Henry Kaiser was a great American industrialist of the early 20th century, amassing a fortune of more than $2 billion dollars before his death in 1967. His early successes were as a contractor; he built the Hoover Dam, the Grand Coulee Dam and a number of the first highways linking the major cities of the American West. One of his favorite sayings was “Problems are only opportunities in work clothes.”

2009 looks to be a year of challenges for the economy in general and the rental industry in particular. Kaiser's message to us is clear: Now is not the time for long vacations, two hour lunches and banker's hours. Now is not the time to panic but certainly now is the time to “put on your work clothes” and pay close attention to the fundamentals of your business. By doing so, you may just find that there are opportunities out there.

Here are a few tips from our “toolbox” to help keep you focused and achieve a positive outcome for your rental business in 2009:

• Know where you stand (Part 1) — closely monitor your revenue trends and payroll expenses

  We have seen things change quickly for rental companies, most notably in the last quarter of 2008. We always say “first things first.” That means you need to “Know Where You Stand” (See February 2007 RER article). Track your revenue and payroll expenses weekly. Compare your weekly revenue to that of the previous week and the same week last year. Compare your month-to-date revenue with last month and for the same time period month-to-date last year. If yours is a general rental company, your total payroll expenses should be no more than 25 to 30 percent of your total revenue; if yours is a construction-oriented (primarily delivery) rental company, your total payroll should be no more than 20 to 25 percent of your total revenue.

  Remember, payroll expense is your single largest cash expense. Excess payroll is the No. 1 enemy of profitability and cash flow. In this economy, be prepared to take action if your payroll expenses are too high for more than two pay periods. Consider freezing overtime. Consider cutting your hourly staff to 32 to 35 hours per week during slow times.

• Know where you stand (Part 2) — closely monitor your cash flow (EBITDA)

  Especially during this period of uncertainty, have your monthly financial results ready by the 10th of the following month. Compute your EBITDA cash flow (Net Income + Interest + Taxes + Depreciation and Amortization). Compare your EBITDA results to the previous month and to the same month last year. Also compare EBITDA year-to-date vs. last year-to-date. Review and compare the various income and expense categories. Look for anything that looks unusually high or unusually low. If you own or manage a general or construction equipment rental business, your target EBITDA should be 30 percent or greater. If EBITDA is 20 percent or less, you most likely have cash flow issues that need to be addressed immediately.

• Know where you stand (Part 3) — monitor and collect accounts receivable

  In a downturn, we often see past due accounts receivable become an issue. Your administrative staff should be your first line of defense calling customers and identifying potential problems either from a cash flow standpoint or billing dispute. After a receivable goes past 60 days, your managers, salespeople and, if required, ownership should get involved. Overall, your Daily Sales Outstanding (total accounts receivable divided by average daily sales on account) should be no more than 50 days. If you have sales commissions or management incentive plans in place, make sure timely collections of accounts receivables are a component of those plans.

• Know where you stand (Part 4) — know your cash requirements

  Put together a cash requirements calendar summarizing payments by due dates and amounts. Include significant payments such as weekly payroll, vendor/accounts payable payments, note payments and facility rent.

• Minimize your inventory of resale merchandise and repair parts: Don't buy anything that is not going to sell in the next 90 days!

  Purchasing items for resale should be based on that simple mantra. Keep your resale inventory lean and mean. Beware of special terms from vendors or seasonal “specials.” For repair parts, follow the lead of the national companies; keep a small supply of filters and other often-used routine maintenance items. Buy the rest from the dealer or manufacturer on a “just-in-time” basis.

• Sell underutilized equipment

  Target an overall dollar utilization of rental fleet (annual rental revenue divided by original fleet cost). If you rent larger equipment, your target should be at or near 70 percent with general rentals nearing 100 percent. At least weekly, run utilization reports using your rental software. Target and analyze items with low utilization rates (40 percent or less). Consider divestiture of low utilization items if no improvement is likely in the next 60 to 90 days.