Henry Kaiser was a great American industrialist of the early 20th century, amassing a fortune of more than $2 billion dollars before his death in 1967. His early successes were as a contractor; he built the Hoover Dam, the Grand Coulee Dam and a number of the first highways linking the major cities of the American West. One of his favorite sayings was “Problems are only opportunities in work clothes.”
2009 looks to be a year of challenges for the economy in general and the rental industry in particular. Kaiser's message to us is clear: Now is not the time for long vacations, two hour lunches and banker's hours. Now is not the time to panic but certainly now is the time to “put on your work clothes” and pay close attention to the fundamentals of your business. By doing so, you may just find that there are opportunities out there.
Here are a few tips from our “toolbox” to help keep you focused and achieve a positive outcome for your rental business in 2009:
- Know where you stand (Part 1) — closely monitor your revenue trends and payroll expenses
We have seen things change quickly for rental companies, most notably in the last quarter of 2008. We always say “first things first.” That means you need to “Know Where You Stand” (See February 2007 RER article). Track your revenue and payroll expenses weekly. Compare your weekly revenue to that of the previous week and the same week last year. Compare your month-to-date revenue with last month and for the same time period month-to-date last year. If yours is a general rental company, your total payroll expenses should be no more than 25 to 30 percent of your total revenue; if yours is a construction-oriented (primarily delivery) rental company, your total payroll should be no more than 20 to 25 percent of your total revenue.
Remember, payroll expense is your single largest cash expense. Excess payroll is the No. 1 enemy of profitability and cash flow. In this economy, be prepared to take action if your payroll expenses are too high for more than two pay periods. Consider freezing overtime. Consider cutting your hourly staff to 32 to 35 hours per week during slow times.
- Know where you stand (Part 2) — closely monitor your cash flow (EBITDA)
Especially during this period of uncertainty, have your monthly financial results ready by the 10th of the following month. Compute your EBITDA cash flow (Net Income + Interest + Taxes + Depreciation and Amortization). Compare your EBITDA results to the previous month and to the same month last year. Also compare EBITDA year-to-date vs. last year-to-date. Review and compare the various income and expense categories. Look for anything that looks unusually high or unusually low. If you own or manage a general or construction equipment rental business, your target EBITDA should be 30 percent or greater. If EBITDA is 20 percent or less, you most likely have cash flow issues that need to be addressed immediately.
- Know where you stand (Part 3) — monitor and collect accounts receivable
In a downturn, we often see past due accounts receivable become an issue. Your administrative staff should be your first line of defense calling customers and identifying potential problems either from a cash flow standpoint or billing dispute. After a receivable goes past 60 days, your managers, salespeople and, if required, ownership should get involved. Overall, your Daily Sales Outstanding (total accounts receivable divided by average daily sales on account) should be no more than 50 days. If you have sales commissions or management incentive plans in place, make sure timely collections of accounts receivables are a component of those plans.
- Know where you stand (Part 4) — know your cash requirements
Put together a cash requirements calendar summarizing payments by due dates and amounts. Include significant payments such as weekly payroll, vendor/accounts payable payments, note payments and facility rent.
- Minimize your inventory of resale merchandise and repair parts: Don't buy anything that is not going to sell in the next 90 days!
Purchasing items for resale should be based on that simple mantra. Keep your resale inventory lean and mean. Beware of special terms from vendors or seasonal “specials.” For repair parts, follow the lead of the national companies; keep a small supply of filters and other often-used routine maintenance items. Buy the rest from the dealer or manufacturer on a “just-in-time” basis.
- Sell underutilized equipment
Target an overall dollar utilization of rental fleet (annual rental revenue divided by original fleet cost). If you rent larger equipment, your target should be at or near 70 percent with general rentals nearing 100 percent. At least weekly, run utilization reports using your rental software. Target and analyze items with low utilization rates (40 percent or less). Consider divestiture of low utilization items if no improvement is likely in the next 60 to 90 days.
- Sell equipment with chronic maintenance problems
Using your rental software, track your repairs and maintenance expense as a percentage of rental revenue by individual unit. Any rental item with 10 percent or more repairs and maintenance expense as a percentage of annual revenue may be a problem. Talk with your shop foreman and mechanical staff. If they believe these maintenance problems are likely to continue, consider selling the unit. But remember, don't skimp on maintenance! Down equipment doesn't make money and unreliable equipment will alienate customers.
