It's the beginning of a new year and what better time to review your rental profitability program for 2005 and beyond? Market conditions are changing. Commodity prices are rising. New tax benefits are available. Rental is becoming more acceptable. All in all, a lot of reasons not to stand pat with last year's rental rates.
But before we continue, let's get one thing straight. When we talk profits we are also talking cash flow. This is a very important point because we can always increase rental revenues by buying more equipment, but that does not mean we can afford it or pay for it on an annual basis. Remember, in the rental business, cash is king. Don't ever forget it.
So, what about rental rates for 2005? Is your rate schedule updated? What did you do? What variables are you considering? Have expenses gone up… or down? What are you expecting in terms of a utilization mix; a lot of long-term rentals or mostly shorter-term opportunities? Are you planning any fleet additions in 2005? Are they new or used? What about delivery equipment? Need more? Have enough drivers?
As you can tell we are only touching the tip of the rental business iceberg and it's getting awfully complicated already. The point I am trying to make is that you cannot just decide to use last year's rental rates, or the so-called street rates, without taking into consideration your changes in cost-of-sales or other direct expenses related to your rental activities. Based on everything you see and hear, rental rates should increase in 2005, and comments from the public rental companies support this statement. Public rental companies expect not only an increase in business (time utilization) but also a second kicker from rate increases as well (dollar utilization).
The increases are necessary because of the steel markets, the gasoline markets, the insurance markets, the personnel market for trained service personnel, and in general, the overall 2- to 3-percent annual general inflation that occurred the last couple of years. If we are talking about cost-of-sale and direct cost items, prices or revenues have to increase to maintain gross margins. If we are talking about SG&A expenses, we need more gross profit to offset the expenses. In short, your costs increase every year and your gross profit dollars have to do the same or better if you are to have a successful profitable business with adequate cash flow.
Are there ways to increase gross profits without raising rental rates? Sure there are. You can change your sales mix from monthly rentals to more weekly and daily rentals. The dollar utilization on the shorter-term contracts is higher than what you get on monthly rentals, and if you can get "normal" time utilization with short-term rentals, gross profits increase.
You can also purchase late model used equipment instead of new units. Your dollar utilization is higher along with your cash flow. If you adjust, however, your rates to compensate for the lower cost you have in the unit, you wind up right where you started and gain zero advantage.
You can also change your fleet mix and go after unique rental opportunities where the dollar utilization is higher and, in many cases, your investment is smaller. If you can find these types of opportunities they are worth investigating.
Need cash flow? Need higher dollar utilization? Maybe the fleet needs to be reduced. If you are not meeting industry dollar utilization standards based on the cost of your fleet, make adjustments now before they get out of hand. When you compute the cash flow implications of keeping under-utilized rental units, believe me, you will sell it tomorrow.
Once you get past fleet considerations, it's time to move on to the rest of your revenues and expenses. Are you selling everything you can sell? Are you charging for everything you can? This is a very important area to review. Remember, a 1-percent change in rental revenues without any change in costs falls right through to the bottom line. So review what the competition is doing and make sure you follow suit.