When cannabis operators talk about growth, the conversation typically centers around revenue. How do we increase sales? Add products? Expand into new markets? Capture more market share?
Those are important questions, but there may be a more important one to answer first: Where is your business actually making money?
I’ve seen cannabis businesses generate strong revenue while struggling to maintain healthy cash flow. I’ve also worked with operators whose revenue growth was more modest, but whose profitability consistently outperformed their peers. The difference often comes down to how well they understand their costs and margins.
For cultivators, that means looking beyond yield and production volume to understand the true cost and profitability of different strains and products. For retailers, it means looking beyond sales to understand which products and categories are actually contributing to the bottom line.
If you’re looking for ways to improve profitability, here are five places to start.
1. Know the true cost of what you sell
It’s difficult to improve margins if you don’t know what it actually costs to produce or sell a product.
For cultivators, the cost of a crop can extend well beyond the cost of seeds or clones. Labor, utilities, nutrients, materials, testing, packaging, facility costs, waste, and other production expenses all affect the economics of a product. Looking at those costs by strain or product can reveal that some of your highest-volume products aren’t necessarily your most profitable.
Retailers face a similar issue. The wholesale cost of a product is only part of the equation. Discounts, promotions, shrinkage, inventory carrying costs, and other selling expenses can affect the margin you ultimately realize.
Action to take: Review your costs at the product or category level and identify where you’re making the strongest and weakest margins. If you can’t get to that level of detail, that’s a sign your accounting and operational data may need to be better connected.
2. Don’t confuse sales with profitability
A product that sells quickly isn’t automatically profitable.
A cultivator may have a high-demand strain that requires more labor, longer production time, or more resources than other products. A retailer may have a best-selling brand that consistently requires heavy discounting to move volume.
That doesn’t mean those products should be eliminated. It means you need enough information to understand the tradeoff.
Product-level profitability can help inform decisions about pricing, promotions, production schedules, purchasing, and inventory. It can also help operators identify products that deserve more attention because they generate stronger margins with fewer resources.
Action to take: Rank your products by both revenue and gross margin. Look for products that generate significant sales but relatively little profit, as well as products with lower sales that produce stronger margins.
3. Find where your cash is getting stuck
Profitability and cash flow are closely connected, but they’re not the same thing.
Inventory is one of the clearest examples. Products that sit too long tie up working capital, take up valuable space, and may eventually require discounting. For retailers, slow-moving inventory can indicate purchasing decisions that aren’t aligned with customer demand. For cultivators, producing more inventory than the market can absorb can create similar problems.
Labor and production capacity can also consume cash without producing the expected return. Inefficient processes, excessive overtime, avoidable waste, or underutilized capacity can gradually reduce margins.
Action to take: Look at your inventory aging, production schedules, and labor costs alongside sales. Identify where cash is being committed without generating a corresponding return.
4. Measure waste, not just output
For cultivators in particular, production metrics can create a misleading sense of performance if they aren’t connected to profitability.
A high yield is valuable, but only if the resulting product can be sold at a price that covers its production costs. Similarly, minimizing waste isn’t simply about reducing the amount of material discarded. It’s about understanding why waste occurs and what it costs the business.
Retailers can apply the same thinking to shrinkage, damaged products, expired inventory, and other losses.
Action to take: Track the financial impact of waste and loss, not just the quantity. Look for recurring causes and determine whether changes in production, purchasing, storage, or processes could reduce them.
5. Use your numbers to make decisions, not just reports
Most operators have access to plenty of financial and operational data. The challenge is turning that information into decisions.
Your reporting should help answer questions such as:
- Which products generate the strongest margins?
- Which products or categories are tying up cash?
- Where are costs increasing faster than revenue?
- Which customers, channels, or locations are most profitable?
- Where are discounts or promotions eroding margin?
- What changes would have the greatest impact on profitability?
If answering those questions requires pulling information from multiple spreadsheets and systems every month, you may have data, but you don’t necessarily have visibility.
The first step is identifying the information that matters most to your business and building a reporting process that delivers it consistently. In some cases, that may mean refining existing reports. In others, it may mean integrating systems, improving dashboards, or evaluating whether your current technology can support your decision-making needs.
The goal isn’t more reports. It’s having the right information in a format that helps you act on it.
Don’t let growth hide a margin problem.
It’s tempting to assume that selling more will solve profitability challenges. But if a product is priced incorrectly, inventory is turning too slowly, or production costs are too high, increasing volume may simply make the problem bigger.
That’s why understanding your margins should be part of your growth strategy, not something you revisit after growth occurs.
For cannabis operators, this is particularly important given the industry’s pricing pressure, regulatory requirements, and limitations on deductible expenses under IRC Section 280E. Accurate cost tracking and allocation can affect not only operational decisions, but also tax planning and cash flow.
The good news is that margin improvement doesn’t always require a major change to the business. Sometimes the opportunity is already there. You just need to know where to look.
Start by identifying your most profitable products, your biggest sources of cost, and where cash is getting tied up. Then use that information to make decisions about pricing, production, purchasing, and inventory.
Those insights can help you protect the margin you’re already generating and find opportunities to create more of it.
At Yeo & Yeo, we help cannabis operators gain greater visibility into profitability through strategic advisory services, cost accounting analysis, operational assessments, and guidance related to IRC Section 280E. By helping businesses understand the financial story behind their operations, we provide the insight needed to make informed decisions, protect margins, and support long-term growth.
