Q: Please elaborate on what is meant by superior access to resources and customers with an example.
A: Superior access to customers means that a company has better access to customers than its competitors.
For example, in real estate, the three most important attributes are location, location, and location. In commercial real estate, a great location translates to better access to customers.
For Larry Crevin, his reputation in the industry provides him better access to customers. He is known for taking care of his customers and providing a superior product and so people seek out Crevin and Total Coverage, Inc.
Superior access to resources means that a company has better access to suppliers than its competition.
In one of our case studies, Benson Manufacturing, the owner has superior access to a large UK supplier because his daughter-in-law works there. With Larry Crevin and Total Coverage, he is able to discern trends in fashion ahead of his competitors and therefore make appropriate inventory purchases.
Q: Please elaborate on what is meant by limitations on competitors’ responses and options with an example.
A: For Total Coverage, the limitation on the responses of the competitors may be that the competition has not figured out what predicts changes in fashion, and therefore they overstock the wrong floor coverings. They may still be tracking appliance colors, or perhaps they have decided cinema marquees are predictive. Crevin understands that trends in women’s cosmetics are predictive of trends in color and fashion and those trends form the basis of his inventory selections.
Another example is a company that is overly product driven. A beverage distributor may be trying to sell only the products that it carries without a feedback loop. As a result, that distributor will be less responsive to customer's preferences than another beverage distributor with delivery drivers that talk to the customers every week and learn what beverages are both selling and requested.
Q: If loans to the owners are like distributions and are really operating expenses, then is it correct, that any money that the owner loans back to the company should be netted out to figure out the adjusted profit?
A: The short answer is no, money loaned to the company from the owners should not be netted out against money borrower from the company by the owners when we figure adjusted profit.
Loans to the owner(s) represent cash out of the company. For all non-subchapter C companies that cash out of the company is an operating event because that is money from the company to the owner(s) that the owner(s) use to pay taxes, and the amount of cash out in excess of the income tax obligation on the company profit is compensation.
In my experience, those loans are rarely paid back. They are usually advance distributions that are subsequently converted to distributions via accounting entries.
Regardless of whether or not the loans are converted to distributions, the money has gone out of the company to the owner for taxes and usually compensation, and taxes and compensation are operating expenses.
On the other hand, when the owner(s) put money into the company in the form of a loan, that loan from the owner(s) is considered financing, usually emergency financing because the company can’t get the money anywhere else. Most people only put money into the company because they have to; the company needs the cash. And their expectation is that those loans will be paid back.
And so, if you have a company that loans $100,000 to the owner(s), and that same year the owner(s) loans $50,000 to the company, the full $100,000 in loans to the owners is operating expenses, and reported profit needs to be adjusted downward by the full $100,000, in addition to adjusting for any distributions.
A: Superior access to customers means that a company has better access to customers than its competitors.
For example, in real estate, the three most important attributes are location, location, and location. In commercial real estate, a great location translates to better access to customers.
For Larry Crevin, his reputation in the industry provides him better access to customers. He is known for taking care of his customers and providing a superior product and so people seek out Crevin and Total Coverage, Inc.
Superior access to resources means that a company has better access to suppliers than its competition.
In one of our case studies, Benson Manufacturing, the owner has superior access to a large UK supplier because his daughter-in-law works there. With Larry Crevin and Total Coverage, he is able to discern trends in fashion ahead of his competitors and therefore make appropriate inventory purchases.
Q: Please elaborate on what is meant by limitations on competitors’ responses and options with an example.
A: For Total Coverage, the limitation on the responses of the competitors may be that the competition has not figured out what predicts changes in fashion, and therefore they overstock the wrong floor coverings. They may still be tracking appliance colors, or perhaps they have decided cinema marquees are predictive. Crevin understands that trends in women’s cosmetics are predictive of trends in color and fashion and those trends form the basis of his inventory selections.
Another example is a company that is overly product driven. A beverage distributor may be trying to sell only the products that it carries without a feedback loop. As a result, that distributor will be less responsive to customer's preferences than another beverage distributor with delivery drivers that talk to the customers every week and learn what beverages are both selling and requested.
Q: If loans to the owners are like distributions and are really operating expenses, then is it correct, that any money that the owner loans back to the company should be netted out to figure out the adjusted profit?
A: The short answer is no, money loaned to the company from the owners should not be netted out against money borrower from the company by the owners when we figure adjusted profit.
Loans to the owner(s) represent cash out of the company. For all non-subchapter C companies that cash out of the company is an operating event because that is money from the company to the owner(s) that the owner(s) use to pay taxes, and the amount of cash out in excess of the income tax obligation on the company profit is compensation.
In my experience, those loans are rarely paid back. They are usually advance distributions that are subsequently converted to distributions via accounting entries.
Regardless of whether or not the loans are converted to distributions, the money has gone out of the company to the owner for taxes and usually compensation, and taxes and compensation are operating expenses.
On the other hand, when the owner(s) put money into the company in the form of a loan, that loan from the owner(s) is considered financing, usually emergency financing because the company can’t get the money anywhere else. Most people only put money into the company because they have to; the company needs the cash. And their expectation is that those loans will be paid back.
And so, if you have a company that loans $100,000 to the owner(s), and that same year the owner(s) loans $50,000 to the company, the full $100,000 in loans to the owners is operating expenses, and reported profit needs to be adjusted downward by the full $100,000, in addition to adjusting for any distributions.