Why Viewing Labor as an Expense Is Wrong

At all sizes of business, employees are frequently viewed as an expense. It's not just management — investors often think this way too. When a public company announces layoffs, stocks usually go up. Investors interpret the reduction as a path to higher profits. We, as managers and owners, are trained to think the same way: only add employees when absolutely necessary. If labor costs rise, profit suffers.

We categorically believe administering labor as an expense is wrong — especially in the lower-middle market. When managed correctly, labor is an investment, not a cost.

When Labor Actually Becomes an Expense

The operative phrase is "when managed correctly." The truth is that most of the time, it isn't. Employees are added as band-aid fixes to immediate problems rather than as part of a deliberate plan.

Band-Aid Labor Examples

Business needs more sales in a specific market — add a sales rep.
That sales rep is doing too much admin — add an administrative assistant.
HR can't keep up with benefits management — add a benefits manager.

Over time, the band-aids compound. As a company approaches mid-market size, labor has ballooned — and management can't explain why costs have risen significantly as a percentage of revenue. The response is layoffs. Employees who came on board to support the mission are left without jobs, wondering what happened.

Was it their fault? No. Layoffs are a symptom, not a root cause. Ninety percent of the time, layoffs are caused by management's lack of a strategic plan or poor understanding of the business. Frequent layoffs and high turnover are nearly always a leadership issue, not a workforce issue.

Step One: Think Like an Operator, Not an Employee

The first shift is mental. If you're the sole executive — or part of a small executive team — working inside the business all day, you're limiting your ability to grow. We've seen it repeatedly with great companies:

Home services owners driving from job to job. Accounting firm partners billing 2,000+ hours a year. Distribution company founders working the floor to ensure orders ship. These are all important tasks — but when they consume your time, the business plan never gets written, and the business never scales.

How do you make the shift from employee to operator? The most common question we hear: "I've looked at the P&L. How do I pay myself a salary and hire a General Manager? There isn't enough cash for both."

This is exactly where the investment mindset kicks in. The most logical path is to forego your salary temporarily. If that's not feasible, other options include taking on an investor, bridging with debt, or structuring a performance-based compensation plan. But the investment has to be made.

Why Hiring a General Manager Is an Investment, Not an Expense

First, it's the single most important step in eliminating Key Man risk — the number one deal killer. Second, it frees you to focus on scaling the business rather than running it. As you refocus on growth and revenue increases, profit repopulates on the P&L and you create the capacity to build an executive team, pay yourself, or generate distributions.

How to Invest in Labor Through Strategic Planning

The most important shift is from reactive hiring to strategic hiring. Employees hired through a strategic plan are investments. Employees hired as band-aid fixes are expenses.

A strategic plan is your business's vision over the next one to three to five years — shared across your team so everyone is aligned. Once in place, it drives everything else:

Set objectives and KPI goals so performance targets are clear and measurable, not arbitrary.
Build budgets from the plan — including projected labor costs tied to specific growth milestones rather than reactive headcount decisions.
Define the roles you need to hire for — including the milestone or trigger that justifies each hire, and a written rationale for why the role exists.
Surround yourself with people smarter than you in their area. Start with Head of Sales or a General Manager. Build your executive team from there. Your job becomes leading the team and ensuring they're headed in the right direction.
Work with your Executive Team and Board to build and refine the strategic plan annually. This is what it means to work on the business.

The strategic plan doesn't need to be a 50-page document. Even a focused, one-page plan shared with your team puts you ahead of 99% of small businesses. And the valuation payoff is significant — any future buyer or investor can immediately see themselves growing the business rather than fixing it. That's the type of company that transacts off-market at premium prices, not on public deal pages competing on price alone.

The Bottom Line

An investment in your people begins with investing in yourself — creating the space to work on the business. From there, hire the best executive team you can afford. Build a strategic plan that moves you from band-aid fixes to deliberate, justified hires. Measure results. Iterate.

When you do this well, the business grows. Profit increases. And when the time comes to exit, the valuation reflects the organization you've built — not just the revenue you've generated.