Metrics in Hire & Rental
It’s time to talk about TU and FU…
Long the staples of performance metrics in Hire & Rental, Financial Utilisation (FU) and Time Utilisation (TU) are widely used to justify business decisions. But do you really know what you are looking at? It may come as a surprise to learn that there are many different variants of these metrics and using the wrong one, or not knowing what you are looking at can have dire consequences for your business.
Before I hear the howls of indignation about the ARA Rental Market Metrics ‘Bible’ – let me clarify that these variants are not incorrect, they are just slightly different interpretations of the same measure. They are all valuable in their own way to measure your business’ performance, but you need to know what you are looking at if you are to use them appropriately. What you need to do is ask some simple questions about what you are looking at.
Let’s start with Time Utilisation…
On the face of it TU is pretty simple – divide days out by days available. So where are the pitfalls?
Well, let’s start with treating all product lines equally. Make sure that your measure is actually using ‘days out’ and not ‘days billed’, this is essential when your fleet mix includes assets charged at all of 5/6/7 days per week. Next, what is ‘in’ and what is ‘out’? Is fleet in ‘out of service’ included or excluded? Are you counting days where the asset is in ‘off-hire’ status i.e. not being charged but still on site?
I’ll give you a simple example… If I own 5 machines and 3 of them are excluded because they are under repair, you shouldn’t pat yourself on the back for the 70% TU you are achieving on the remaining 2 assets. Your CFO/Accountant will not be sharing your enthusiasm.
Now for Financial Utilisation…
This one is contentious… so the simple equation is – hire revenue divided by cost… but cost can mean a lot of different things. Again, none are necessarily wrong, but each definition has its strengths and weaknesses.
So, what am I talking about… cost is cost, right? No. Each business treats the ‘cost’ of an asset differently in reporting… the standard is the original cost of the asset (OAC), the next is replacement value (ARV), and finally we have written down value (WDV)… please don’t use WDV, this is the remnants of desperate owners trying to sell a business for more than it is worth.
The decision about which cost to use in the equation is up to you – neither is necessarily correct or incorrect and each has its own benefits. For example; using ARV instead of OAC can actually normalise some of your reporting by removing variances in purchase price over time. Whilst OAC is a more accurate financial measure.
Let’s cover some basics… FU is not Return on Investment (ROI), ROI is calculated using gross margin divided by capital cost (not revenue). This generates a starkly different result. Also, whilst being a result of, FU is not a direct measure of price movements. Take the recent challenge faced by many in the migration of assets from mining activity into metropolitan BAU. Many of these mining assets were highly modified to meet requirements leading to a higher purchase price, dropping these assets into a metropolitan market may lead to a fall in FU not because the market is dropping prices, they are just being compared to a higher original cost.
And finally… the common challenges that apply to both…
Both measures can be presented with different periods, commonly these are 1 month, 3 month or 12 months. Each of these periods has its place in your reporting arsenal, 1 month is helpful for status reporting, quarterly helps to build normalised trends and annual removes seasonality from the picture. Take some common seasonal products for example; air conditioners, heaters or compaction… what is the point of measuring 1 month or even quarterly performance of heaters in summer?
How does your reporting system account for asset movements? This is an important question, because quite commonly performance history can follow the asset. In real terms, this means that ‘dumping’ poor performing assets into a strong area will make the original area look better and the new area be dragged down distorting your view of performance.
Both of these measures are useful and important, but decisions cannot be made based on these in isolation. Existing and past performance of TU and FU are helpful in managing your rental business, however, understanding the future of the market and trends are the true signs of a business manager. Take the example of a major company who saw strong FU and TU performance leading in to a new major freeway project. This company purchased a large number of compaction assets to service the project despite being warned that a trough in road construction was approaching… the result? 70 rollers sitting in the yard for >5 months without customers. As the ad’s say… history is not a reliable indicator of future performance.
What about FTU? What is FTU? Well, FTU is a combination of the two measures that takes TU and weights it by capital cost – this is a very helpful measure of capital allocation… Is the majority of where you spent your money actually delivering on performance?
So, let’s summarise. Are FU and TU still relevant and essential tools for a rental business? Yes, of course they are. However, you need to press your analysts and IT department to ensure that you fully understand what these measures are based on and what assumptions have been made. The next time someone tells you about their FU/TU performance, ask them what it is based on… I’ll bet they don’t actually know.
Wolf & Bear Services know what these measures are; how they can and should be used and how to apply them to real business decisions… You may think you have a handle on your business, what works, what has worked, but it might be time to talk to the professionals. The future of your business might depend on it…
***Disclaimer: Please note that this piece is general in nature and represents the opinions of the author. It should not be used to make financial decisions without further consultation with your financial advisors in respect to your business position.