Episode 429: Thinking Time - A Salary Cap For Your Business
In this episode, host Bradley Hamner (Speaker A) uses the analogy of professional sports salary caps—particularly the NBA, NFL, and the Los Angeles Lakers—to introduce a financial control framework for small‑to‑mid‑size businesses. Drawing on concepts from Greg Crabtree’s book Simple Numbers, he proposes that businesses treat labor costs as a “salary cap” equal to roughly 50‑58% of top‑line revenue (or 50% of gross profit when cost of goods sold exists). He walks through the calculation with a $1 M revenue example, explains how to include the owner’s W‑2 salary, and then discusses how to allocate the remaining labor budget across functions such as sales, service delivery, executive assistance, and office management. The conversation highlights the importance of tracking this salary‑cap metric over multiple years to inform hiring, layoff, and marketing investment decisions. Throughout, Hamner shares anecdotes about his son’s Mets fandom and includes a brief sponsor message for Club Capital, an accounting advisory firm for insurance agencies.
Chapters
How are you gonna allocate those funds?
How much of that is gonna go to sales? How much of that is gonna go to your service team?
I'm a big Lakers basketball fan. They have to work within salary cap restrictions. Sure, I know that at times they can go over a number and pay a luxury tax, but we don't have the ability to do that. So we have to have some financial controls in place. And I think that what the salary cap does is indeed give you that. It gives you some checks and balances and some controls on how much am I spending on labor and even what is my return on investment from that labor. It's a super simple calculation to make.
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Hey everyone. Well, recently the New York Mets signed a player to a $765 $100 million contract. What I'm going to do in this short episode is share with you something that is not necessarily around baseball contracts, but something that is absolutely inherently involved in a lot of different professional sports teams and how it could actually benefit your business. This podcast is called A Salary Cap for Your Business. See, you know, my son Cooper, who I've talked about at different times. He's a big New York Mets fan, and there's a great story about this. In 2018, 2019, he went with his grandparents to a Reds and New York Mets game, and he got to see the Mets win that game in a walk-off home run fashion. And since that point, he's been a huge Mets fan. So I, and we, have really adopted the Mets, and I was fortunate enough to get to take him to the Mets-Dodgers game, or one of the games. In New York City this past fall. So as you may have heard, the Mets acquired Juan Soto from the Yankees, ironically, for just a ridiculous amount of money. As a matter of fact, $765 million, I believe, over 15 years. But what's unique about baseball is they really don't have a salary cap. The Dodgers were able to sign Shohei Ohtani, and obviously the Mets now have been able to sign Juan Soto. But most of the other sports professional leagues do have some sort of salary cap. Now, I'm not sure about professional soccer, at least I'm not sure how they set up, but certainly the NBA and the NFL do. So the baseball teams can basically pay whatever the market bears for their players in addition to some sort of tax for doing so. But again, like the NBA and NFL, those teams actually have to work within a salary cap. And our businesses are much more like the NFL and the NBA in the sense that they— we have a salary cap too, because we don't have an endless amount of money for our businesses. Everybody that I personally work with in the area that I know is companies doing at least $300,000 up to $3 million in annual revenue. And so obviously there is a cap that someone can really spend to be able to acquire their team members or labor in their business. And I'd be remiss if I didn't acknowledge the inspiration for this topic. And that's from the book Simple Numbers by the author Greg Crabtree. Greg is a friend, but he's an incredible entrepreneurial speaker, author. If you've not read Simple Numbers, I definitely recommend that you do so. So the idea of a salary cap is something that I think we can consider for our businesses as well. So while you may not have this verbiage in your vernacular inherently, there has been really a max that you can spend on labor in your business. And look, generally speaking, most businesses will be pretty well suited to spend somewhere between 50% and 58% of their top-line revenue in the form of labor, therefore creating a salary cap. Now, one caveat to this: if your business has cost of goods sold, you're gonna want to use a slightly different formula, which is revenue minus your cost of goods cost of goods sold times 50%. So it's really going to be 50% off of the gross profit number. That's important. For many of you, if you do not have cost of goods sold, and you would certainly know that if you did, then you can just do it off your top line revenue. So an example of this would be a million-dollar business, cost of goods sold $400,000. So their gross profit they're operating off of is $600K. So their target labor range would be somewhere between $300,000 and $350,000. $100,000. Okay, so now what? So I would take your 2024 revenue and also begin to kind of forecast