Cap space in basketball refers to the amount of money a professional team has to sign players with. It is important for front offices to know how much cap space they have at all times, especially before the draft, during free agency, and before the trade deadline.
The National Basketball Association uses a soft cap. This means that while there is a set maximum amount of money teams are allowed to spend, it is flexible given certain circumstances. This differs from the hard cap system in which teams are not permitted to exceed the limit.
One of the benefits of having a soft cap is that it allows teams to better retain players who have been on the team for a long time, and thus are eligible for a larger contract. The cap can be passed if there is not enough space to sign players in these situations.
Big time free agents want to go to places where they can be paid, a lot. If a team has many large contracts for mediocre players, they will not have enough space to sign superstars. Players and agents look at cap space when choosing which team to sign with, not just for themselves, but to see whether the team could bring in another high-profile player to play with them. While most players want a large contract, they also want to win, and will want to play for teams that have enough cap space to sign multiple all-stars if they are currently lacking in star power.
An important note about trades and cap space is that trades cannot be completed if it would put a team over the cap. This is why players will often get dropped or traded to another team for cash considerations in order to make room for another player's contract on the payroll.