RAC Business from an ROI Perspective

This article should be reaching you just about the time you attend, or at least hear about, the 2006 Car Rental Show in Las Vegas. Visiting this show, if you do it the right way, should prompt you to carve out time to reflect on your business, and put your efforts and results into perspective. Over the past few years, VRCG’s partners have written articles on various aspects of the business such as training, fleet, company culture, sales, remarketing and other subjects. Think of the thoughts we’ve shared with you as components. This article is our effort at tying all of those pieces together so they make sense. This article is bluntly intended for owners of companies, or those individuals who would like to run their own operation. I’m not saying that all of the other folks in the business shouldn’t know these things, but I’m hoping this will be a call to action for owners.

A New Approach
The dictionary defines return on investment as “…A measure of the net income a firm’s management is able to earn with its total assets. Return on investment is calculated by dividing net profits after taxes by total assets.” Put in basic terms, return on assets is mostly a financial measure. However, I’m expanding this definition to include not only money—and the return you get on it—but the return you get on your time and your efforts, as well. I challenge you to make a value judgment about your use of money, time and efforts.

Looking at the various parts of your business, let’s start small and then go macro:

The Results of Your Branch Employees’ Efforts
The foundation of your company is the point where your employees are interfacing with your customer. Call it point of sale, branch, whatever you like. If this group of people isn’t appropriately focused on making your business sing, then you need to do something about it. Some examples of misuse of time might include your middle management hosting too many useless meetings about administrative issues rather than sales or customer service issues, or too much idle time where your counter personnel aren’t busy (maybe between arriving flight rush time or the like). There are always car prep items, office cleanliness issues, phone or face-to-face marketing opportunities, training issues (including phone or one-on-one sessions) or a dozen other productive things that can be done while on duty. Generally, your head count is the second largest expense your company has. If you don’t actively manage this investment in people, at best you earn a poor return on your investment—at worst you lose the battle to stay in business.

The Results of Your Marketing Efforts
Too often I ask owners or senior managers what their marketing strategies are, or about the tactics they’ve put in place to support those strategies, and I get a blank look. Or, even worse, I hear “somebody else in the organization is handling that…our Web guy, or our Sales Manager, or so-and-so is doing that.” Well, I doubt very much that the Sales Manager, Web guy, or so-and-so has their own money in the company, nor have they mortgaged their home to secure the line of credit that supports car purchases and working capital. If you don’t have a solid handle on what your marketing efforts are—and their effectiveness—then you are getting a substandard return on your investment. I’m not saying that someone in the organization shouldn’t be in charge of this, but if you are just winding them up and letting them go without proper understanding of what they’re doing, how they’re doing it, and how they’re measuring effectiveness, you may be earning a poor return on your investment.

The Results of Your Collection Efforts
All of us occasionally have receivables problems, as it is in the nature of our business. An ironic corollary to this is the fact that we had to pay cash to get this money owed to us. Just as we had to pay cash to our employees to do the rental transaction. And we had to pay cash to buy the car that got rented. And we had to pay cash to rent or buy the building from which we sent the car. And we had to pay cash to get the lights to go on, put fuel in the tank, put food on the table, and on and on. So, when I hear that “yeah, we have money outstanding for 60 (or 90 or 120…) days, I wonder how much the owner or manager values the investment they have in their company. Frankly, the argument that accounts receivable are an intractable problem just isn’t valid—just look at what Dell Computer does. When you figure out that they actually collect money for their sales three or four days before they ship any product—even though it’s a different industry and a different business model—it still shows that there is potential improvement to be had.

The Results of Your Loss Control Efforts
Getting cars wrecked while they’re out on rent is a fact of life. Unfortunately, just as the aforementioned examples showed, we’ve got cash tied up in an asset that can’t make any money. In your mind, view that unrentable unit as a chunk of cash, and every day that it sits, the “depreciation mice” come along and nibble at it a bit at a time. If it sits long enough, there’s not much left. The truly sad thing about this situation is that you lose four times: first, you can’t rent it, and need another car in its place...ka-ching. Second, you’ve got to pay to get it fixed, and maybe you collect from an insurance or credit card company, or maybe you don’t...ka-ching. Third, you’ve got “damaged goods,” and when you try to sell it or turn it back after it’s fixed...ka-ching. Fourth, you have administrative time (read: money) tied up in administering the claim...ka-ching, once again.

Now, some of you do loss control internally, some of you subcontract it out, but how often do you measure date of loss to date of funds received? How many of you measure how much less the wrecked-now-fixed unit sells for than one that hasn’t been damaged? How many of you simply assign this task to somebody else, and forget about it? How many of you even keep detailed statistics on this part of your business? If you don’t keep tabs on this part of your business, given the fact that you have a lot of money tied up in it, then you might not be collecting as much return on your investment as you should be.

