A basic principle for any business is to know how much your operation costs you, how much income your business brings in, and what your profits will be.
In some business enterprises, figuring out costs, losses, income and profits is an exceptionally complicate calculation, especially if the business has employees, rather than being a sole proprietor with you as the owner and only worker.
Complex businesses with multiple employees, locations, and national or international procurement and sales almost always have accountants and field operating officers to manage outgoing cost and income.
As a black-market cannabis grower who operates solo in a moderately sized indoor grow op based out of my home, my cost and cannabis income analysis requires an investment of time and brainpower for accurate record-keeping and calculations. However, I’m glad to have the control in knowing how much I spend, how much I earn, and what my profits are.
To better understand how to do my grow-op accounting, I took a small-business accounting course at a local junior college, read some books (I recommend Small Time Operator: How to Start Your Own Business, Keep Your Books, Pay Your Taxes, and Stay Out of Trouble), and studied online tutorials. With the information I learned, I’m now going to walk you through procedures I use to determine how well my grow business is doing, so you too will have the tools necessary to determine how profitable your weed growing is.
Cost Of Providing Space For Your Cannabis Grow Op
The first step in accounting for your cannabis grow op is to analyze the cost of providing a physical indoor space for your crop, similarly to the calculation a tax accountant would make to determine a home office deduction for space in your home that’s exclusively dedicated to your business endeavors.
You’re looking for the square-foot percentage of space that’s used solely for cannabusiness activities. To simplify the calculation:
- Take the total square footage of your home.
- Divide this figure by the square footage of your cannabis grow room and any other home space used to support your cultivation operation, such as a closet where you store your hydroponics nutrients, or a refrigerator or freezer you use solely for storing buds and concentrates.
- Then add up the cost of renting or owning the entire home and its infrastructure. These costs may include property taxes, homeowner’s or renter’s insurance, mortgage payments, municipal water, sewerage and solid waste removal, repairs and maintenance, internet, phone, electricity, security, and anything else that has to be in place to own, rent, sustain and live in the home.
Here’s a handy example of how to figure the percentage and costs. Let’s say yearly operating costs for your home are $14,500 and your indoor grow op occupies 19 percent of your home space. The grow op’s portion of your home’s basic annual operating costs is $2,755, and this is a cost you put into the expenses column of your cannabis growing expense ledger.
Calculating Electricity & Water Costs For Cannabis Growing
In some sectors of grow-op home business costs, you have to take into account more than square-foot percentages. Consider electricity and water, for example. When I precisely measure the exact amount of electricity and water I use for growing my cannabis, I figure not just the dollar costs, but the ratio of use compared to my baseline water and electricity for other domestic needs. The simple truth is, if you don’t have a grow op in your home, you’re probably going to use a lot less water and electricity there than if you do.
Electricity and water costs vary by region, climate and season, so it’s important to keep track of how much of each you give your cannabis crop on a month-by-month basis.
It isn’t easy to do, because you have electricity costs from grow lights, fans, dehumidifiers and air conditioning, and at least some of the cost of powering such equipment is shared with the rest of the home.
If you’re running an unsealed grow room that doesn’t have its own air conditioner (in other words, the grow room is cooled by the same air conditioner that cools the rest of the home), you use the same kind of calculation as with the home office deduction, but you add to that the extra BTUs of cooling power needed to remove heat from grow lights.
Calculating the cost of air-conditioning electricity involves knowing how many BTUs of cooling capacity are being used just for the grow op, plus the cost of electricity per watt.
But I found an easier way to figure it out.
Before I built my grow room, I was living in the house where I eventually started my professional cannabis grow op. I knew what my electricity bills were for the months I grow indoors, from October to May, and I also requested from the electricity company two years’ worth of records for my home’s monthly bills.
After I established the basic cost of electricity per month without a grow room, it was easy to see how much extra I was spending on running a bunch of grow lights. For a typical October without a grow room in operation, my electricity costs were $67. With a grow room, it was $160.
In April, without a grow room in operation, my electricity cost was $53. In April with a grow room, the cost was $135. These comparisons help me estimate total electricity cost of the grow op per season, and also on a yearly basis.
I also took into account that grow-room heat offsets my heating costs during colder months.
Calculating water usage for cannabis growing is somewhat easier than calculating electrical costs. I can easily see how many gallons of reverse osmosis water I use when mixing my hydroponic nutrients solution. And I know how much water waste my reverse osmosis system creates. (For every gallon of reverse osmosis water, about 1.5 gallons goes to waste.)
Because I’m billed based on gallon consumption readings from the municipal water meter, I contacted the municipal water agency to find out how much each gallon is costing me, and then did the math.
Cannabis Grow-Room Costs For Transportation And Equipment
Another business cost for many growers involves transportation. Again, the home office deduction model is useful here. How much do I use my vehicle to procure grow-op supplies, clones, seeds, and to visit other growers in my cultivation network?
