Financial Benchmarks to Drive Rental Profit - Rental
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SECTION: Rental

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Financial Benchmarks to Drive Rental Profit

By George M. Keen

Article Date: 03-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.


Analysis formulas and considerations to make a better buck - for both types of rental approaches and expectations.

Rental is an interesting area to examine from a strategic point of view. Let's look at rental growth in the last 20 years.

In 1987, did you consciously make the decision to enter the rental market? Consciously make the decision to commit a certain amount of funds to rental? Did you establish specific financial benchmarks for rental operations and continuously monitor progress against those goals to adapt, change, and improve? Or, did you get into the rental business as a reaction to certain factors?

What we've seen as a consulting firm is that most heavy equipment dealers are in rental not due to an established strategic focus, but as a reaction to certain situational drivers.

The drivers were:

  • The growth in companies such as Hertz and other national rental companies, other dealers doing rental business and customers asking more about rental. This led dealers to say to themselves "Boy, we better be in this rental business."
  • Our salespeople quickly discovered and our practices reinforced the fact that you could avoid dealing with the price objection regarding new unit retail price if you sold the customer a rental unit at a significant discount. And the more reinforcement we gave to the issue of equipment prices being too high the more we legitimized salespeople looking for low hour, low price units to avoid the price question.
  • Customers are coming to the conclusion that they don't need to own every single piece of equipment. They really want to use equipment until they fulfill the contract or job they are working on. We see this outsourcing also in the area of extended warranty and guaranteed maintenance. Customers today really want to focus on doing their business, (home building, road building, mining, forestry, or whatever) and not have to worry about equipment utilization, costs and the like. These customers are looking to rental.
  • The latest trend we see is customers wanting to single source. If they are comfortable with the dealer, the relationship, the service, the product offering, then more and more they want that dealer to be flexible enough to meet all their needs. A major one is rental.
We like to think, as management consultants, that after we do training in strategic planning, all our clients use this approach in a very disciplined way. But the reality is that most business ventures evolve as this rental question evolved. One day we wake up and realized that we have $1 million invested, that we're operating a strategic business unit - rental; and our customers are asking for more and more of it. Our problem is we really haven't said, "Given a clean sheet of paper, how do we execute the rental business in an efficient, profit focused way?"

The first strategic question to be answered about rental is, "Are you in the rent-to-sell or the rent-to-rent business?" The answer we frequently get is "Yes!" Depending upon which day and who asks the question, we can get different answers. Again, this is because rental grew not as a result of a strategic plan but as an alternative to some other difficult issues.

Suppose we ask two CEOs about their rental business. One CEO is in the construction equipment business and his expectations of rental are X; the other CEO is solely in the rental business and his expectations are Y. Their expectations differ because of the way they define their businesses. The CEO whose rental business is viewed as a support to sales and has an "everything is for sale" mentality, may be willing (in our experience they are willing) to accept a lower level of performance in rental because he believes he'll make it up in the other aspects of the business.

The other CEO in the rental business doesn't have a choice. He must make his profit through rental, and thus his expectations and probably performance will be higher due to this focus. He is in a true rent-to-rent business.

For example, the "everything is for sale" or rent-to-sell dealer has a light equipment unit that they purchased for $25,000 in their rental fleet. The unit has had good rental utilization and now has a book value of $17,500. A sales person looks at that unit and says if we can get $20,000 then we make a nice $2,500 gross profit on that unit. Everyone is happy.

A company in the rent-to-rent business might look at this transaction differently. If that unit was bought for $25,000 and returned $6,750 of gross profit in the first year, $6,750 in the second year and it is expected to continue at that level, the sale of that unit for $2,500 profit would not be adequate. Their expectations are different.

The rent-to-sell dealer would probably say, "Yes, but this helps with our marketshare, it gives us another unit in the field on which to do parts and service business; also I can replace it with a new unit (probably at a higher price)." And, we're comfortable with all that if your intent is rent-to-sell. We're not comfortable with all that if your intent is rent-to-rent because you may be giving up margin by turning the unit over too quickly.

This is exclusive of maintenance, which I know some of you are thinking about. What we find, though, in our work with lots of dealers is that the maintenance issue is not the critical factor around which you make decisions about retiring rental units. It is a factor but it is not the critical one. In fact, here is a suggestion for those of you who are maintenance-focused: Do an analysis of all units you've retired from rental. Calculate for each unit the total revenue, total maintenance expense, and number of months in rental. See if those units with the highest months in rental had significantly higher maintenance expense as a percent of sales. You might be surprised at what you find.

Our conclusion is that we probably need a different set of financial expectations for a rent-to-sell business as compared to a rent-to-rent business. So let's look at those two businesses and how each of them performs financially.

What's Your Rental Mentality?

In a dealership, rental is part of a larger operation. So, we need a view of the whole company in order to evaluate properly the rental position. Here is a financial view of the whole context with a rent-to-sell orientation.

 

Rent-to-Sell Model Percentages

 

New & Used

 

Rent-to-sell

 

Service

 

Parts

 

G & A

 

Sales

 

15% Profit Margin

 

100%

 

100%

 

100%

 

 

Gross Profit

 

100%

 

30%

 

65%

 

35%

 

 

Personnel

 

50%

 

10%

 

20%

 

10%

 

5%

 

Operating

 

25%

 

3%

 

10%

 

3%

 

3%

 

Occupancy

 

10%

 

2%

 

5%

 

2%

 

2%

 

Total Expenses

 

85%

 

15%

 

35%

 

15%

 

10%

 

Operating Profit

 

15%

 

15%

 

30%

 

20%

 

-10%

 

So, what does this model look like in real dollars with a typical sales mix? The following chart is an example of how these percentages work out.

 

Rent-to-Sell Sales Mix

 

New & Used

 

Rent-
to-sell


 

Service

 

Parts

 

G & A

 

Totals

 

Percent-ages

 

Sales

 

$600

 

$150

 

$100

 

$150

 

 

$1,000

 

100%

 

Gross Profit

 

$90

 

$45

 

$65

 

$53

 

 

$253

 

25.3%

 

Personnel

 

$45

 

$15

 

$20

 

$15

 

$20

 

$115

 

11.5%

 

Operating

 

$23

 

$5

 

$10

 

$5

 

$12

 

$54

 

5.4%

 

Occupancy

 

$9

 

$3

 

$5

 

$3

 

$8

 

$28

 

2.8%

 

Total Expenses

 

$77

 

$23

 

$35

 

$23

 

$40

 

$197

 

19.7%

 

Operating Profit

 

$14

 

$23

 

$30

 

$30

 

($40)

 

$56

 

5.6%

 

We expect in a rent-to-sell dealership to achieve a 30 percent gross margin on rental. This is for a capitalized rental fleet. So the issues of rate and utilization have a significant impact on whether you make or don't make the 30 percent number. For those of you who use a percentage method for rental gross profit, you know that rate and utilization do not directly impact rental gross profit. However, they certainly impact the total amount of profit you make when your rental unit is sold and you examine total wash out gross profit.

In a rent-to-rent dealership the expectations in terms of expense levels remains the same but the gross profit expectation is raised to 45 percent.

Rent-to-Rent Model Percentages

 

New &

Used

Rent-to-rent

 

Service

 

Parts

 

G & A

 

Sales

 

15% Profit Margin

 

100%

 

100%

 

100%

 

 

Gross Profit

 

100%

 

45%

 

65%

 

35%

 

 

Personnel

 

50%

 

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