Thank you. If you are the leader, press star now. You will now be placed into conference. To mute your line, press star six. To unmute, press pound six. Your conference is being recorded. I can hear you fine. Great. I've got a headset into a cell phone, so hopefully that gets rid of any background stuff as well. Okay. That sounds great. And you've done plenty of these before, correct? Well, I've done probably about four or five. This is the... I'm trying to think when it was maybe January, we started a different format, I mean, a different recording process. Right. And so that first one was pretty rough, and then we re-recorded it like in February or early March. Okay. And so before, I could kind of, you know, a moderator like yourself could jump in and whatever. I felt like I was talking into a blind, dark alley, and I had no idea who's out there, who's listening, or whether I'm too loud, or keep going, and everything. Right. So, anyway, I'm trying to get over the first time, as I said, was such a bad experience. I just kind of made a gun shy from... So, I'm glad there's, you know, you're handling this thing around here a little bit early, and I'll figure out how to do it. Yeah, yeah. So, basically, once we're about to start, I will make you the leader, and then you'll see the arrows on either side of the presentation, and by clicking on one or the other, you can go backwards or forwards. Okay. Okay? And then I'll be... I'm going to... I'll hit mute, so once we're ready, you can just start, introduce yourself, and start rolling into the presentation. Okay. Okay? So, on the... My mouse, as far as... So, some of my slides, there's some animation to it that brings up one line at a time or something, so I can use my mouse like I normally would, or am I hitting a mixed arrow? Oh, I'm not quite sure about that. Honestly, I don't know. So, I guess we'll both learn that. We'll find out. Yeah, yeah. Can you flip control to me right at this moment so I can check that out? Sure. Absolutely. You know what? Yeah, I don't see you. I don't see you on there anymore. For meeting information, attendees, I'm showing you and me. You still there? Yeah, I'm here. Okay. Yeah, I don't... I'm not seeing you. You're not listed under the attendees. I'll click out and come in again. All righty. Here we go. All right. So, I'll just... I'll set you as leader, and do you see the arrows then? I do. Okay. Okay. Um. Okay, so they are bringing it in sequence, okay. Okay. Yep. All right. Good with that. Okay, and so I Can tell folks that if they've got a question along the way they can type it in and I'm going to see that we're over on the left column under chat Correct audience question. Yep Okay, so I'll have that tab open Okay So if you've been with the AED a while since July, okay, so coming up on here Okay, and you primarily? Work with what the IT related stuff or training and education or no actually my role Well, yeah, my role is actually a membership development. So, okay I'm just happy to help happy to pitch it and help out with that. Well, you know Rebecca Rebecca that yeah, but she did have the baby. I don't know if you know that. Yeah She told me that yesterday. I knew it was sometime in April With the expected date. So that's good. Yeah, she She went in I think it was Friday or Saturday Okay. Yeah, so She is now a busy mother of two, oh my goodness Been there done that so it yeah life I remember Something bill Cosby said a long time ago. He said You know if you only have one child that's really not parenting because you always know who did it, you know, it's true. Yeah That's a good point, yeah, I have three boys so trying to get oh, yeah Any facsimile of the truth is something? Yeah daunting task Although with one being away at college, you know doesn't help Yep I Live in lookout Mountain, Georgia, which is just outside of Chattanooga. Oh, okay Okay, and I moved here about two years ago. I'm born and raised in Jacksonville, Florida Okay My wife and I decided we wanted to cruise into the sunset in a different place Yeah, I've known are you in the is that in the Smoky Mountains then or no? Well, uh The Smoky's are probably about 50 60 miles from us is where the beginning of the Smoky's are Okay We are Lookout Mountain. I don't know if it's actually part of a chain or not. We're at about 22 to 2400 feet and Kind of they kind of run the corridor between Tennessee and North Carolina Okay, we're just a little bit west of that by about 50 miles alright All right. Looks like we've got one person in already I'm gonna go ahead and mute my phone and You know, let's as soon as everyone gets logged on you can start one ready Excellent. All right, if you need anything to let me know how will I know that they're all on? I'm not seeing anybody In these I'm just seeing you and me I I'm seeing a list of them. Okay, so You know just in case I can let you know, you know after a 10 o'clock I would start or 11 o'clock your time. We got about two minutes Okay. All right. Thank you very much. You're welcome Thank you. Thank you for watching. Well, good morning, everyone. Welcome to another in a series of webinars sponsored by the AED Foundation. These presentations are to help develop the professional rental manager, help dealers make more money in rental. In today's topic, we are going to talk about rental fleet internal charges. What's really fair? Rental can make a lot of money for dealerships, and sometimes rental can be abused by some of the other departments within a dealership. It causes a lot of consternation and struggles because people don't necessarily