In the NFL, and other pro sports, the league has a salary cap that teams must adhere to. It’s to promote parity and it’s worked. Over the last 10 years only five of the 32 teams have a cumulative winning percentage of .600 or higher.
In our businesses we don’t have a salary cap, we’re not interested in parity, it’s not a zero-sum game so we all can do well, and at the same time there are factors that keep things in check. Those include:
- If we pay people too much based on their productivity we’ll lose money. If we don’t watch our costs we’ll lose money. If we ignore sales and marketing strategies business will eventually disappear. A good lesson on this is the restaurant industry. Good restaurateurs know exactly what percentage of sales food costs, labor costs, rent and other key expenses must come in at to make it a profitable venture. Manufacturers should know what their cost of goods sold needs to be. Good metrics make a difference.
- In the (small business) buy-sell world one of those factors is the banking industry. Good banks add a layer of common sense (don’t get me going on banks that will allow a business buyer to be leveraged to their eyeballs or higher). Banks are in business to be paid back and have their own metrics, which borrowers must meet or exceed. In a way it’s a “pricing cap” that acts as a sanity check.
We don’t have to manage the cap, as NFL teams do, but we do have to manage a budget. Managing a business simply by how much money is in the checking account vs. knowing your numbers is a sign of an upcoming disaster.
“Those who have knowledge don’t predict. Those who predict don’t have knowledge.” Lao Tzu