By David Oliver (bio)
Owner, First American Rentals

As the old management adage goes “what gets measured is what gets done”. How do you measure store performance? Do you measure the obvious or what really matters?

If you're in the rental business strictly as a philanthropic venture, there is no need to read any further....If you are still reading then you must be interested in the return on your investment.

ROI, in basic terms, is defined as the return on money put at risk. There are three crucial areas of measurement to determine a stores performance.

Gross margins
The money invested into a rental store primarily goes to inventory. Inventory is what produces return on our investment. Inventory generates top line revenue, after we pay for the inventory and directly related inventory costs (service, parts, repairs) the dollars left are gross margins.

A well managed store should generate 70% gross margins. This means that for every dollar our inventory generates we have 70 cents left, after all inventory costs are paid, to pay store expenses, (Salaries, advertising, transportation, housing, training and administrative costs) If you are not Aarons, and are not generating 70% margins the manager is not trained or capable of running that store.

You can't bank BOR
When discussing store performance with peers, most managers speak endlessly about BOR. However, it is a rare few who know what their gross margins are, let alone their revenues and operating profits. This is due to upper management not educating managers on the key performance areas of the store such as top line revenue, gross margins, and operating profit. While BOR is a barometer, you cannot put BOR in the bank.

I have seen many high BOR stores with poor gross margins and very low operating profits. At the same time, it's possible to have a low BOR store with high gross margins and operating profits which result in the store with the lower BOR producing a higher ROI. This is not to say that BOR is'nt critical. Higher BOR is desirable, but the quality of the agreements (APC, average price per contract) and the gross margin produced by each BOR is where the focus needs to be. Only with this balance in mind does more BOR equal a greater ROI.

Set your rental rates with goals in mind
Rates and terms will determine your gross margins. If you use income forecasting for financial accounting you simply take the landed cost of the goods when purchased and set your rate and term so that you receive a 75% gross margin after depreciation from each rental payment, this leaves 5% to cover repairs, parts, service, charge offs, and payouts.

This knowledge becomes even more critical as we get back used goods to be re-rented. Armed with the proper knowledge, managers are able to make the correct financial decisions when determining what term and rate to re-rent used goods to insure 70% margins or higher. Obviously distressed goods will not produce these margins, so it is critical to re-furbish goods to like new condition. When this is not possible we have to accept a lower margin. Focusing on Gross Margins allow managers make behavioral decisions about their inventory that are in concert with the gross margin goals.

Back Into Revenue Goals
With gross margin taken care of it is now just a matter of insuring that we have enough contracts on rent to generate the top line revenue goal.

Your APC will determine your BOR goals to reach your revenue goals. Remember the revenue is only good if the gross margin is solid. Of course we must collect it.

With a 70% gross margin you will realize a minimum of 25% operating profit, this will be higher if your housing is cheap, your advertising is 5% or lower and your payroll runs 20%.

Good locations, good people and good inventory are critical to achieve your desired ROI. Good locations, good people and good inventory worthless if management does not educate, train and measure what matters.

Imagine a doctor who does not understand the instruments he is working with. Even the best physician is dangerous if he is not educated about the tools he is using to perform the procedure.

Take the danger out of the equation through education and training on what really matters in order to maximize your ROI.