Once I know that percentage ratio, I take the total operating cost of my vehicle in gasoline, maintenance, replacement parts, depreciation, auto loan or lease payment and auto insurance, and figure out the percentage math to see how much grow-op-related transportation is costing me.
The other costs of growing indoor cannabis include capital investments and/or fixed one-time costs such as light stands, grow light fixtures, hydroponics systems such as deep water culture, and light movers.
You also have fluctuating operating costs such as soil, rockwool, coco coir, deep water culture, soilless mix, hydroponics nutrients, pH fluids, pH meters, trimmers, trellis netting, reverse osmosis filters, carbon filters, and grow bulbs, along with depreciation of the capital investments you make on equipment.
If you’re like me, you replace your grow bulbs and pH meter every season. You don’t have repeat use of your root-zone media. You replace your reverse osmosis filters and carbon filters every season. It’s easy to log those expenditures by keeping your hydroponics store receipts.
Other expenditures include the cost of cannabis seeds and clones. Log everything you spend on plant genetics, hydroponic nutrients, grow pots, pH meters and all secondary supplies.
How Much Is Your Cannabis Grower Time And Labor Worth? Here’s What Mine Is Worth
Many cannabis growers don’t factor how much their time is worth. In legalized states, grow-op workers are earning $10–15 per hour, while managers of licensed grow ops are earning $35 per hour or more, sometimes with additional perks like health benefits.
Most of us cultivate cannabis because we love growing it, so we don’t tally the labor value of the hours we spend tending our crops — but I do.
I spend an average of 150 hours on my grow op each four-month season, and I consider my labor to be worth $20 an hour. If you hire staff, such as bud trimmers, of course you include the cost of their labor.
I also include as a labor cost the time it takes me to record and tabulate the minutiae of costs for housing and running my grow op. Those activities are the trickiest parts of small-business accounting. The easier parts are totaling your cannabis income and doing the math to see how profitable, if at all, your grow op is.
For the calendar year of 2016, I spent a total of $6,700 on grow-room supplies and operating costs, on the portion of my home used for growing, and on transportation and living expenses of my grow op. My labor was worth about $6,000. This totals $12,700 total cannabis growing costs for the year.
My total dry harvest weight that year was a few ounces over 12 pounds. I sold most of it retail at an average of $300 per ounce, and some wholesale for an average $2,500 a pound.
My total cannabis gross income that year was $42,000. This amounts to $29,300 in profits, which is about equivalent to what I’d have had in my pocket if I worked a regular job in a skilled industry, clocking 40 hours a week with taxes, social security, disability and health insurance costs taken out of my pay prior.
Obviously, I don’t declare my income, but it’s not just because I want to keep every penny I earn. It’s also because I don’t support what the federal government does with our taxpayer money (waging endless wars, including the drug war, and giving tax breaks to billionaires and corporations).
My property taxes fund the things I believe in: libraries, roads, fire protection, sewage and trash pickup. Federal income taxes are mostly squandered and misused. I have no moral qualms about being a “tax dodger.”
However, if you’re a licensed producer in a legalized cannabis state who wants to deduct business expenses and comply with state laws, you not only have to pay taxes, you also have to have an accountant or cannabis accounting and tax software to log and tabulate your grow-op expenses and income.
The Benefits Of Cannabis Grow-Op Accounting
Some of my grower friends complain that keeping track of costs and figuring profits seems like a lot of work with few benefits. However, there are plenty of identifiable benefits:
- When you can see where you’re spending your grow-op money, you see where to streamline and otherwise modify your grow expenditures, so you spend less or spend more efficiently. For example, I was using a whole-house air conditioner to handle all my climate control needs. When I did my accounting, I saw that the electricity costs associated with that choice were skyrocketing. I consulted with a grow-room AC expert, who explained that using a whole-house air conditioner is inefficient. If I bought a split unit installed directly into the grow rooms, I’d save money on AC electricity expenses and be able to run sealed grow rooms. Eventually the money I saved would more than pay for the new splits.
- Issues with economies of scale reveal themselves when you crunch the numbers. The fixed costs of property taxes, home maintenance and repair are the same, whether you run a grow room or not. If you run a grow room with one grow light, your electricity and water costs go up some but not much. If you run two or more grow lights, but your grow room yield increases considerably, this means more profits per season. If you have the space and time, it’s better to run more grow lights, so you get more buds from the same space.
- When you see how much it costs to produce each ounce of cannabis, it helps you set fair prices that may attract more customers. It costs me about $68 an ounce to produce my cannabis, which includes the value of my labor, and all the money I spend to have a place to grow and to give my crops the light, water, climate, air movement and nutrients they need. I sell retail for $300 an ounce. If the market changes or I want to sell more weed faster, knowing that my retail small-sale markup is 500 percent gives me insight into whether I can afford to lower prices when necessary.
When it comes to the costs and profits of growing your own cannabis, knowledge is power. Keeping records and doing the business math helps you fine-tune your grow room business to prime it for long-term success.