As a cultivator or manufacturer, you probably don’t find cost tracking to be the most thrilling aspect of your cannabis business. Logging expenses and tracking the bill of materials and labor – we’re guessing that’s not why you got into the cannabis industry.
However, as unexciting as it may seem, the benefits of tracking your cost of goods sold (COGS) far outweigh any drawbacks. For operators across the cannabis supply chain, accurate tracking of COGS is key for tax mitigation, compliance, and driving profitability.
What is COGS?
Cost of goods sold, or COGS, lets you calculate the total direct costs of the products your cannabis business sells. This includes everything from the raw material and supply costs, labor hours, and overhead costs such as utility payments.
Why is it important to track your COGS? Aside from common business sense, it centers around Section 280E. We have an entire blog series breaking down the topic in more detail, but we will summarize its significance here. In short, based on Section 280E, as a business participating in the manufacture or sale of cannabis products, you cannot deduct certain business expenses from your gross income. As a result, your tax liability is much higher than for other businesses. However, while there are many types of expenses that cannabis businesses can’t deduct, you can deduct COGS.
How does this apply to your vertical?
Cost Tracking for Cannabis Cultivators
In cultivation, understanding costs and yield is everything – from calculating the cost per gram to the pound of product. It is the only cost you can write off to mitigate the tax burden because of the 280E tax structure.
Cultivators have historically relied on manual processes and spreadsheets to manage their operations. However, as the industry starts to come into its own, cultivators need to move from the mere reproduction of smooth workflows to the optimization of operations and quality control. Yet, the majority of operators have no insight into this at any point in time for their business.
Cost Tracking for Cannabis Manufacturers
Tracking costs on infused ingredients, packaging, and labor is important for any successful cannabis manufacturer.
Manufacturers create their products using ingredients from multiple suppliers, with various batches or lots. As the industry matures, it’s critical that all ingredients be tracked back to their origination (with associated test results). This includes any other solvents or other ingredients used in the production process.
How to Simplify Cannabis Cost Tracking
Logging and processing expenses is a necessary yet time-consuming process. As a cannabis operator, what are you to do? With COGS being the only deduction under 280E, accurately and seamlessly tracking your COGS is critical to your business’s success.
This requires increasingly sophisticated software that can handle multiple inputs and outputs to capture the variety of product variations/workflows that operators must capture. MJ Platform’s specifically designed features allow you to identify various ingredients, their names, the cost per unit, your current inventory levels, and the unit of measure associated with each product. In addition, you can keep track of the costs of packaging, employee labor hours, and machine labor hours.
Interested in simplifying your cannabis cost tracking? Request a demo of MJ Platform today.
