Rental business recovery depends on owners' and managers' abilities to raise standards and the level of professionalism across the board.
There is a saying that “a rising tide lifts all boats.” Certainly the falling tide of the last few years left a number of rental companies financially stranded. Revenue declines at many independent rental companies exposed fundamental flaws in the way their businesses were managed.
The most common of those flaws were related to insufficient management reporting systems and failure to monitor key (and very basic) financial measures such as revenue trends, cash flow, payroll expense, rental fleet utilization and repairs and maintenance expense. The failure to monitor these metrics resulted in delay or failure to take appropriate action in a timely manner.
We at Hageman, Stansberry & Associates believe that there is a recovery in progress. This recovery is not one that is just going to “wash over” all rental companies. By all accounts, this recovery is a fragile one and we believe 2011 is likely to bring modest revenue gains of 5-10 percent compared with the depressed levels of 2010. Keep in mind, by 2010, most rental companies had experienced revenue declines of 30 percent (or more) from their peak levels of the 2007/2008 timeframe. It may take five years or more for many companies to regain those lost revenues and profits, others may never see them again.
Given a modest recovery, there is a finite amount of incremental revenue gains to be had by rental companies in most markets. The competition for these incremental revenues is going to be fierce. These revenue increases will mostly go to companies that are pro-active and prepared to take advantage of these additional revenues.
Almost every independent rental company faces competition from national rental chains. Make no mistake, these national companies have been scrambling to make sure that they are well positioned for a recovery. Read any recent article or press release and you can see evidence of professional, pro-active steps they have taken including increased training of employees, improved customer relations and customer contact management, more sophisticated fleet management, higher percentage of on-time deliveries, green initiatives, expense control, better systems for equipment maintenance, etc. One thing this recession has made clear; rental companies that use “seat of the pants” or “gut feel” management practices will likely not survive in the long term.
Here are a few tips that our clients at HS&A actively put into practice:
Have a practical management reporting system in place
We believe in the development of concise, consistent reports where management and ownership can take a quick look at certain key measurements in the business and act on those reports. We have developed a proprietary “Know Where You Stand™” system of daily, weekly and monthly reports and monitoring systems that have become second nature to our clients. These reports track key measures relating to revenues, payroll, cash flow, fleet utilization, cash, accounts receivable and resale inventory among a host of other things. We have found that most rental software systems, sometimes combined with report writers and/or Excel spreadsheets, can easily provide this data.
If your system can't, then it's time for a change. Regardless of the system used, these reports should be consistently and readily available to management and ownership. These systems serve as “early warning” signals for negative trends and indicate positive trends as well so that management can take action. The recession hit different geographic areas at different times and with different intensities. We believe the same type of difference will occur with this economic recovery. You need to know precisely where you are at in your business at any given time.
Set short- and long-term goals for your company
Many of the industry metrics we track and that were common in 2007/2008 are difficult to achieve with depressed levels of revenue. Set realistic short- and intermediate-term goals and take action so that your business can return to these proven historical metric levels. Let's say that your long-term, pre-2009 EBITDA (cash flow-Earning Before Interest Taxes Depreciation and Amortization) was 40 percent of total revenue. If your 2010 EBITDA was 23 percent, a realistic goal for 2011 may be 28 to 30 percent, the 2012 goal is 35 percent and the goal for 2013 is back to 40 percent.
In addition, ownership should evaluate its long-term goals. Are you looking to pass the business along to a family member? Do you want to sell your business? If the answer is yes to either question, what is your time frame? What financial condition (from a revenue, cash flow and debt perspective) do you feel comfortable passing along to your family member? What value do you want from your business if you sell it? At HS&A, we have developed specific programs (MAPS) to help those business owners that are looking for an exit strategy within the next five years to achieve their goals.
At HS&A, we are firm believers that your employees need to be vested in your business. There needs to be honest and open communication between ownership, management and employees. Employees need to be empowered but they also must be accountable. Clear goals and objectives should be set for each department, location and for the company as a whole. Many rental company employees have not had a raise, or even a review, in the past two years. In fact, many have experienced pay cuts and have seen co-workers let go.
We are not advocates of across-the-board pay raises or restoration of prior pay rates. We believe the best system to help employee morale is to establish an employee bonus/incentive system that lets the employees participate in your company's recovery. These plans should be realistic and achievable, however, they should also be designed to benefit the company first and the employee second. These incentives can be based on any number of measures; achievement of revenue goals, achievement of profitability goals, managing payroll and/or overtime within certain parameters, controlling repairs and maintenance expense, reduction of down time or even based on on-time deliveries.
Regardless of whether or not a compensation adjustment is in order for any individual, management should conduct a formal review of each employee at least annually. The purpose of the review is to establish clear expectations of the employees, reinforce good performance, improve unsatisfactory performance, and foster a spirit of cooperation and teamwork.
Re-invest in your business
Most rental companies have drastically cut back on capital expenditures the last several years (and justifiably so). In 2011, we recommend returning to fleet investment levels at or near normal levels. We recommend fleet purchases of approximately 10 percent per year of the total original cost of your rental fleet. The fleet level should be based on your target level of fleet utilization. For example, if you have $1 million of rental revenue and your target dollar utilization is 60 percent for 2011, you would need $1,667,000 of rental fleet to accomplish that goal. Your target investment for 2011 would be 10 percent of $1,667,000 or $167,000. We recommend “triaging” your fleet and start with the items that are in the most desperate need of replacing based on repairs and maintenance expense, among other things. Non-rental investments to improve your computer systems, delivery vehicles and facility/infrastructure improvements should also be considered.
Lastly, don't blindly go back to where you were
Don't blindly replace your inventory with the same items, same model, same brand, same quantity that you've always had (one of the biggest mistakes regarding rental fleet we have seen during the downturn is too many units of the same item). Make sure each unit justifies the investment based on your dollar utilization. Shop vendor pricing, warranties and terms. Consider buying late model used equipment instead of new. Consider rental purchase or re-rent terms with vendors on certain larger units.
Look at slightly different units within the same category; maybe you need more articulating booms instead of straight booms, or more track vs. rubber tire loaders. By the same token, if you are re-hiring or adding employees based on increased volume, take a fresh look at the necessary staffing and compensation for each position; counter sales, driver, yard and mechanics. Your business has changed; so has its staffing and inventory requirements. Each decision should be based on sound business logic, not just “that's the way we have always done it.”
The coming recovery should be a fresh start for your business, not just a chance to relive the past. Raise the level of professionalism in all aspects of your business; sales, marketing, website, employees, computer systems, management reporting and the entire decision-making aspect of your business. Raise the utilization of your rental inventory and the expectations you have of your employees. Those rental companies that do so will be well positioned to take their fair share (and more) of the incremental business generated by the recovery.
Gary Stansberry is a partner in the rental industry focused consulting firm of Hageman, Stansberry & Associates. HS&A specializes in business sales, business valuations, business sale preparation and operational consulting all within the construction equipment rental and party/special event rental industries. For more information on HS&A, visit www.rentaladvisors.com. Stansberry can be reached at email@example.com.