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Material Handling Wholesaler Cover
December 2017
Enjoy the December cover story as Dave Baiocchi helps you transition from supplier to strategic partner

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Rental resurgence

Last month we covered your growth potential index, or how much your business can grow using the existing capital base and internally generated funds. Our point was that internally generated funds can only support a certain amount of growth and to try to grow beyond that calculated amount could result in cash shortages similar to what you feel when business drops off significantly. I know it sounds crazy but believe me when I say you can put yourself in bankruptcy under both scenarios.

We also suggested that growing the revenues of those lines of business that require the least amount of working capital (when compared to equipment sales) could increase the overall gross profit margin as a percent of sales and in effect push out the timeline when you will hit the cash flow wall. It’s not hard to figure out that more inventory and debt accompanied by a 2-3 time turn on the inventory will increase the need for more working capital and cash.

Product support consisting of parts and service fit that niche of faster turns and higher profits and I believe a number of dealers are finding out the pent up repair work is out there for the taking. In fact, many dealers I have talked to recently suggested that 2011 was a very good year; one of the best in the history of the company with product support and additional rental revenues resulting in higher gross profit and bottom line profits. If this is, in fact, a reasonable assumption then one has to ask if the rental piece of this new business is helping or hurting when it comes to generating additional cash flow.

There is no doubt that material handing dealers know the rental business. You have your short-term fleet and most likely a long-term fleet with various programs available depending on customer needs. You also have dealer and customer financing available, maybe not as much as you had previously but enough to get the job done. In summary, dealers have their LT fleet which should self-fund itself as long as customers continue to make timely payments, and a ST fleet which has more “rental risk” attached to it.  And with the state of the economy remaining flat, along with customer reluctance to take on LT rental commitments, dealers have to ask themselves if the ST rental risk could become a problem in 2012 and beyond.

What would happen if your ST business accelerates and the LT business shrinks? I think your “rental risk” increases if that happens because your fixed self-funding deals now become open-ended deals where you have to scratch to generate enough cash to cover the nut associated with a ST fleet. It would be an interesting exercise to see if the current ST fleet is sustainable at various time and dollar utilization figures that may make up the current market if customers start shopping for ST deals as a way to deal with a rocky economy.

 Rental is making a comeback or maybe it is a permanent change in how customers now want to do business. By rental I am referring to a rental model that offers up flexibility in terms of utilization and a lack of financial risk. If this scenario does come true a material handling dealer could become more of a pure rental company than an equipment dealer primarily in the business of selling lift trucks, because a pure rental business is a completely new business that requires a different approach as far as management is concerned.

Rental is a balance sheet management game where one strives to own just enough rental units to service the existing market, getting adequate rental rates to cover debt service and a profit. Sounds pretty easy, but it is more like trying to herd cats. But get out of sync on any of these primary attributes and you can find yourself in a cash flow bind that is hard to recover from.

Maybe this rental surge will not hit your market, but then again it may. If there is any possibility it could you may want to ask your CFO to spend a few hours trying to understand the implications of this switch from LT to ST transactions.