“It was a great month — our revenue was higher than last year’s.” Sound familiar?
If this is how you judge performance, you operate in a void. It’s time to break away from the myth that just improving on last year’s revenue is a great goal to set. For years I have heard people in rental branches talk about branch goals. When pressing them for further explanation, I’m told something similar to the following: “Well, our branch did $60,000 in revenue in November 2004, and our goal is to do 10% higher than that ($66,000) in November 2005.” When I hear that simplistic answer, a number of questions then come to mind:
More often than not, branch personnel or managers have not thought about these questions, or their answers. Often, they are content with answering questions with the old standby: “Because that’s what we were told.”
Is your company training all employees how to truly measure dollars as they make the journey from the top line (of gross sales and revenues) to the bottom line (of net profit)? And, at the same time, are these employees learning how to effectively set goals? If not, you’re missing an opportunity to strengthen your team.
When you set company goals but fail to advise employees how to meet those goals, you’re being unfair to your staff. More importantly, this makes accomplishing the goals difficult. At the same time, absence of guidance also makes it difficult to hold people accountable for not reaching their goals if they aren’t involved in the process.
How do you start down this path? First, let’s start with measuring top-line performance. Be sure your employees are not just looking at total revenue as a barometer of how they’re doing. Make no mistake, revenue growth is important. But there is more than one way to discover your true performance. You can be more effective in making your team smarter business people if you look at performance on a per-unit basis.
Let’s expand on our example cited at the beginning of this article. If branch employees attained their goal of $66,000 in revenue, they would feel pretty good about themselves. But if we had a true look at performance from November 2004, it may reveal a different story:
Nov. 2004/ Nov. 2005/ Growth
Revenue/ $60,000/ $66,000/ +10%
Avg. Fleet Size/65/ 79/ +20% [PAGEBREAK] Revenue growth would have to grow to $72,000, or 20%, to just keep pace with the growth of the fleet. If we extrapolate the revenue numbers on a per-unit basis, our results further show that the month wasn’t as good as we thought.
Revenue per Unit
The reality is that we earned $88 per unit less in revenue than the prior year. Now, let’s take a hypothetical look at how this could have happened. First, to review basics, daily dollar average (DDA) is the average dollar amount earned per day on each vehicle rented. Utility is “the little number divided by the big number” — or your total number of units on the road divided by your total fleet size.
Nov. 2004/ $38.46/80%
Nov. 2005/ $36.62/76%
Net change/ ($1.84)/(-4%)
So what has occurred here? The branch did improve revenue by 10%, but DDA and utilization both fell. The revenue grew because the fleet size rose 20%. What should be obvious from this example is that setting a goal of a 10% increase in revenue, and potentially giving a bonus to employees for this increase, could fuel bad behavior. This could actually cost you money, putting you further in the financial doghouse.
A more effective goal for this office might be to improve revenue per unit by a minimum of $20 per unit and grow the average on rent for the branch a minimum of 10%. Achieving this goal will ensure that much more of this growth in revenue will drop to your profit line. The above served as an example for setting goals when looking at top-line dollars and fleet/on-rent size.
Now, let’s address the most important piece of your business — profit. In the beginning of this article I mentioned that many rental branches are issued goals by someone they report to, without having any true input in setting the goals. As a result, these employees are left in the dark. The same can be said for profit. Frequently, managers tell rental office personnel what their profit was (or wasn’t) for a particular month, without offering them any detail or explaining what they can do to improve performance. When your team operates on a per-unit basis, staff members more easily understand what level of revenue is needed to reach break-even. [PAGEBREAK] Let’s take a look at how a typical branch should look at break-even:
Revenue per Unit
- Expenses per Unit
- Costs per Unit
= Profit per Unit
You may wonder whether expenses and costs are the same thing. Here is how we define each:
Revenue per Unit - $835
- Expenses per Unit - $370
- Costs per Unit - $380
= Profit per Unit - $85
For the month of November, the branch had a break-even point of $750 per unit ($370 + $380) and the location earned $85 per unit in profit, or $6,715 ($85 x 79 units). With this line of thinking, branch personnel understand that as long as fleet size operates in a certain range, the typical break- even point will be under $800 per unit.
When you instill into your company culture the concept of measuring on a per-unit basis, your team will better understand true branch performance. Goal setting will become a more effective tool. A break-even point, either on a per-unit basis or on a total-dollar basis, will certainly fluctuate month to month. But it’s simpler to understand a break-even point of $750 per unit instead of a break-even of $59,250. I’m guessing that one of your goals is to improve profitability on an annualized basis. If you rely on all your teammates to help take your company there, you need to share your knowledge and to coach them on how to reach performance goals. Remember, car rental is a team sport.
Thom Amick is vice president of VRCG Inc., a consulting firm in Southfield, Mich. His company’s motto, if it had one, would be: “Be pretty good at all parts of your business and you’ll do just fine.” Amick has agreed to be an ongoing contributor to ARN.