Utilization 101

For equipment rental businesses - like most businesses - the most important factor to success is cash flow. The more times a piece of equipment is rented, the more money it brings in, which pays for fixed costs such as payroll, debt service and so on. If enough revenue is generated, the business turns a profit.

Savvy rental businesses know there's a bit more to it than that, but the concepts behind running a profitable rental business are not too complicated. One of the most important yard sticks to measuring success in a rental business is utilization.

There are two different utilization metrics. The first is time utilization, which refers to how much time a piece of equipment is out on rent. It can be measured in days, weeks or months. Without time utilization, nothing else matters. In other words, if a piece of equipment is not being rented, it is not generating cash flow.

The other utilization metric is dollar utilization. This is calculated by dividing 12 months worth of rental revenue by the original acquisition cost. For example, if a piece of equipment cost $20,000 and brings in $14,000 annually, it is getting 70% utilization.

Achieving optimum utilization is a balancing act. Rental businesses want equipment to be out on rent enough to generate adequate revenue to cover expenses and debt service, but not too often, because that would result in costly wear and tear on equipment. Also, if a piece of equipment is out on rent all the time, chances are your business is turning away customers because the equipment they want is not available.

The optimum dollar utilization rate depends on the type of rental business. Acceptable entire-inventory dollar utilization targets are around 65% for large, national rental houses; 100% for smaller, general rental centers; and up to 150% for party stores. With regard to time utilization, rates should fall between 40-80%, with 60-70% being the sweet spot. When rates are too low or too high, adjustments need to be made.

Tracking utilization is vital to the success of equipment rental businesses. In order for businesses to really know how they're doing, they need to track utilization across the entire inventory and also by each individual piece of equipment. Each unit should be treated as its own separate business; it has to cover it's own fixed expenses plus debt service. If each piece of equipment is pulling its weight, so to speak, then the entire rental business will be on sound footing.

Dollar utilization is fundamental to profitability - costs are costs - but it is so dependent upon time utilization that it's hard to say one metric is more important than the other. Both need to be analyzed and managed, as do rental rates, which are a key component of the formula for profitability. ?Þ

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