understand the right way to apply internal charges. So my name is Larry Kay, and I own a company called Scrip International. Just a little bit about me. I grew up in the equipment rental business, dating back to the early 70s. Sold a rental company to what ultimately became RSC. We were one of the top 50 in the US. I started again and sold to United Rentals. And in the late 90s, got into consulting with folks like Caterpillar and Bobcat Corporation. Some things with Parex. And so I started to learn a little bit about the dealer world and how dealers are implementing rental and some of the struggles that they have along the way. So I began consulting primarily with manufacturers and distributor networks, trying to lend my years of experience towards helping dealers make money. I have sold to a number of companies, I have associates in Brazil and also in Peru that work with me to help dealer groups. Today's program, we are going to try to focus on those types of charges that maybe you as a rental manager or maybe you're a rental coordinator, you don't seem to have any say over that. Or maybe you're in a position of management at your dealership and you're just trying to figure out what should be the appropriate charges going against rental equipment or to the rental department. So we're going to take a look at those expenses and see whether or not they are really associated with the value of the fleet or whether it actually is something that you could start to associate with revenue driven by the equipment. And then lastly, as I work with dealers around the country, sometimes what a dealer will say, having been in rental for a little while, the dealer principal will say, you know what, this rental, it's hardly making me any money, but I really like the idea of the parts and service business that it's creating for me because I have an internal customer now. And I really like the idea of growing my own used equipment and I make pretty good margins when I sell that used equipment. But doggone it, the rental, it's not making any money. I thought it was going to make more money. So the idea here is that it kind of depends on what pocket you really want to put the profits. Where do you want to show them? And so my goal today is to talk about the various types of internal charges and look and see what's maybe appropriate or not. So if you're setting up a rental operation at your dealership, you can make some good choices, maybe, or I'll say more informed choices from the very beginning. And then if you've got a dealership that you're wondering, basically, what I just described, how come we're not making more money, you may be able to look internally and discover that maybe there's a little bit of abuse going on by one group or another that's actually have a negative impact on the rental operation. So let's take a look. I've picked out a number of what I would call key areas of expense and acquisition costs. So in the rental business, it really does matter what you pay for the equipment. However, it is very different than the acquisition costs associated with selling something. So I know dealers are generally very good negotiators with their manufacturers. And so if they can get another 1% or 2% discount on the sale of a machine that's only generating maybe 10%, then 1% or 2% is huge. I'll say the acquisition costs of equipment over a three to five year period in rental is almost insignificant, that extra 1% or 2%, because you're not really making money on the acquisition costs. You're really making money on how effective you are as far as keeping that piece of equipment on rent. Another area that we're going to look at is the depreciation. This is really a huge, huge deal. It's probably, as a percentage of your cost, managing a rental fleet, it's the biggest one. And there's a number of different choices that can be made when we set up a depreciation schedule. And believe it or not, it'll drive a lot of operational choices based on the financial decision that we made concerning depreciation. And we're going to get into each of these in detail. The interest cost associated with your fleet, whether or not that's currently being shown on your operating statement or not. But money isn't free, and so when we expand our rental fleet by a million dollars or whatever, there's a cost of money associated with that. We want to talk about it. Then we've got parts and service. And this is probably where most everybody's focus is when I technically buy services on behalf of the rental department, I have to buy some parts. What kind of price should I be paying from the parts department? And if I have to get some labor done to support my rental machine, what type of price should I be getting from those guys? So we'll talk about all of that in a little bit of detail. Then another area that I see that is not managed very well at dealerships is the damages. A piece of equipment goes out, comes back, it's torn up. The way that that is handled and the booking of those damages, we're going to talk a little bit more about that, because that could be potentially eating up some of your expenses in the rental department, and it's not necessarily being booked correctly. And then lastly, through the lifespan of a piece of equipment, let's just say a machine's been in rental for three or four, maybe five years, and now it's time to roll that thing out and make a nice, used piece of equipment out of it. There's a variety of things that happen right at the very end to get a piece of equipment ready to sell. And those are all kind of internal expenses, and we've got