Your equipment rental company may be hustling, bustling and overflowing with orders, yet you may still have problems paying your monthly bills. Regularly reviewing a number of general small business metrics and industry-specific key performance indicators (KPIs) can help you pinpoint and correct problem areas that are impacting your financial performance while eating away at your bottom line.
Small and Mid-Size Rental Metrics
Also known as gross income or gross margin, your company’s gross profit helps you determine if you’re pricing your goods or services appropriately. You calculate gross profit by first determining your total revenue, and then deducting the cost of the goods sold. You then divide the total by the revenue.
You can calculate your gross profit margin with the following equation:
Gross profit = (revenue – cost of goods sold)/revenue
If your company’s revenue was $1,000, for instance, and the cost of your goods sold was $500, your gross profit equation would be:
Gross profit = ($1,000 – $500)/$1,000 = $500/$1,000 = .50, or 50 percent
Also called net income, net profit refers to your company’s total earnings after deducting all your expenses. These expenses include:
- Cost of goods (COG)
- Selling, general and administrative expenses (SGA)
- Depreciation costs
- Taxes from revenue
- Other income
You can use the equation:
Net profit = total revenue – total expenses
Using that same revenue of $1,000 mentioned above, you would calculate net profit by subtracting the total expenses from the $1,000. Expenses would include the $500 for COG, along with your additional expenses. If your additional expenses came to $300, your net profit equation would look like this:
Net profit = $1,000 – $800 = $200
Net profit is typically measured on an annual or quarterly basis, allowing you to compare figures to ascertain if your company is increasing its profits over time.
Net Profit Margin
Like the gross margin, your company’s net profit margin is a percentage. Net profit margin is calculated by dividing your net profit by your total revenue.
Net profit margin = net profit/total revenue
Plugging in the numbers from above, your equation would be:
Net profit margin = $200/$1,000 = .20, or 20 percent
Aging Accounts Receivable
An account receivable aging report lets you review how quickly the invoices you issue are being paid. You may note some companies pay within 15 days, others within 30 days, while others may not pay open invoices for 90 days or more.
Slow-paying accounts can be the main reason behind company cash-flow problems, which you can clear up by charging late fees or even letting go of clients who don’t pay their pills in a timely manner.
A typical report lists the customer name, the total amount due, and the length of time specific invoices have gone unpaid.
|Customer||Total Due||0 to 30 Days||31 to 60 Days||61 to 90 Days||90+ Days|
Accounting software programs can easily generate and automatically update account receivable aging reports, letting you filter the results by different date ranges to target the most overdue payments.
Current ratio refers to the proportion of your company’s current assets to its current liabilities. It’s used to indicate your company’s liquidity, which is the ability to pay your bills from cash or from assets you can rapidly transform into cash.
The current ratio equation is:
Current ratio = current assets/current liabilities
If your company’s current assets are $100,000 and its current liabilities total $50,000, your calculation would look like this:
Current ratio = $100,000/$50,000 = 2/1 = 2:1
The higher the ratio of assets to liabilities, the better off your company generally is. The ideal current ratio typically ranges between 1.5:1 and 3:1. Current ratios of 1:1 or less is often considered a sign of insolvency.
Specific Metrics for the Equipment Rental Industry
While general metrics work well for gauging the overall performance of any business, equipment rental firms need to go beyond general metrics to get the most accurate results. Here you can focus on three main areas for which you can define additional KPIs: assets, operational and customers.
Taking stock of all your fixed assets lets you review trends in maintenance and reliability. The asset category contains a number of KPIs that include:
- Time use: number of days a unit has been rented/total time available
- Downtime: number of days unit has not been productive for any reason
- Repair time: number of hours spent repairing a unit
- Fleet age: average age of your equipment, in months
- Maintenance costs: average daily cost of maintaining a unit
- Reliability: number of days a unit has been in repair/total days available
- Asset-group use: daily use of your asset groups, such as tillers, excavators, etc.
Even if your equipment is up to par, your company can still suffer if your operational performance is not. Operational KPIs include:
- Cross-hire ratio: the amount of turnover that comes from cross-hire
- Turnover per operator: how much individual operators contribute to daily turnover
- Overtime percentage: average overtime hours/total hours of work per week
- Operator idling time: Unscheduled time individual operators spend idling each week
- Percentage of planned jobs finished on time: number of jobs finished on time/total number of jobs
- Response times: average amount of time between an order and execution of that order.
Assessing your customer base lets you determine which customers are most important as well as trends surrounding rental demands. Customer KPIs include:
- Order count: average number of monthly orders from individual customers
- Revenue ratio: revenue generated by a particular customer/total revenue
- Repeat order time: number of days or months between a particular customer’s orders
- Cancellation ratio: number of times a particular customer cancels orders/customer’s total number of orders
- Debtor days: number of days it takes a particular customer to pay an invoice
- Asset rental trends: number of rental contracts per month for each asset group
Regularly reviewing your equipment rental company’s performance not only keep you up to date on the company’s current state of health, but it showcases areas you can strengthen and improve.