s what the cash conversion cycle (CCC) measures. CCC looks at the efficiency of a company’s cash flows in a given timeframe and provides insight into liquidity, calculating how long it takes to convert inventory and other capital into cash.

CCC requires calculating three separate ratios: average inventory days (AID), average days receivable (ADR), and average days payable (ADP).

CCC = (AID + ADR) – ADP

Aim for shorter cycles as they indicate efficient operations and good cash flow management. Focus on how long it takes to convert raw materials into cash. This multi-faceted process may include inventory optimization, transforming accounts receivable processes, and being more strategic about accounts payable.

The Bottom Line on Manufacturing KPIs

While there are plenty more manufacturing KPIs to track, the few we’ve outlined here are a good place to start. Once you’ve compiled your data, it’s important to act on it, especially if the results indicate any concerning trends.

Numbers can be complex, but there’s a lot at stake. Speak to the experts at Growise about tracking manufacturing KPIs and how to leverage your data to drive efficiency and profitability.