As someone who operates an M&A company that buys small businesses (niche healthcare sector), if there's one financial concept that I see business owners and many on this sub misuse it is the idea of "profit". Particularly, what "profit" actually means for a founder-keyperson business where the owner of the business is also a key employee of the business.

Cash flow is not the same thing as profit.

Let's take the example of a small convenience store. The store currently generates $500k/year of revenue and currently cash flows $50k to the owner (10% Seller Discretionary Earnings margin). The owner works 2,000 hours/year for the business, about 1,500 of those as a cashier and 500 of those on management duties such as ordering, bookkeeping, etc. He operates the business out of the storefront of a mixed use building that he owns, and does not currently charge the convenience store any "rent" as he does not see the need to do so when he owns the building. So, is this a $50,000/year profitable business. NO!

To figure out profit, we need to understand the difference between "Seller Discretionary Earnings" (all of the cash flow out of the business that an owner could enjoy, if they are willing to continue doing the same work for the business as the current owner) and "Profit" (true cash flow for an absentee owner who must pay fair market rate for all of the business' expenses).

The current owner actually wears three financial hats that matter:

He is the owner of the business: This entitles him to all profits.

He is the landlord of the business: The business should be paying him for this!

He is an employee of the business in two roles, as a cashier and a manager: The business should be paying him for this!

So, what's the true profit of this business?

SDE = $50,000

Fair market rent = ($20,000)

Fair market compensation for owner's work, including employer expenses such as employment taxes = ($30,000 for cashier work and $15,000 for management work)

Profit (loss) = ($15,000)

Ruh roh. This business is actually $15,000 in the red with -3% profit margin, with those losses being experienced via opportunity cost for the owner. Simply put, if he rented the space to another tenant and took a job doing the same work that he does for his own business, he'd be making more money than the $50,000/year he makes now.

Why does this matter? Understanding true profitability is important for understanding how your business is actually doing and what it will be worth some day if you decide to sell it. Most businesses are valued on the basis of their ability to produce cash for a new owner, and unless an owner is willing to work the register they're going to care about profitability rather than discretionary earnings. As a founder the time you invest in your business as an employee still has implied value and would need to be replaced after you exit, even if you don't currently account for your own "employee" wages properly in your bookkeeping today.