Cash on the table

Cost of cash for cannabis businesses

The cost of cash for retail businesses is elusive, but most business owners/managers would be shocked to realize how much it costs their business.

Unlike merchant services processing fees, which are easy to identify (just look at your contract or statements), the cost of cash is buried in multiple line items. Without a distinct line item, it is easy to underestimate the cost of cash.

A recent study across a range of retail industries found the average cost of cash ranged from 4% to over 15%, with an average of 9.1%. Cannabis was not included in the study, but as discussed below, cannabis businesses would most certainly be at the top of the range or above.

Direct and indirect costs

The cost of cash is comprised of both direct costs (hard costs associated with cash) and indirect costs (lost sales due to cash customers spending less than customers paying electronically).

In an industry like cannabis, which is so dependent on cash, there also are intangible costs. Things like safety, slower line speeds, and stress.

Direct costs of cash

The hard costs of cash are buried in multiple expense line items, including:

  1. Labor (drawer closing/rebuilding, deposit prep)
  2. Transportation
  3. Deposit and bank fees
  4. Cash loss/shrinkage

Labor costs are the least obvious but they’re the largest component. All the time spent opening and rebuilding cash drawers (which requires redundant counting, often by a manager), researching cash over/short issues, doing safe counts, processing change orders, and getting change from another drawer really add up.

Cost of cash by function
Source: IHL Group

Indirect costs

The fact that people spend more when paying electronically is well documented. How much more they spend varies depending on the study (are online payments included, are bill payments included, etc.), but it’s somewhere between 2x – 5x more.

The difference is skewed by several factors:

  • Electronic payments are naturally used for larger purchases
  • Cash is favored by lower-income individuals, who spend less
  • People spend more when buying on credit

However, the impact of the influences above is mitigated. Debit and credit cards are increasingly being used for smaller purchases, accounting for 50-60% of purchases between $10-100, which reduces the impact of debit and credit cards used for large dollar purchases. Additionally, debit card purchases outnumber credit card purchases, which reduces the impact of buying on credit.

For cannabis businesses, a conservative estimate of electronic transactions being 25-35% higher seems prudent.

Cash compared to merchant services processing fees

Many cannabis businesses balk at paying merchant services fees because compared to cash the fees seem expensive. After years of being cash only, cannabis businesses are numb to the costs associated with cash.

If you consider merchant services fees a cost of doing business, just like labor, armored services, and banking fees, the fees will seem more reasonable. Even a bargain when you realize how much cash costs.

Merchant services fees are almost always less than the cost of cash. This is before considering the indirect costs of cash.

Most businesses pay merchant services fees of 2-4%. So even for businesses with the lowest cost of cash (4.1% in the study linked above), the cost of cash is higher than their merchant services fees.

Factor in the increased spending for electronic payments and the cost of cash is rarely less than merchant services processing fees – for any business.

Cost of cash for cannabis businesses

In the study linked above, the average direct cost of cash was 4% – 15%. The businesses in the study averaged 30% of transactions in cash. Most cannabis businesses are twice that.

Source: IHL Group

Cannabis businesses also have higher cash transportation costs, banking fees, and compliance costs. Combine those higher costs with taking in cash at twice the rate of the businesses in the study and the cost of cash for cannabis businesses is surely near the top of the range, and most likely above 15%. Perhaps close to 20%.

That’s a staggering cost burden for any business. Combine that with the lost revenue from cash sales and it’s clear cannabis businesses are at a disadvantage. Luckily, cannabis businesses have more electronic payment options than ever, and some are very close to what’s available for traditional businesses.

How much is cash costing you?

Even if your cost of cash was 3% (below the range in the study) and your merchant processing fees were 3% (bottom of the range for cannabis businesses), cash would cost you more due to the lost sales if customers had paid electronically. Cash never wins.

Curious to see if reducing your cash sales would help your business? We developed a calculator that lets you compare the impact your mix of cash and electronic payments has on profit.

Additional Tools and Resources

Below are some of our resources to help you navigate the tricky world of cannabis payments and use payments to help your business realize its full potential.

  1. Merchant services fees vs cash calculator
  2. Increasing profits through payments
  3. How to drive more electronic payments
  4. Download our Strategic Guide to Cannabis Payments