My partner, Fred Hageman, and I travel the country consulting — valuing or representing buyers and sellers of rental stores. Over the past 14 years we figure we have seen and analyzed more than 2,000 stores, from large, delivery only, contractor-oriented businesses to smaller general rental stores, renting smaller equipment on a daily and weekly basis to smaller contractors and homeowners. Often, we see stores that have not reached their full revenue and/or profitability potential. In almost every case we can narrow down the reasons for the store not reaching its full potential to one (or more) of five problem areas that we call the five biggest mistakes a rental store can make.
Excessive payroll/employee costs
Payroll and related taxes, insurance and employee benefits are usually the single largest cash expense in the rental business and should be analyzed accordingly. The first measure we look at is revenue per employee. The benchmarks we use are a minimum of $100,000 annual revenue per employee for smaller general rental centers and $150,000 of annual revenue per employee for larger contractor-oriented stores. This guideline holds true for stores generating 70 percent or more of their total revenue from rental and related charges. If a store falls below these benchmarks, they are most likely overstaffed. We have seen many well-run stores easily exceed these benchmarks, which should be viewed as a minimum.
The second measure we look at is total payroll and related expenses as a percentage of total revenue. Included in payroll and related expenses are base pay, overtime, vacation pay, sick pay, commissions, bonuses, payroll taxes, employee insurance and any other employee benefit expense. Regardless of the type of store (general rental or contractor), total payroll and related expenses should fall between 25 and 30 percent of total revenues.
We believe this measure is important enough to track every payroll cycle. Depending on whether your payroll is weekly, bi-weekly or semi-monthly, design a report taking your total payroll expense for the period and divide by your total revenue for the same period. This allows you to note both revenue and payroll trends and take immediate actions to either cut overtime or reduce headcount, if necessary.
Stay in touch with your employees and customers
Several times over the last few months we've heard stories of managers that never leave their office or that communicate with employees only via e-mail. We are firm believers in getting feedback from all levels of your operation. Work in or around the counter one day or even for an hour. See what type of situations your front line people are confronted with on a daily basis. Gauge their reactions to the situations. Are they properly trained?
Walk the yard and see what types of equipment are in your yard and not on rent. Use green tags and check the date they went on the line as rental-ready. Is your yard clean and organized? Visit the down line and check for pieces that have been there for more than a day. Visit with the mechanic working on that piece and see what his mechanical opinion is of that particular piece of equipment. Ask what causes delays in the repairs and visit with the foreman or shop manager on how these delays can be prevented. Make notes on individual pieces of equipment and check the machine history for time and dollar utilization, as well as the repair history.
Call on customers in person, both big and small, alone or with your salesperson, and thank them for their business. Inquire about their business and any upcoming jobs they may have. Ask them how you and your staff can help better service their needs.
Sales/marketing
Fred and I have a saying “You're either going forward or going backwards. There's no staying the same.” Regardless of the size of your business, if you do not have an outside sales presence, you will eventually be going backwards if you are not already. Many rental store owners justify the lack of a salesman by saying “We had a salesman once and it just didn't work out.” Have you ever hired a counter person that did not work out? Did you decide to never hire another counter person because of the one that didn't work out? Of course not, because you have to have a counter person to run a rental business. Face the reality that this is also true of a salesperson.
Check the references of any salesperson you interview. Consider administering one of the many psychological profile tests that are commercially available. Once hired, train them on the counter for a week or a month to get a feel for your business. Ride with the salesman the first few days to make sure he is presenting your company in the proper manner and to see how he handles the various situations that come up in a sales call. Have regular meetings to discuss progress and problems. Have training resources available. Help him map out his territory, call frequency and strategy for maximum efficiency in the field. And lastly, have a tracking program to gauge territory revenues and new accounts.
The second flaw we see in sales is the lack of proper marketing of rental companies. Many rental store owners put a yellow page ad in the local phone book and call it good. We find the most successful stores are also a part of their community. They support the local sports teams, charities and chambers of commerce. They are active in local contractor and trade groups. If you are competing against the large national companies, make it known that you are “the local guy,” that money spent with your company stays in the local community. A word of caution, however: You must be sincere and consistent in your support. This is a lifelong commitment, not just “once a month.”
Inventory control/fleet management
If you are in the supply/resale business, stock only items or quantity of items that will yield at least a 30 percent gross margin and turn a minimum of four times per year. Too often we see companies overstocked because of “deals” offered by vendors to buy in large quantities.
On the rental fleet side, we like to see 60 percent dollar utilization for larger rental companies and 100 percent dollar utilization for smaller general rental companies. Develop a “hit” list of items below a certain utilization factor — somewhere around 30 to 40 percent dollar utilization. High time utilization with low dollar indicates your rates may be too low. Low time and low dollar means you probably have too many or maybe shouldn't have the item at all. If you have more than one branch, look at possible re-deployment of the asset at another branch.
Another common mistake we see with fleet management is the decision of when and if to sell a piece of equipment. Many times we see equipment being used well beyond its useful life and conversely, a decision made to replace a piece of equipment based solely on its age, regardless of its condition. We believe a number of factors need to be evaluated prior to the sell decision. We tell our clients to look at 13 different criteria including those related to time and dollar utilization, replacement cost and repairs, and maintenance measures.
Insufficient data and reporting
According to one of the rental industry's leading software vendors, approximately 50 percent of all rental stores are not computerized. Our experience is that, even in the ones that are, often the system is used only for a fraction of its capability. Every rental store needs a handful of meaningful reports on a timely and concise basis. If you are overwhelmed, try narrowing it down to a few reports that you are familiar with and comfortable with. We recommend the following as a starting point:
- Daily or weekly revenue reports broken down by rental and rental related charges — such as delivery and damage waiver — and sales. Include a comparable period from last month and last year if possible.
- An equipment utilization report showing original cost, rental income and repairs and maintenance expense. You should have the ability to sort by several different criteria including utilization and repairs and maintenance to help identify problem areas. These reports should be analyzed monthly.
- Do a payroll expense comparison to revenue every pay period. It allows you to easily track your single largest expense compared to revenue.
- Monthly financial statements should be completed and available by the 15th of every month. We see many companies doing this only annually or quarterly. From these same companies we usually hear upon review of their statements, “We thought we were doing better than that.” Always know where you stand.
If you're not happy with your rental company's financial performance or revenues, avoid or address these common mistakes.
Gary Stansberry is a consultant with Hageman, Stansberry & Associates, Cameron, Calif., and Arlington, Texas.
