Most fans following the NRL understand the idea of a salary cap – and if you aren’t familiar with NRL it is Australia’s National Rugby League. Like many sporting leagues they have some form of a salary cap which is an agreement or rule that puts a limit on the amount of money that a team can spend on players’ salaries.
You might also think that this sort of policy is reserved for big earners and sports superstars but a salary cap makes sense for businesses too. As a business owner, have you thought about the benefits of a salary cap? Here’s the rundown for you.
What are the benefits of a Salary Cap?
- It helps to protect your profit margin.
- It helps you make efficient use of the team you already employ.
- It helps you recognise and understand the implications of increasing or decreasing staff numbers.
How does it work?
- Step one – you set a target net profit percentage. Let’s say your revenue is $1,000,000 and your aim is to achieve a 10% net profit of $100,000.
- Step two – subtract that from your revenue.
- Step three – deduct all non-labour expenses from your revenue. For this example the amount would be $500,000.
- What’s left over is your salary cap – in this case $400,000.
How does this help?
- It creates a clear picture of the labour you can afford.
- You can track your monthly labour costs.
- Helps set meaningful forecasts you can work with.
- As you grow, your costs grow and it is good to control what you can. Labour costs is one of them.
At our Alternative Board meetings we spend time exploring the numbers that help keep our businesses on track. If you would like to discover more about formulas that inform, I’m here to help so get in touch.