Owner's pay is the most commonly distorted line item in small business financial statements. Too many owners pay themselves too little, making their business look more profitable than it actually is. Simple Numbers treats this as a fundamental error.
The market-rate principle
Greg Crabtree's Simple Numbers framework requires that owner's pay reflect what you'd have to pay someone else to do your job. If a journeyman plumber earns $70,000 in your market, your books should show $70,000 in owner's compensation — even if you only draw $40,000. The difference is a hidden subsidy you're extending to your own business.
Why this matters for every other metric
LER, pre-tax profit margin, salary cap — all are calculated after owner's pay is accounted for. If owner's pay is understated, every downstream metric looks better than it is. Crabtree is blunt: a business that only works because the owner is underpaid is not a healthy business.
Owner's pay vs. distributions
Owner's pay (as a salary or guaranteed payment) is a business expense that reduces profit. Distributions are taken from equity after profit is determined. These are different things, and treating distributions as pay obscures true profitability.
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