Self-propelled particle (SPP) systems are intrinsically out of equi-librium systems, where each individual particle converts energy into work to move in a dissipative medium. When interacting through a velocity alignment mechanism, and with the medium acting as a momentum sink, even momen-tum is not conserved. In this scenario, a mapping into an equilibrium system seems unlikely. Here, we show that an entropy functional can be derived for SPPs with velocity alignment and density-dependent speed, at least in the (orientationally) disordered phase. This non-trivial result has important phys-ical consequences. The study of the entropy functional reveals that the system can undergo phase separation before the orientational-order phase transition known to occur in SPP systems with velocity alignment. Moreover, we indi-cate that the spinodal line is a function of the alignment sensitivity and show that density fluctuations as well as the critical spatial diffusion, that leads to phase separation, dramatically increase as the orientational-order transition is approached.