How well you manage your inventory is a key contributor to whether your rental business is profitable or not. Having too little of a rental item decreases your potential revenue, but having too much of an item increases the cost and doesn’t always equate to more revenue. Maintaining the optimum amount of items in your inventory will maximize your revenue while also minimizing your costs.
How then can you determine what the perfect quantity is for each type of item? The main tools are through the utilization of an item and the return on investment (ROI), often referred to as dollar utilization. Item utilization is the ratio of amount of time an item is rented compared to the amount of time the item is available for rental. An item that has been rented 6 months out of a year would have a 50% item utilization. While the ROI is the annualized rental income divided by the original fleet cost. An item that had $6,000 on income for the year and cost $6,000 would have a 100% return on investment.
The Item Utilization report from Point-of-Rental Enterprise shows both the utilization percentage as well as the return on investment on each item for the current month/year. This report is a key tool to determine what level of efficiency a certain item is performing at. The most efficient rental items will have a high utilization rate and a high ROI percentage.
For example, if you had ten trailers and were considering purchasing more, a quick look at the utilization percentage would show the ROI for the current ten. A low utilization is a strong indicator that ROI wouldn’t increase significantly with additional units since even the current ten are not be rented each calendar day.
Below are the four relationships between utilization and ROI percentages and possible scenarios for them. Note that you must account for seasonal differences and other factors that occur in the real world.
This process should also be done to evaluate your rates. Over time, equipment increases in cost, but many operators don’t adjust their rates accordingly. For example, you set your rates three years ago on a $1,000 item. It now costs $1,300 to purchase that item. That 30% increase in cost will decrease your ROI by 24% each year. If you are unable to pass those costs on to your customers, you might find that the item that used to be a high utilization and high ROI item is now a high utilization and low ROI. The best course of action would be to decrease your inventory.
Keeping your business running at peak performance requires time and effort, but if you stay up-to-date with the balance of utilization, rates, and quantities, you will likely see a positive change in your bottom line. To learn more about how Point-of-Rental Software can help you to balance utilization, ROI, and your bottom line, please email [email protected]. For more information about our software offerings, visit pointofrental.com.