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The Results of Your Administrative Team

A good business management team is the bones of a good rental company. The owner is supposed to be the head, the operations people the arms and legs, and the culture of the company is the heart and soul. How often do you make sure that the bones are healthy? Are you holding every administrative person up to high standards? Are you measuring their output, and making sure that they’re focused in on what really matters to you and your company? At the same time, are you giving them the tools they need, and the credit they’re due? Are you using your administrative department as a dumping ground for failed rental employees? Conversely, are you asking your administrative team for their input, ideas and better ways of doing things? Scratch deep, and they’ll often have good ideas, but sometimes management gets in the way of implementation. I challenge you to not view this team as a millstone around your investment, but a group that has the ability to maximize your cash.

The Results of Your Management Team
This is probably the single biggest opportunity I see when we visit prospects. Oftentimes the owner(s) try to do all the thinking for the company and rely on their management team to execute. But, if the management team isn’t hired correctly, compensated correctly, given appropriate incentives or held to high standards, there is a disconnect between what is needed and the results obtained. The overbearing owner wants employees who “just do what I say,” and the aloof owner says “go do it, and let me know how it turns out.” But the enlightened owner, who is truly looking out for his own interests, husbanding the value of his investment, is somewhere in between the fire-and-forget mode of management and the autocratic style. Your management team should be benefiting from your knowledge, and you should be spreading it far, wide and frequently. And once you dispense it (over and over and over), you should then have the wisdom to step back and let them run with the knowledge.

This is a little bit like trusting your 16-year-old with the car keys the first few times. You can’t ride with ‘em all the time, so you’d better be a good teacher. At the same time, the end results of the kid with the car (bringing it home in one piece) and your management team (delivering profits, growing the business, treating customers and employees right, etc.) are comparable. And if you’re not getting the desired outcome (keeping the car safe, and keeping your company safe), then you’d better be prepared to make some changes to safeguard your investment.

The Results of Your Buy-Side and Sell-Side Efforts
Dave Arney, a partner at VRCG, has written at great length about benchmarking and the “how to” of fleet planning. I won’t rehash this. But even to this day, in 2006, you can still hear how 9/11 hurt the used car market; how the manufacturers cutting down a bit on fleet sales is hurting the buy-side of the rental business; and on and on. All used as excuses for why a company’s fleet costs continue to consume so much more of a company’s operating budget.

Yet, at the same time, the owner is allowing the processes that lead to results—good or bad—to remain the same. Teams march to the same old auction. They rely on an inappropriate percentage of fleet to be either factory or franchisor buybacks. They refuse to spend more time on fleet planning. They refuse to beef up their remarketing department, and so on. There are always a lot of someone else’s excuses for poor results. Frustrations mount. Nobody knows what to do. Are you getting a solid return on your investment?

Your Time, Effort and Focus
It’s easy to look hard at your employees’ efforts if you follow some of the thought starters mentioned here. But what about you? Are you executing a balanced approach to the things you spend time on? All of us have strengths and weaknesses. Some of us like accounting, some like marketing, some like used cars. Some owners are introverts, some owners are back-slapping extroverts.

It’s human nature to gravitate to the things you like to do and spend a lot of time on them. But an owner has to have a balanced plan to work on all facets of the business, whether you like it or not. This also gets more difficult when some of the things you don’t like to do, or aren’t very good at, demand skill and attention. Sometimes your over-attention to one part of the business, or neglect of another, is obvious to your employees. And, like your kids, your employees will hear what you say, but mostly mimic what you do.

If you don’t have a balanced approach to your business, and don’t pay appropriate attention to all the moving parts, not only will the business suffer because of your unbalanced approach, but you’ll also exacerbate the situation because your team will follow your lead. All of us have heard from our financial advisors about the importance of a balanced financial portfolio, but how many of us apply this logic to the things we work in the biggest investment we have, our company?

Your Money
In Southeastern Michigan, where VRCG is headquartered, local banks are advertising certificates of deposit that will yield 4.5% on the deposit, and you can withdraw all or part of your money one time, any time, before the note matures. So, according to their ad, you can “have the high yield of a CD with the liquidity of a money market fund.” This begs for a big question to be asked: Is your company yielding 4.5% (or more) on your money, with no risk and the ability to take cash out whenever you want?

Yes, I understand the concept of leverage (whereby with only 10% to 20% of the value of your fleet in retained earnings, you can go out and borrow another 80% worth of inventory to rent), but think about the strings that are attached to that money. You have personal guarantees, you’ve got your house pledged, you’ve got your first-born all tied up. Let’s put it in money terms: You have 1,000 units at $17,500 per copy. That’s more than $17 million in assets. The bank will probably require you to keep maybe 20% of this value liquid. So, that’s about $3.5 million in real cash assets. Put that cash at my local bank and earn 4.5% interest on it, and you can personally haul out more than $13,000 per month with virtually no risk – no pledged homes, no kids with liens on them, no people to manage.

I challenge you to look at your company from a return on investment perspective. If you can’t justify your risk versus your reward, I further challenge you to ask more from those around you...and yourself, as well.