In the rental industry, maintaining acceptable time and dollar utilization on your rental fleet is a foundation for success or failure. Successful rental companies usually know, monitor and manage their time and dollar utilization of their fleets, down to each individual piece of equipment. If you don’t know your utilization rates and don’t track and manage your fleet based on these basic principles of the rental industry, then you are way behind the curve.
Time and dollar utilization are correlated and proper management of your rental fleet depends on your ongoing utilization analysis using these basic fundamentals. Simply put, dollar utilization is calculated by dividing annual rental revenue by original acquisition costs. All rental companies should know and continually monitor dollar utilization for their overall fleet and also for each piece of capitalized equipment.
Time and dollar utilization rates vary depending on what type of rental company is being analyzed. If a rental business is primarily focused on contractors and construction, the overall target dollar utilization rate should be 60 percent or higher. If the business is focused on general rentals and homeowner equipment, the target dollar utilization should be near or above 100 percent. Party and event rental companies, which generally have less capital investment than contractor or general rental centers, should target dollar utilization rates of 150 percent or higher.
While both time and dollar utilization are intertwined and reliant on one another, my business partner, Gary Stansberry, and I are most concerned about dollar utilization. Why? It’s simple. To get a proper return on an investment, you have to measure that return and the measure for returns is dollars. At the end of the day, everyone — you, your banker, investors, managers, employees, spouse and family — is concerned about how much money you make in your business. Great time utilization and poor dollar utilization doesn’t pay the bills. Not for long, anyway.
A piece of equipment that is always out on rent but doesn’t make an acceptable return doesn’t cut it. However, just because you have good dollar utilization doesn’t mean that time utilization isn’t important — it is — and you must “manage” your fleet based on both metrics.
How can you get good dollar utilization without time utilization? You can’t. The equipment has to be out on rent, but at an overall rate and return you can live with. Always start with dollar utilization and then look at time utilization by both category and individual pieces of equipment. Time utilization will tell you a lot about rate and quantity issues regarding your rental fleet.
Your rental fleet is your single largest investment in your business. Just like your stock investments, a rental company needs to have a “diversified portfolio” of rental equipment. That means some items will have better returns than others. You need to maximize your returns and minimize or alter your poor performing assets, both in stocks and in the management of your rental inventory. Here’s how to do it:
- High time/high dollar utilization. This is the best of both worlds and what you should strive for, but it doesn’t mean you shouldn’t analyze and manage this type of equipment or category/class of equipment. This scenario should prompt an owner to add more of this type of equipment or, perhaps, even raise the rate a bit as long as it doesn’t negatively affect time utilization to the detriment of dollar utilization.
- High time/low dollar utilization. This is problematic and again, low dollar utilization is what to avoid at all costs. This classic scenario means that your rates are too low. Who wouldn’t want to rent something dirt cheap if they could? This category is indicative of items that are always on rent, but at cheap rates. In this situation, you have to raise rates. Time utilization could drop by doing so, but you can make more money by raising your rates. Don’t get sucked into the old theory of, “We’ll make it up on volume.” That’s what this is. Anything under 40 percent dollar utilization needs to be “flagged” for review.
- Low time/high dollar utilization. This isn’t a bad position to be in, but again, one that requires management. This situation usually reflects a rate that is too high. Lowering your rate here to a more reasonable level could increase your time utilization and also increase your dollar utilization. There are exceptions. For example, it could be a seasonal item that is priced properly. It could be a specialty piece of equipment where the rate won’t affect how much time it will be out on rent or you may have too many units of this particular item. You have to look at the whole picture. Also, make sure that if the rental rate is lowered that the dollar utilization isn’t negatively affected. If it is, then return the rate to its original level.
- Low time/low dollar utilization. This typically reveals overstocking of a category or class of equipment. Items that fall into this scenario represent business you may not want. In this situation, some of the overstocked items should be sold or disposed of until time utilization improves, bringing dollar utilization up. There also could be an issue here with high rates, although having too much of this type of equipment is usually the culprit. You also might consider sub-renting this type of equipment if it is vital to your rental operation, since owning it could be a money-loser for you.
Remember, dollar utilization is dependent on time utilization. What you paid for the equipment also is a huge factor in the overall equation. Some historically low dollar utilization items, such as reach forklifts, for example, are very expensive — especially when purchased new. When a piece of equipment is very expensive, consider buying used, late-model equipment. Saving $30,000 on a used unit versus the cost of a new unit will dramatically improve your dollar utilization since your annual rental revenue is divided by the original acquisition cost whether you bought new or used. With well-maintained equipment, most market rental rates are the same for a one-year-old unit versus a four-year-old unit.
Managing your fleet starts with time and dollar utilization. There are several other “best practices” and various components involved in running a successful rental operation, but in order to run your business effectively, you have to know and manage the basics.