Key performance indicators for a rental business
Boben Matthew, general manager of Ace Power, outlines financial and operational performance indicators for a power rental business
Anybody in a rental business invests in anticipation of a potential business opportunity over a certain period, usually the usable life of a machine. Rapid change in technology and infrastructure creates a need for every rental business to invest in technology and enhanced services and skill development. Constant reinvestment in advanced equipment is a must to sustain a rental business and achieve a higher return on investment.
The following KPIs help measure the health of a power rental business.
Monthly P&L: This is one of the most important KPIs. Monthly figures must be compared with previous months, last year same month, year to date total and last year to date, which enables a business owner to understand in one glance where the business is heading, and if necessary, take remedial actions.
Utilisation factor: This indicates the actual number of days a machine is going to be used intensively. Usually 60-65% is a decent figure. This indicator is similar to that in the airline and hospitality industries where a day lost is non recoverable. Utilisation above 80% means its very tough for a business and this may lead to poor service and loss of regular customers.
People to equipment ratio & people to revenue ratio: These parameters are relevant while analysing companies for mergers and accusations. Ideally every 15-20 units should have a dedicated service person. This depends on several factors such as geography, number of running hours, range of equipment, applications and frequency of use.
Rev/GRA ratio (revenue to gross rental asset): This indicates the speed of recovery of investment. Usually 50-60% is a reasonable value. Those below 40% indicate a tough or highly competitive market, and above 60%, a booming market with less competition. If the assets acquisition value is much lower than
the market value, then the Rev/GRA ratio increases to 70-80%.
Depreciation: This is a sunk cost on the balance sheet. Depreciation varies from place to place, equipment-to-equipment, usage, refinance cost, etc. Ideally 15-20% is the right depreciation value for a rental business. It’s highly risky if it exceeds 15% of the original equipment cost if we consider the new replacement cost, cost of finance and inflation.
Direct cost / indirect cost: Direct costs cover all the direct expenses incurred during a rental activity, such as transport, fuel, materials and direct maintenance. Indirect costs covers the overhead such as the engineer's salary and their vehicle expenses. Direct and indirect costs shouldn’t exceed 15-20% and 10-15%, respectively. In some countries, it’s the other way round where manpower cost is less and equipment usage is also less. In total, they should not exceed 25-35%. Overhead costs, which include yard and offi ce rent, insurance, establishment, management salary, telephone, travel, etc., should ideally not exceed 20-25%.
Debtor days, EBITDA and debt to equity ratio: The debtor days range should be 60-75 days, and the current ratio, 2:1. The EBITDA should be 50-60% if external finance is used for new purchases, and the business' exposure should not be more than 2-3 times the EBITDA. The debt to equity ratio shouldn’t
Smarter companies operate on the basis of many other KPIs. Only an expert in the rental business will be able to offer solutions that cannot be matched by competitors while increasing revenue and improving Rev/GRA ratios.