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.
‘Year-end’ – just who is it good for? Absolutely no one – except perhaps the IRD and accountants. ‘Year-end’ exists for tax purposes only, is set by governments and is purely to determine your tax liabilities.
It is a necessary compliance exercise, normally done by an accountant on your behalf, who may well have no connection to you as a business owner. The irony is that the numbers we report at ‘year-end’ – often several months afterwards – document our ‘history’ and are not the ones we need if we want to really understand our business.
Every ‘year-end’ should be a beginning. We should keep our eyes on the numbers every day and those numbers should speak to us all the time. Get them to pop off the page and tap us on the shoulder so we pay attention and know what they’re up to.
When a small business is born, the focus tends to fall primarily on cash flow, sales and immediate costs which means some indicators as to business health are missed, ignored or simply unknown. It’s easy to get caught up in jargon but there are a ‘number of numbers’ to consider. Labour efficiency ratios, for example, may sound complicated but they help us to understand productivity and the value and return achieved for every dollar invested in wages. Looking at our figures on a rolling twelve-month basis allows us to keep our finger on the pulse, build confidence and make strategic, proactive decisions.
Here at The Alternative Board, we have the tools to help you understand your numbers so you can make sound and timely decisions about your business. Advice on tracking your numbers, your business performance and business improvement is how we help you make a new beginning and a fresh start every month.
The reality for business owners is that keeping a close watch on your numbers will not only help you predict sales, trends and downturns, it will help you prepare for a crisis, develop business continuity plans, allow you to ‘expect the unexpected’ and deal with it accordingly.
Our dynamic tool to help track your historic and forecast financials is one I would highly recommend. It provides a current and accurate picture of where a business owner is now so the right decisions can be made. Rolling reports show trends and highlight the numbers that matter every day.
In April – alert level changes permitting – I’ll be running a workshop for business owners interested in getting to the root of their numbers. If you would like to come along, get in touch (contact us) and let’s start a new beginning together.
A sudden slip into Alert Level Three, the blast of the emergency ‘COVID’ warning through our phones and once again we’re into the balancing act of keeping our businesses moving in exceptional circumstances.
Last month our Pulse Check results told us how adaptable and flexible New Zealand’s small business are, with business owners altering operations and changing practice in order to survive the challenges that 2020 has thrown at us all. Just as we have rolled out our August Pulse Check – which you can access here if you would like to participate – the beat has changed again and, in Auckland, we are facing at least three days at Level 3, probably more, with the rest of New Zealand parked up at Level 2 for the time being.
We asked our Auckland team for their thoughts on the current situation and their advice was simple — we’ve been here before, rely on past experience and know that it will pass.
The Alternative Board’s managing director Stephen James said: “Knowing it will pass, spend some time addressing a few scenarios. For example, if Level 3 lasts, as announced, for three days what do you need to do? Or, if it remains in place for two weeks or if Level 4 is declared and we have full lockdown for an indefinite period — what then? Develop plans of action for each scenario and communicate these to your staff and stakeholders.”