what you actually think your revenue is going to be in 2025 going forward and multiply that number by 50 to 58%. And this is so important. Yes, you do need to include your W-2 salary in that as well. Now, what should your W-2 salary be? You also You'll find this in that book, Simple Numbers, where Gregg talks about that you need to pay a market-based wage. Now, he tends to advocate probably for a higher W-2 salary than maybe what some of you may be doing currently. But I do think his point is certainly well suited. That's maybe for a different topic, another podcast for another time, but do include your number in that for the labor. And so I think the closer that you can get to 50%, or maybe even less, and you're still able to be profitable and still able to continue to grow, that gives you enough leeway. The labor number in any business— your salaries and wages and taxes and all of those numbers— that labor number is by far, for every business, even once you get past the cost of goods sold, in some businesses, that is by far the biggest expense you're gonna see on a profit and loss statement. So what that does is it creates a salary cap. And so when you begin to think about your salary cap, and so let's just take as an example, you're a million-dollar business and you want to be, you know, running at a 25% profit margin. Okay, so we got 75% left. And let's say you're going to take 50% of that is your salary cap. Maybe you're paying yourself $75,000. So we've got $425,000 to go around. How are you going to allocate those funds?
How much of that is going to go to sales? How much of that is going to go to your service team? How much of that is going to go to your executive assistant?
How much of that is going to go maybe to your office manager if you have one? How much of that is going to go to any of your support, maybe fractional support staff? If you think of it that way, I'm a big Lakers basketball fan. They have to work within salary cap restrictions. Sure, I know that at times they can go over a number and pay a luxury tax, but we don't have the ability to do that. So we have to have some financial controls in place. And I think that what the salary cap does is indeed give you that. It gives you some checks and balances and some controls on how much am I spending on labor and even what is my return on investment. From that labor. It's a super simple calculation to make. And when I've ran this with some of our members one-on-one, they said, wow, it was really eye-opening for me to kind of look at it that once I had the number, I took my revenue number and I had somebody that was doing the number off of $450,000 in top line revenue. They begin to see like, wow, I never really thought of it from, I've got this bucket of pool of money in. I didn't want to make sure I get the best return on investment from that. And it helped them to see their business in the money that they were spending, not just running it through twice a month through their, you know, Gusto payroll or their SurePayroll, their ADP. I mean, you know, you kind of get lost in that. But when they looked at it on the annual basis and said, yeah, that makes sense, this is a resource that I need to really allocate well, it really helped them to be able to make some decisions that otherwise they didn't really know what the right decision was going to be for some of their team members. And so I'm curious, run your numbers. Have a salary cap range somewhere in that 50% to 58% range. And the more that you're able to push that number down while still being able to grow, certainly, if you pull that number too low, like I have an example of someone that in 2024 ran a 50% 52% profit margin. Well, sounds great, right? And it did. He made money, but he himself said, I would rather take some of that money, push down my profit number this year and reallocate some of those funds to more team members. And he's doing it intentionally. So his profit's not gonna be even close to 50-something percent this year. It's probably gonna be closer to 40%. And he was running at about $1.3 million or so. And so that intentional 10%, instead of being profit, he's actually going to increase his salary cap, increase, you know, what he has, because he still has margin there and he wants to continue to grow. And the way to grow is typically through people, adding capacity, and also through investment in marketing. So I'd be curious, run your salary cap number. How are you doing currently? So run your historical numbers. I think it's just, as Greg says, this is an incredible number to track over time. So maybe if you're going to go back and look at what was my revenue and what was my total labor number in maybe 2020, '21, '22, '23, '24, and you can get 5 years' worth of data and see how that number moves over time. Typically, that's not a number that you're going to be able to make major moves unless I guess you went in and made some layoffs or you went and hired a lot of people all at one time. But it is a number that I believe that you can track over time. Been incredibly helpful to me. It's been incredibly helpful to some of our clients and members for us to be able to share some of that with them, for them to be able to think about their labor spend in a different way. Salary cap for your business. Hope that serves you. Till next episode. Lead well and go be great.
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