- Extend the life of your rental assets
Many units continue to be profitable producers well beyond normal replacement cycles. In lean years, almost all of the national companies age their fleet to reduce capital expenditures. Make sure you only extend the life of rental assets that are not currently or likely to be maintenance problems.
- Consider buying used or refurbished equipment
Minimize your capital expenditures by buying late-model used equipment or refurbished equipment. Many times, such used equipment can be obtained at prices 33- to 50-percent lower than buying new equipment. This can reduce your capital expenditures, conserve cash and limit your debt. If you do buy used equipment (or extend the life of your current fleet) make sure the unit is mechanically sound and looks like new — including new paint, decals and seat covers.
- Supplement your fleet with re-rent equipment, especially on larger ticket items
Rather than using your precious cash or incurring additional debt, develop a relationship with other rental companies or local equipment dealers to provide equipment as needed for a rental. Make sure you are making a minimum margin of 20 percent on re-rents and make sure that the equipment condition is documented at the time of delivery and again when it comes off rent.
- Take cash discounts and prompt payment discounts
Many times you can get up to a 5-percent discount paying cash at the time of purchase or a 2-percent discount paying an account within 10 days. Where else are you going to get those kind of returns?
- Create an all-star team of your best employees
If you do have to cut payroll expenses, make sure you keep your “franchise players.” In any organization there is a core of key employees and then there are other employees that are transient or long-term projects. Keep the key employees “invested” in your business. Keep them informed of where you are taking your business and make sure they know they are part of a long-term plan. Keep up training programs and keep incentive plans in place.
- Limit discounting
Have a policy on who can discount and by how much. Know your “walk-away” rental rate on each piece of equipment. Have a realistic book price and make sure that your overall actual-to-book realization rate is at least 92 percent.
- Put your focus on your customers and customer service
Lasting relationships are often built in hard times. Meet and talk regularly with your customers; let your customers know that their business is important to you. Call on former customers. Find out why they no longer do business with your company and see if you can get them back in the fold. Remember, if you are writing fewer rental tickets you have fewer “at bats” with customers thus making each contact all the more important. Make sure your counter people and drivers portray the proper image and that your equipment looks good and is in good working order.
- Take nothing for granted
Ask vendors for additional discounts or better terms. These may take the form of cash discounts, quick pay discounts, extended payment terms or volume discounts based on lower-than-normal order quantities. Shop different vendors and consider using different brands than you have in the past. Look at every bill and consider the quantity and necessity of your purchases. Review and shop insurance rates and coverages. Closely analyze property tax statements; often assessments can be challenged. If you have facility leases coming due with third-party landlords consider asking for a rent reduction (taking into consideration other comparable facilities on the market) or ask for repairs normally done by your business to be absorbed by the landlord.
- Get competent advice from competent advisors
Have your business looked at from an unbiased third party. Utilize your CPA and your banker. Get advice from knowledgeable rental industry sources. We say that sometimes it's hard to work on your rental business when you are working in your rental business.
- Consider expanding your business: From chaos comes opportunity
For those that are financially capable and have their own house in order, opportunities abound to grow and improve your business during down times. Acquisitions are an excellent strategy to open up new markets with existing locations, customers and employees. Over the years, some of the most successful business owners we have seen have grown during times of economic downturn and have dramatically increased their market value when it is time to exit their business.
- Put on your work clothes
Lead by example. Keep yourself active and involved in the business. Work the rental counter. Answer the phones. Reduce labor costs by working the Saturday shift at your rental store. Make sales calls with your sales staff. Spend some time in the shop and make inquiries about individual pieces of equipment. Personally attend trade organization and civic meetings. We always say, “Your people will do what you do.” If they see you working harder than ever, they will appreciate it and follow suit.
Remember, “This too shall pass.” Maintain a positive attitude. The rental industry is a strong and resilient industry. Not including 2008, since 1981 there have only been two years that the overall industry has declined. By following these guidelines, we believe that your business will be in a position to thrive in the future.
Gary Stansberry is a partner in the rental industry consulting firm of Hageman, Stansberry & Associates (HS&A). HS&A specializes in mergers and acquisitions, business valuations and working with rental business owners to increase the cash flow and value of their business. More information on HS&A can be found at its website www.rentaladvisors.com. Stansberry can be reached at (817) 563-6882 or by email at [email protected].