COGM, or Cost of Goods Manufactured, is a record of the capital outlay for production in a given period. COGM is important in assigning accurate costs to inventory on a unit-by-unit basis and in determining the total on-hand value of that inventory.
Properly calculated COGM isn’t directly reflected in taxes, and so it is often second to COGS, or Cost of Goods Sold, when discussing the financials of cannabis companies. While the two terms may seem synonymous, COGS very importantly only offsets the cost of goods whose sales receipts fall within the given fiscal period. Tangentially, unsold inventory is, perhaps obviously, not part of this calculation. In fact, unsold inventory is effectively ‘null’ in tax calculations–a cost incurred, but invisible to the IRS until sold.
While the ramifications of this equation can be obvious, how to handle them is less so. Determining whether to hold inventory for extended periods depends on the company’s growth targets, scalability, and working capital, to name but a few factors impacted up and down the line from this simple production metric. Similarly, operations at the edge of capacity with just-in-time delivery can be grueling. COGM can help inform the decisions which descend from these complex relationships. As in most legacy industries, assigning these costs with exacting accuracy can help cannabis businesses develop important insights into logistics, sales goals, and more. Lower margin products, regardless of expiration date, tend to have shorter financial and fiscal shelf-lives than items with low COGM and high sales prices, as their storage and maintenance rack up costs while failing to enter the tax sheet.
For cannabis producers, the balance of COGM and COGS remains key to profitability. In places like Colorado where severe market downturn is decimating businesses in the adult-use space, it’s the difference between paying the bills–including the tax bill–or not.
COGM as a metric can be modulated by systems like perpetual inventory for input materials or just-in-time delivery but choosing the right systems to maximize your margins can become a project. That’s where Fire Business Strategies steps in with decades of combined cannabis production experience ready to bring to bear to make your cannabis venture efficient, sustainable, and profitable.
