What does your contracting business and the AFL have in common???
Well, you both have a salary cap.
Every team in the AFL operates under a salary cap.
This is the maximum amount they’re allowed to spend on players’ salaries.
And like these AFL teams, your trade business also has a salary cap.
There’s a point at which your business can’t spend any more money on people over a 12-month period.
And there’s 3 primary reasons why we want to know what our salary cap is:
1. It stops you over-investing in labour which causes labour creep and erodes your profit,
2. It stops you underinvesting in labour which can stunt your growth and cause you to burn out, and
3. It stops you funding labour inefficiencies which allows you to get the best bang for buck from every dollar you spend on labour
So, how do you calculate this salary cap?
Well, it’s actually really, really simple.
All you need to do is make some projections based off where you think your business will be in 12 months’ time, factor in a pre-tax profit target, and then reverse engineer the numbers to uncover your salary cap.
For example:
This tells us that we’ve only got $450,000 to spend on people over the next 12 months!
That’s $450,000 to cover your fair market salary AND the salaries of both your office staff and field staff.
So, you might only have the budget to pay 4 or 5 peoples wages on top of your own over the next 12 months… And it doesn’t matter if they’re casual, part-time, full-time, or if they’re your cousin or spouse… And it doesn’t matter if you give incentive pay or overtime…
The sum of all spending on wages across a 12-month period cannot exceed $450,000. It’s as simple as that.
Every dollar over this $450,000 is a dollar that you’re eroding from your pre-tax profit target – which isn’t what we want at all!
And on the other end of the spectrum, you don’t want to spend too much under $450,000 on labour because you might be underinvesting and stunting your growth!
Not to mention the likely burn out you'd feel from trying to do more tasks in the business than you should because you haven't invested in people!
That's why, you want to try and stick as close as you possibly can to this budget, otherwise you’re either hurting your pre-tax profit target of $150,000 OR stunting your growth and profit potential!
If we’re currently over the salary cap:
• Is that extra cost an investment into the growth of the business?
• If we don’t plan to grow, do we need to cut some of our labour costs by letting go of some of our employees?
• Are we overpaying some of our employees from what would be a fair market wage?
• Am I trying to outsource too quickly?
• Are all our labour costs necessary and do we need to make cost cutting measures in other places of the business?
• Do we need better performance per employee to drive up the money made per labour dollar?
• Or is it a combination of everything?
If currently we’re under the salary cap:
• Are we hindering the growth of our business by underinvesting in our labour?
• Are we underpaying some of our employees from what would be a fair market wage and risking losing them to a competitor?
• Is our team just very productive, so we're able to make more money per employee?
• What can we invest this spare money in to accelerate growth?
• Or do we not want to grow and just take out larger distributions?
These are critical questions that need to be answered to make sure we’re not falling victim to either labour creep from over-investing in our labour OR stunting our growth by underinvesting in our labour.
If you're an electrician, plumber, painter, carpenter, or any other trade business owner who is looking to take their business to the next level, click here to learn more about how our team can help!
