How to Plan When You Don't Know Where Your Revenue Is Going to Be

Despite what many business operators believe, it's most important to get a handle on costs before even beginning to worry about revenues. In this week's Financial Forum, Mike Farley takes a hard look at what it takes for equipment rental businesses to succeed.

As 2010 roars into the second half of the year, many equipment rental business operators are trying to sharpen the focus on their crystal ball for the next three quarters. Let's look at some things to remember and potholes to steer clear of.

The most frequent financial issue in any rental business is control of costs. The second is "dead" or under-utilized assets on the balance sheet. The third is getting paid for what you do. The hardest issue to get a handle on is NOT where your revenue will be but rather:

  1. What is the exact break even cost of your business on a monthly and quarterly basis?
  2. How do I eliminate "bad assets" off the balance sheet and collect past due debt?
  3. What is the maximum rate I can receive for my existing rental assets?

Every single P & L or income statement on this planet begins with revenue calculations, and most rental operations are run by those with an entrepreneurial spirit which sees every opportunity as a "glass half full." This is a dangerous combination, as virtually every company spends 75% of its time on creating revenue, thinking the costs will "take care of themselves."

At your earliest opportunity, go to your P & L and look only at your cost lines. Do you need every single employee and is every single expenditure legitimate for the long-term health of your business? As you look at your costs, start at a 25% reduction factor on each line and then plan to get there immediately. Remember, your costs reductions fall straight to the bottom and every dollar of revenue growth except one always has a related cost.

What is that "one" exception? Maximizing the rate. Many credits are written each month on a mutually agreed upon rate simply out of fear of losing a customer or poor record keeping. Add up all your rental credits over the course of a year -- you will become physically ill at the amount of "pure profit" poured down the drain.

In every single instance, your plan as a manager begins with knowing your cost. Low costs and a clean balance sheet are primary to every successful rental company. Only once you know these two facets of your business intimately should you even begin to worry about your revenue base.

Questions or comments? Contact Mike Farley at [email protected].