Many rental company owners find their financials confusing. There is a constant stream of expenditures - many are hard to classify. How do you judge the success of a month when the expense and revenue go across two months? Why are percentages important some times and not others? Which numbers are important to my situation?
Making quick sense of financials is the first step to diagnosing both problems and potential. Here are my five go-to assessments:
#1. Your True Costs of Goods Sold
Costs of Goods Sold are critical calculations in project sales, but did you know that you have COGS even when you sell nothing? Any cost incurred in the event of or in preparation for a sale should be considered COGS. Therefore, your entire warehouse staff, technicians, and logistics team are all direct costs whether you sell anything or not.
Most companies can estimate the direct costs involved to execute a given project or business transaction. However, savvy companies can also calculate their costs when they don’t win the job!
#2. Revenue Ratios
When pricing live events, the ratio of labor to equipment is critical. There is always a hard cost associated with labor, so it is easy to assume that is the best place to specify cost savings. But, labor pricing represents your differentiator and your greatest financial risk. Even so, most companies undersell labor.
Whether you sell dry-hire rental or custom-designed extravaganzas, there is a labor to equipment ratio that is right for you.
#3. Buy or Rent?
What is the most important metric for a rental-based business? I will give you a hint…it’s a potentially volatile finance expense and your job is to keep it consistent. Depreciation. Too much and you overheat your balance sheet. Too little and you can't build equity. There is a right amount for your business model.
Don't forget that the need for sub-rentals is a sign of a healthy rental business.
#4. Share of the Customer
Winning a client is a huge undertaking. Keeping them is a battle against unseen forces. The more connection points you have the better your chances of retaining them. Do you know what your share of your customer actually is?
Your customer needs a variety of products and services. How many do you provide? Which ones would make a difference? There is a reason that highly profitable companies have 6-10 lines of business instead of 1-2.
#5. What Are You Worth?
In asset-based, highly capitalized businesses the valuation number that matters most is EBITDA. Do you know what yours is and how to improve it?
What do high-value companies do differently from yours? Review items 1 through 4.
If you would like to learn more about how to interpret your business results, schedule your free consultation today.