Rental Equals ProfitWritten By Dan Kaplan
Article Date: 12-01-2004
Copyright (C) 2004 Associated Equipment Distributors. All Rights Reserved.
There is only one reason to be in the rent-to-rent business – to make money.
If you’re in the rent-to-rent business and it’s not profitable, there are steps you can take that are guaranteed to increase rental sales and margins.
To illustrate, consider this actual case history of a dealership. (To create this example and preserve the anonymity of the dealership, I have combined data from several dealerships. The data, while not attributable to any single dealership, is indicative of the operating parameters I encounter regularly and is illustrative of the specific changes that can be made to improve profitability in
rent-to-rent. Burris Equipment Co. was kind enough to allow us to photograph their dealership for illustration purposes; however, they are not in any way portrayed in this case history.)
The ABCD Equipment Co.
In 2004, rent-to-rent revenue for the ABCD Equipment Co. will be approximately $3 million. With a fleet first cost of $14 million, dollar utilization is 20.9 percent, which means the fleet is significantly under-utilized. The net loss is $300,000.
Dollar utilization at ABCD is down from 22 percent in 2003 and 24 percent in 2002.
Fleet cost: $10.3 million in 2002, $15.5 million in 2003
Rental revenue: $2.5 million in 2002, $3.4 million in 2003
$ Utilization: 24% in 2002, 22% in 2003
Compared to the dollar utilization of 20.9 percent currently being generated by the ABCD Equipment Co., the major rental companies are producing dollar utilization rates of:
United Rentals 59.1%
For a dealership the size of ABCD, the breakeven dollar utilization on the rental fleet should be approximately 37 percent, fully allocated, which requires rental sales of $431,000 per month.
Parts and Service
Currently, all service and maintenance functions are being performed by the dealership shop and the rental business is being charged $45 per hour for labor and dealer net for parts. For the 12 months ending December 2003, that resulted in a total of $815,000 charged to the rental business for parts and labor. Approximately 50 percent was labor and 50 percent was parts.
ABCD is spending 24.5 percent of rental revenue on parts and labor for the rental fleet.
A typical rental operation spends 9 percent to 12 percent of rental revenue on parts and labor.
To compete as a rent-to-rent company, the rental business must function like a rental business and not like a full-service dealership. Two shop bays should be dedicated to the rental fleet. The rental shop should only perform preventive maintenance, with major repair work performed by the dealership shop.
With labor costs of $405,000, ABCD is paying for the equivalent of 7.3 mechanics, which is a mechanic staffing ratio of one mechanic per $1.92 million in fleet first cost.
With an average fleet size of $14 million generating rental revenue of $3 million, the mechanic staffing level is appropriate. The problem is the dollar utilization of 20.9 percent. Labor staffing should be based on the current rental revenue or rentable fleet. At current levels, ABCD should only require a mechanic staffing level of four.
Assign four mechanics specifically to the rent-to-rent business – one lead mechanic and three “B” mechanics. The lead mechanic should decide what level of service is required, if any, and when to move the equipment to the dealership side for repair.
Rental Manager/Sales Staff
Hire a qualified rent-to-rent branch manager for a base salary of $60,000 to $80,000 and a standard bonus of 20 percent if the business plan is attained. For exceptional performance, which should be defined in the branch manager’s compensation plan, pay a maximum bonus of 40 percent of base salary. The bonus should be paid annually.
Hire three dedicated rental sales reps – one for every $1 million in rental revenue – at a base salary of $25,000 to $30,000 plus 3 percent of gross rental sales. They should also receive a car, expense account and fringe benefits. If dealership sales reps also handle rent-to-rent, they should be compensated at a rate of 1 percent of gross rentals collected.
In 2003, trucking was not allocated to the rental business to cover delivery costs. This should be changed and the rental sales rep should be compensated on delivery revenue at the same rate as for gross rental sales. Delivery costs and revenue are so critical to profitability of a rent-to-rent business, they should be broken out as separate line items on the operating statement.
Two rental coordinators should be able to handle both rent-to-rent and rent-to-sell dispatch.
ABCD will also need two administrative personnel to handle rental billing and follow-up for the rental operation. Additional administrative support may also be required to handle accounts receivables and collections. If the dealership side of the company wants to provide the rent-to-rent side with administrative support, a charge should be made to the rental operation for that service.
Excerpted from December 2004 Construction Equipment Distribution.
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