How to best take advantage of the growing rental sector
There are many reasons why the equipment rental sector is booming. Predictions indicate a nearly 5 percent growth rate every year until 2020, at which time the industry could be worth more than $57 billion.
Between calls for dematerialization, the apparent lack of interest among younger generations in owning things and the high price of getting a new business off the ground, buying access to equipment rather than owning outright is a model with real staying power.
Equipment rental companies have a lot to offer, but they have to know how to measure success in this competitive and fast-growing industry. Here are six key performance indicators (KPIs) worth keeping an eye on.
1. Washout Percentage
Another way to think about washout percentage is in terms of “cash in, cash out” for every asset the company owns. This KPI provides a detailed, retrospective breakdown of an asset’s profitability once it’s targeted for retirement from the fleet.
To determine the washout percentage, take the total rental income for the asset and subtract the original purchase price, any carrying costs and maintenance expenses over its lifetime.
This yields the real-world profitability of the machine. More importantly, it helps plan for the future. It can tell you what sale price to watch for on a similar piece of equipment to ensure you can realize your desired return on investment in the time you own it.
2. Income-to-Maintenance Ratio
There are multiple reasons to avoid keeping machines around that require constant maintenance. One is the profit you’ll miss out on while the equipment is out of commission. Another is the loss of customer loyalty and satisfaction if they have the machine when it fails.
Measure the income-to-maintenance ratio for each asset in your fleet to see how much each one earns compared to how much it costs you in upkeep expenses. Additionally, looking at historical data along these lines helps you identify the point at which different pieces of equipment round the corner from “profitable” to “not profitable.”
3. Rental Rate
Rental rate is the amount of revenue you receive per machine compared to the number of contracts to rent it. It is a KPI that can be broken down by the month, week and day. It also yields useful insights if you compare different equipment types and brands.
Measuring this KPI lets you glean insights into how much you need to charge for each rental to reach your benchmarks for each time interval.
Drilling down into the rental rate for different makes and models is a good way to improve your competitiveness, too. If some equipment variants aren’t reaching the benchmarks you’ve set, you might consider carrying a brand that’s in higher demand.
4. Financial Utilization
Financial utilization also goes by the name dollar utilization. Find it for each piece of equipment by adding up the total revenue it generates each year and dividing that by the cost of acquiring the machine. It’s a reminder that your gross earnings aren’t a true indicator of an asset’s profitability — you must factor in the original cost to find its actual revenue.
As with other APIs, financial utilization is useful if you want to find out where to place your investments in the future. You can see which assets are most profitable for you and which ones are slowest in paying for themselves. Buying new equipment to rent out versus acquiring gently used machines will greatly impact your financial utilization equations, which further informs your business model.
5. Time Available and Time Utilized
The time or asset utilization KPI is a measurement of how many days the pieces of equipment in your fleet were available for rent and how many days they were actually under contract by customers.
A good benchmark in the industry is that 72 percent of your equipment should be under contract at any given time, with a further 20 percent standing by in rental-ready condition. The remaining 8 percent may be in transit or undergoing maintenance.
All your equipment requires ongoing maintenance, which costs you money over time. Observing the demand for each product compared with how long it sits idle without being rented is a good way to identify time and money pits so you can remove them from your fleet. Measure this KPI at regular intervals for each machine.
6. Company Growth Over Time
The S&P 500 grows 10-12 percent annually. Therefore, ideally, your company should be sustaining at least 10 percent growth each year.
You can determine the percentage change in growth and profitability over time by calculating the difference in this year’s revenue compared to the previous year’s and then dividing the result by last year’s. This determines how your company’s earning potential is changing over time, which might be the most important KPI you can measure.
The rate at which your rental revenue grows should be similar to the overall change in your company’s value. If it isn’t, it might mean you’re reinvesting too much back into the business and spinning your wheels on unproductive expenses and investments.
The Equipment Rental Market Is Thriving
Since 2008, the popularity of renting heavy equipment has surged by an impressive 400 percent. In addition to helping companies meet short-term demand and avoid buying new assets outright, renting is popular because it allows businesses to test-drive new equipment and technologies before making a purchase.
You can have all the enthusiasm in the world for complex equipment, which is presumably why you got into this business in the first place. With these KPIs in mind, you will stay motivated and goal-focused as you grow your company.
Written by: Megan Ray Nichols, BOSS Contributor
Megan is a STEM writer and blogger at https://schooledbyscience.com/