Why You Should Pay Yourself a Salary

In the P&L post I published recently, I made a point about labour costs that I want to come back to. I said that every owner-operator should include their own salary in the labour line of the P&L. I also said that many don't pay themselves a proper salary at all, and that I think that's a mistake.

This is the longer version of why.

The pattern I keep seeing

Most owner-operators I've worked with, particularly those running smaller independent cafés, pubs and restaurants, don't pay themselves a fixed salary. They pay their staff, pay their suppliers, pay the rent, pay the utilities, and then take whatever is left at the end of the month. Sometimes that's a reasonable amount. Quite often it isn't. Occasionally it's nothing.

The reasoning feels logical enough. The business comes first. If there's a shortfall somewhere, the owner absorbs it. Staff need to be paid on time, suppliers need to be paid to keep deliveries coming, and the landlord isn't going to wait. The owner's income becomes the most flexible cost in the business, the one that can shrink or disappear entirely when things get tight.

I understand the instinct. But it creates a problem that goes well beyond the owner's bank balance.

What your P&L is actually telling you

If you run the business and you don't cost your own time, your P&L is not showing you reality. It's showing you something more flattering than reality.

Think about it this way. Your labour cost, that 30-35% of net sales I talked about in the P&L post, is supposed to represent the true cost of staffing the operation. If you're working 50 or 60 hours a week in the business and none of that is costed, the labour line is artificially low. As a result, your net profit looks better than it should. The business appears healthier on paper than it actually is. What this means in practice is that problems get hidden. If your concept isn't generating enough revenue to cover its real costs, you might not see that until the situation is serious. The numbers aren't raising the alarm because you've quietly absorbed the shortfall with your own unpaid time. You're effectively subsidising the business, and the P&L, the one tool that should be telling you where you stand, can't do its job properly.

I've seen this play out repeatedly. An operator looks at their figures and thinks things are broadly fine. The margins look acceptable, the business is ticking over. But the moment you add in a realistic salary for the owner's role, the picture changes significantly. In some cases, what looked like a modest profit becomes a loss. That's uncomfortable to see, but it's far better to see it than not to.

So what is a realistic salary? Ask yourself: if I stepped away from the day-to-day running of this business tomorrow and needed to hire someone to do what I do, what would that cost? Not a token figure. A real one. What would you need to pay a competent general manager to open up, manage the team, deal with suppliers, handle the books, cover shifts when someone calls in sick, and do all the other things you do in a given week? In most cases, depending on location and the size of the operation, you'd be looking at somewhere between £30,000 and £45,000 a year, possibly more.

That figure is the market value of your labour. It's what the business would have to pay if you weren't there doing it for free. Whether you actually pay yourself that exact amount is a separate question; the important thing is that the P&L reflects it. Because if the business cannot support that cost and still function, that is critical information.

The trap of paying yourself last

There's a particular danger in the "take what's left" approach that goes beyond the accounting. It affects how you experience running the business.

If you're working 50-hour weeks, carrying the stress of ownership, making every significant decision, and at the end of the month you're taking home less than you'd earn managing someone else's pub, something has gone wrong. Not necessarily with your commitment or your ability, but with the commercial structure of the operation. The problem is that because you never see the shortfall as a line item, because it's never written down as "owner worked 220 hours this month for £8 an hour," you don't fully confront it. It sits as a vague sense of being underpaid rather than a specific, quantifiable problem you can address.

I think this is one of the reasons burnout is so common among independent operators. It isn't just the hours. It's the hours combined with the financial reality not reflecting the effort. Paying yourself a salary forces you to face that equation honestly. If the number is painful, at least it's visible, and visible problems are the ones you can actually do something about.

Now, there's an obvious counterargument here: "I can't afford to pay myself a salary right now." And in the early stages of a business, that might be fair. You're building something, investing your time, and the returns haven't caught up yet. But you need to put a real time limit on that. Six months, a year, whatever feels right for your situation, but a definite point at which you expect the business to be able to pay you properly for the work you're doing. This is worth being honest about. A business that permanently relies on its owner working unpaid isn't a viable business yet. It might become one, but only if you confront the gap rather than absorb it.

If you can afford to pay yourself, then the business holds up. It's covering its real costs, including yours, and everything you build from there is built on solid ground.

Salary, dividend, and the point where you have real choices

It's worth being clear about two different things: the management salary and the owner's dividend. They serve different purposes, and separating them gives you information you can't get any other way.

The management salary reflects the value of the work you do in the business. It sits in the labour line of the P&L, alongside your staff costs. It should be a realistic figure based on what you'd pay someone to do the same job. This is a cost of the business, not a reward for owning it.

The owner's dividend is the return on your investment, your reward for the risk you've taken and the capital you've put in. It comes from the profit that remains after all costs, including your salary, have been met.

Here's where this distinction becomes genuinely powerful. If you're paying yourself a management salary and the business is also generating a profit on top of that, you're building towards something important. You can see, in real numbers, what the business earns with a properly costed manager in place. The moment that profit (your potential dividend) reaches a level you could live on by itself, you have reached the point where you could, in theory, hire someone to replace you and step away from the day-to-day without an immediate financial crisis. You might choose not to. But you could. That's not just financial security; it's freedom. It means you have choices about how you spend your time, and the business has proved it can stand on its own.

Without that information, the decision to step back is a leap into the dark.

What to do with this

The practical step is simple, even if what it reveals isn't always comfortable. Set a salary for yourself. Make it realistic; base it on what you'd have to pay a manager to do your job. Put it into your P&L as a labour cost. This applies whether you're a sole trader or operating through a limited company. The mechanics of how you pay yourself differ, but the principle is the same: your time has a cost, and the business needs to reflect it.

Then look at the numbers.

If the business still shows a profit after your salary is included, you're in better shape than many operators. If it doesn't, you haven't created a problem. You've uncovered one. The problem was always there; you just couldn't see it because your unpaid labour was papering over it.

Either way, you now have a true picture. And a true picture, however uncomfortable, is the only thing you can build on.