The NBA's Finance Game: How Sports Teams Manage Million Dollar Budgets
By Imani Williams
We all know that the NBA makes millions upon millions every year. But how is that money made? Where do they get the budgets to manage teams of high-performing athletes? And how is that money handled?
Now that basketball season is back, we’re breaking down the key financial terms that determine how NBA teams manage their million-dollar budgets. And hopefully, you’ll learn a thing or two about how to manage your own cash.
Before we get too deep into it, we’re going to cover 3 main figures you need to know: the salary cap, the luxury tax, and the apron.
- The Salary Cap
The Salary Cap is like a budget limit that every NBA team should stick to. It’s the total amount of money a team can spend on player salaries in a given season.
Call it the green zone. If you stay in the green zone and keep your spending below the cap, you’re good 👌🏿.
It's not a random number though; the cap is decided based on the league's revenue. For the 2022-2023 season, this magic number was around $112 million.
But some teams make more money than others. So some of you might be asking, “Why should every team have the same budget? If they got the cash, why not use it?”
The point (or at least the intent) is to help maintain competitive balance in the league. More money equals more resources, which could result in an unfair advantage.
- The Luxury Tax Threshold
Now just because every team SHOULD stay in the green zone, doesn’t mean they will.
This is where things get interesting. The luxury tax threshold is the point at which teams will be penalized for overspending. It's usually set slightly higher than the salary cap. For the 2022-2023 season, it was roughly $136 million.
If a team's total player salaries go any higher than that, they need to pay a luxury tax. The purpose of this is to check teams on their excessive spending. When a team pays that tax, the NBA redistributes the cash to other teams.
So we’ll treat it like the yellow zone. If your team is in this yellow zone it’s not great, but it’s not that serious. All they have to do is chill with the spending, pay their tax, and move on. It is the yellow zone though; they do need to proceed with caution…
- The Apron
There are two types of people in the world: those who slow down at the yellow light, and those who speed up like they all of a sudden have somewhere important to go. 🚗
NBA teams can be the same way. Once we move past the yellow zone, we enter the red zone known as the apron. It sits a bit higher than the luxury tax; for the 2022-2023 season, it was set at around $143 million.
Now if your team is in the red zone? Bombastic Side eye 😒🙄
Jokes aside, it's pretty serious.. when a team's total payroll approaches or crosses the apron, there are a few consequences.
For one, they have limited flexibility to make certain player transactions. These can impact their ability to sign free agents using certain exceptions or execute sign-and-trade deals.
Moreover, teams that use certain exceptions become subject to what's known as a "hard cap." This means they cannot exceed the apron for the entire season, no matter what. No emergencies, no exceptions.
In essence…
In simple terms, the salary cap is the green zone where teams should keep their spending. The luxury tax threshold is the yellow zone where teams should pay their tax and proceed with caution. The apron is the red zone where additional restrictions are placed on player movement.
So there you have it, a breakdown of the NBA’s budgeting system. If it’s helpful for you, consider applying this technique when managing your own money. Create green, yellow, and red zones for your spending, and hold yourself accountable to stick to the budget 🚦