There are a lot of factors to consider before deciding on required fleet changes and how to make them happen while still maintaining a “bank acceptable” balance sheet and positive cash flow. The only way to reach a reasonable conclusion on the balance sheet and cash flow is by projecting your rental activity, including the timing of fleet changes throughout the year, to see where you wind up.
When doing this type of analysis, it’s normal to overestimate the revenue side of the equation, but it’s best to check your projections by using a variety of sources including Rouse Asset Services, ARA Rental Metrics and the quarterly financial reports of national rental companies (realizing there might not be a 100% correlation between your business and theirs).
On a monthly basis, track the historical cost of your rental fleet along with the related rental revenue, time and dollar utilization, plus debt service requirements for each month. Do this for a year and you’ll have a trailing 12-month schedule of the historical results. Then take this historical data to determine how the changes you’re looking for in rates and utilization affect your operating results and debt service coverage. This is your starting point to determine how to project out each month in the rental projections for the next 12 months, which will guide you in making decisions about fleet changes.
Before you can reach any conclusions, you need to spend some time digging into the fleet data by month and Cat Class, to see which classes are underutilized and exactly where you are in terms of dollar utilization by class, keeping in mind the seasonality of the business, lost orders, hard-down units and historical weather conditions. This real data also takes into account discounted rental rates which take a big bite out of the bottom line. This data should all be available from your management software system.
Doing this exercise for the trailing 12 months puts you in a position to make informed decisions about fleet additions and deletions that result in an acceptable balance sheet, debt service coverage and positive cash flow. Once you have this program laid out you can continue to update the results and check your overall rental trends for a 12-month period to see if they are moving up as you expected.
One more comment on seasonality: If you have a seasonal business, there will be months where you will not meet the debt service requirement and will have to partially fund debt service out of cash reserves. We’ve all been through this, knowing full well the remaining months in the year will have to make up the shortfall with higher rental volume and hopefully better rates. Thus it’s best to not overestimate rental revenues unless there is at least a high probability you will hit the rental numbers required to meet the projection. Nobody wants to go through another round of issues with the banks and a lack of cash flow because the cost of fleet additions exceeds the revenues being brought in by the new additions.
In short, do not overextend yourself if you cannot get rental rates that cover debt service.
What can you do to successfully manage your fleet?
- Go through the exercise described above.
- Do not overextend yourself and always have rental units in the money in case you need to reduce the number of units in the fleet.
- If rental rates do not support the cost of a new unit, buy used units for your fleet.
- Determine where you’re making good money and concentrate on those types of units.
- Keep your fleet rent-ready. Down units will kill your cash flow.
- Manage your business to move the trends in the right direction.
Many of you are probably thinking “Who is going to do all of this and keep it up to date?” Well, you are, or you run the risk of repeating the mess we were in a few years ago.