What Is Cost of Goods Sold and How Does It Affect the Cannabis Industry?
What Is Cost of Goods Sold for a Cannabis Business?
To calculate your profit, your accountant needs to know the cost of goods sold. But what does this amount mean? Here’s what cannabis businesses should know.
Business is as old as people, so balancing revenues and expenses is not exactly a new concept. In fact, the first balancing scales may date back over 7,000 years, when the Ancient Egyptians used them to determine the weight and value of coins.
Today, the concept of balancing, especially revenues and expenses, is still a huge part of the business. And the cannabis industry is no exception.
One piece of information that makes up expenses is the cost of goods sold or CoGS. What is the cost of goods sold when it comes to marijuana? What exactly are you paying for?
We’ll go into more detail about this in the paragraphs below.
What Is the Cost of Goods Sold?
Cost of Goods Sold (CoGS) is exactly what it sounds like: how much did it cost you to actually acquire or make the product you’re selling? It does not include any costs associated with actually selling it. Where you’re storing it before it reaches stores and the salary of the employee who convinced the customer to buy it is not considered part of the CoGS.
How Does This Apply to the Cannabis Industry?
In the cannabis industry, the cost of goods sold refers to getting cannabis that you can sell. This includes the cost of seeds, as well as the cost of soil, water, the light, and the electricity used to power, said light.
If you have employees that help tend to the plant while it’s growing, their payment will also figure into the cost of goods sold. If you’re paying into a pension or similar plan for any of your employees, include that as well.
Also included will be any costs associated with storing and raising your plants.
Finding the Cost of Goods Sold
Whether you love or hate math, one thing is for certain: mathematicians have thought of a formula for pretty much everything. Cost of Goods Sold is no exception.
The formula for Cost of Goods Sold is your inventory at the beginning of the year, plus the cost of purchases in that year minus your inventory at the end of the year.
B + P – E = CoGS
This is a bit challenging when dealing with balance sheets because they only include inventory from the end of a given year. The good news is that you can substitute the ending inventory from last year for the beginning inventory of this year. You should record any extra inventory on a balance sheet.
Type of Business
The type of business you’re running is going to affect your CoGS in a lot of different ways. For instance, if you’re a small-time grower who’s selling to a dispensary, your profit will concern what you receive for the product and not what it sells for at the dispensary.
In other cases, you may be working in a dispensary that buys from suppliers, in which case your Cost of Goods will involve what you paid for a product, not what your supplier paid to grow it. Given that all business runs on profit, many choose to work this into the sales price.
Certain businesses function as an all-in-one. They grow the plants beneath the dispensary and sell the final product upstairs. This is the only situation where the Cost of Goods Sold will concern growth and the final profit will be what the customer at the dispensary paid for it.
It also should be noted that if you’re running a dispensary, at least one of your employees will be a budtender. Budtenders are specialized, educated workers who can make up to $15 per hour.
The Cost of Goods Sold comes with one major risk. The numbers are easily manipulated, so if you’re working with a crooked accountant or an employee you can’t trust, you’ll need to know what exactly is going into the books. Otherwise, you’re setting yourself for robbery.
On a Weird-Note
You may have heard the recent news about Canada. Marijuana was legalized in Canada earlier this year. This means that you can sell recreationally, assuming you have the proper training, licensing, and whatever else the government decides is necessary to go into business.
In the United States, recreational marijuana is still illegal everywhere except for a few states. Only 9 states have legalized any form of recreational marijuana, and even those states can have strict regulations.
Oddly enough, however, being an illegal drug-dealer doesn’t make you immune from taxes. If you don’t report your income to the IRS, you can still be charged for tax evasion, in addition to possession.
Weirdly enough, you are technically allowed to claim CoGS as a deductible, regardless of whether or not your business is legal. The government has closed these loopholes, but this has been a process.
The first effort involved trying to close the loophole by specifically restricting marijuana. This was challenged by medical marijuana businesses, who managed to get it overturned. Now, only illegal drug dealers cannot claim benefits or deductions. That being said, legal marijuana businesses can only claim CoGS as a deduction, largely due to the fact that federal law still recognizes marijuana as a dangerous drug.
Cannabis and the Cost of Goods Sold
The Cost of Goods Sold has many implications for the cannabis industry, from growing to supplying and selling. It also involves the storage and the paychecks of the employees who get it done.
For those who need a more positive lens to look through, there is a simple formula to calculate CoGS and some funny tax laws regarding the legal and illegal cannabis industry.
If you want more business advice or to find a good accountant for your cannabis business, please visit our site. We can teach you about some accounting issues that tend to especially affect cannabis businesses. We can also give some great advice on how to make something you love profitable.