Are sub-rentals really as bad as you think?
In fact, sub-renting equipment strategically should bring in more profit, not less.
I was reminded of this not too long ago when I had a chance to catch up with an old friend. This veteran operations manager has been running operations longer than I’ve been in the business — and I’ve been doing this for 30 years. He’s quite good, to say the least.
When we started talking about sub-rentals, his eyes lit up and he said, “I love sub-rentals!” So I asked him to elaborate. “Using sub-rentals means all of my equipment is busy. If all of my equipment is busy, I’m making a ton of money!”
He understands the reality that many AV business owners are missing: Sub-rentals are not bad — sub-rentals are a valuable tool in growing your business. Here’s why…
Why AV Business Owners Don’t Like Sub-Rentals
Many people assume sub-rentals are “bad” because they incur a direct cost. These costs reduce the gross profit you’d earn if you owned the equipment. Many people interpret this as a loss. It seems every time they sub-rent, they pay someone else instead of paying themselves.
That’s a typical rental mentality… but it’s not a mentality that leads to growth.
If you don’t own all the equipment you need for a client, should you stop renting equipment altogether? Of course not.
Instead, you should maximize your potential for using the equipment you own by supplementing it with the sub-rental equipment you need to take the job. Although your profit may be minimal for the specific equipment you sub-rented, your total profit is much better.
Three Benefits of Sub-Rentals
For any kind of rental company, some level of sub-rentals is optimal. The key is identifying the percentage of sub-rentals that makes sense for your business. While too many sub-rentals can definitely be costly (and indicate you should have bought more equipment), most sub-rentals make money.
How do they make money when they cost so much? They allow you to meet demand and accommodate growth, avoid buying equipment you don’t need, and enable you to better utilize the assets on the shelves of your warehouse.
1. Meet Demand and Accommodate Growth
Sub-rentals help you meet demand and grow your capabilities before it makes sense to invest in owning the equipment. It provides a scaffold for reaching the next level of growth.
2. Avoids Unnecessary Purchases
Sub-rentals also save you from investing in equipment you don’t want to own. When equipment is too expensive to maintain or won’t be used frequently, it’s best to sub-rent it.
3. Utilizes Other Assets
Sub-rentals help you utilize other assets too. If you can sub-rent some equipment, you’ll be able to use the equipment you own to make more profit.
I worked with a client who had an opportunity for a new project, but when the team realized they’d have to sub-rent projectors, they assumed the job wasn’t worthwhile because the sub-rental cut their profit.
I asked, “Do you have all the other equipment sitting on your shelf?”
“Yes, but the projectors cost too much.”
Then I explained, “If you sub-rent the projectors, the equipment you own works towards your profit. If you don’t sub-rent, none of the equipment makes money.”
Only looking at direct costs can lead you to the illogical conclusion that a job that includes sub-rentals is not worth the investment. However, when you see the costs of sub-rentals in the scheme of the total job, it often makes more financial sense.
How To Make Sub-Rentals Profitable
Stop assuming sub-rentals are bad and start figuring out how to use them to your benefit. With the right sub-rental rate and CAPEX plan, sub-rentals can become profitable.
Start by discovering the optimal sub-rental rate for your organization. It’ll probably be somewhere between 3-15% per year, depending on your:
- type of business;
- current growth;
- current market; and
- process of capitalization.
During years of growth, expect the rate to be higher. There are many variables, but there is a right number for you.
You also have to create a CAPEX plan that allows you to continue to reinvest in your business. Every company has an optimal CAPEX percentage — usually between 3-10% of your revenue per year depending on your specifics. Make sure you allocate funds to continue to further your business objectives.
When you spend CAPEX, spend it smartly. If you are relatively well-capitalized, regularly buy equipment, and reinvest in your company to keep up with growth, here’s your approximate budget for your capital expenditures:
- 50% of your CAPEX budget needs to go towards reducing sub-rentals. We don’t want our sub-rental expenses to grow — even one percent. Invest in keeping the sub-rentals down. Don’t continue sub-renting equipment you should own.
- 25% of your CAPEX budget should be applied towards retiring items. You know those items you shouldn’t rent anymore because they’re out of date? Here’s your chance to upgrade.
- Keep the last 25% for the fun part. Buy the new “toy” you need to make opportunities and great ideas possible.
Don’t think of sub-rentals as good or bad — think of sub-rentals as data. When you know what you’re spending and accurately understand your true profit, you can better strategize how to make sub-renting equipment work in your favor.