to figure out who it is should be paying for that. So I want to make sure that each of you have an understanding that this is not just a download of information today, so I'd invite you, as you have questions along the way, please type them in, and we'll see whether I address it as we're going along, or maybe at the end we'll have a little bit of exchange time. So we'll take a deeper dive into these areas of expense. So as I said, looking at the lifecycle of a piece of equipment, on the acquisition side, some things that typically happen is the dealership buys the equipment, and so we've got a dealer net cost. And then I really have to decide, am I going to transfer that piece of equipment right into the rental fleet? And should the sales department take any kind of profit on that? They were the ones that had to order it, and potentially it came out of their new fleet and it moved over into rental, or should I just move it at direct dealer net? And then one of the issues that I see a lot is the idea of extended warranty. So typically, during the lifespan of that machine in my rental fleet, an extended warranty is not really going to come into play during the lifetime that I expect to hold it in my rental fleet. However, on the backside of selling this machine, having a one or two year period of warranty left over, that's very attractive. So the concept here is, does the rental department get burdened a little bit with this extra cost of an extended warranty during its lifecycle and rental? Because the value is actually for the next guy. And so we need to think about that. And then obviously, PDI, when a piece of equipment shows up at a dealership, and it goes through the service department, and various things get attached to this thing, or there's just the standard inspection, the service department's going to make a few dollars on behalf of this piece of equipment, whether it goes for a new sale or whether it goes for rental. So that's kind of on the acquisition side, things that I know is going on with internal charges. So now it's in the rental fleet, and we've got ongoing maintenance costs. We've got the interest, basically, for the finance costs associated with that item while it's in the rental fleet. We have our general overhead costs, have personnel, and we have commissions that are paid generally to our sales staff based on rental revenue. And then we have our depreciation. And we move into the disposal process, and we've got our prep costs. And then we've got our sales commission, potentially. And disposal costs could potentially be marketing expense, however you might go about that. The prep costs would generally come out of our service department if we're going to have them upgrade some things. So all of these are areas where there is cost taking place internally. So I want to bring to attention, I study the AED cost of doing business survey each time it comes out. And so when I look in there to see what kind of margins are being taken, I want to draw your attention to most service departments today, AED average dealer is making about 68% gross margin selling to a retail customer. According to the survey information, they are averaging about 62%, 63% gross profit margin internal. So what that would clearly tell you is that it's quite common for the service department to discount their labor rate about 10% to the rental department. Which if you have a more mature rental fleet, it is very possible that your rental fleet is your biggest customer. And so therefore, it wouldn't necessarily be uncommon for a dealership to pass some type of incentive on to their very best customer. And so the key here from a rental management perspective is the price is one thing, and I'm glad to get a discount, but I actually expect exceptional service primarily with turnaround time. To be able to just get a discount, but then the service department is thinking that they don't make as much money on the rental department as they do on all the other paying customers. So therefore, my machine, being a rental manager, gets to sit on the floor a day or two longer, then that's actually hurting me. So I would caution you when this decision is made between the rental department and the service department, what kind of price are we going to pay? I think from the rental management side, the discussion should be more about what kind of speed and service can I expect, and I'll pay a fair price for that. So then if we look at the parts department, so the average gross profit margin made in retail parts sales across the country is almost 31%. What I'm seeing, according to the survey results, is that most dealers are marking up their parts 20% to the internal customer, the rental department. And that's fine. To me, the same thing applies. The rental department could become or should become one of the largest consumers of parts that the parts department has. So we've got this really big, good, consistent internal customer being the rental department, and they're entitled to a discount. But it shouldn't come across at dealer net because somebody's got to place those orders, somebody's got to stock the parts, and there's value to that. So I think getting what ultimately is a 10% discount from the, well, in this case, more than that, from the parts department is a good thing. The parts department needs to make money, and they are, but they can, the same thing goes, if they give me a good discount, but they're always having to go chasing things that I'm looking for that are standard, that causes the equipment to sit. So pricing is important, service is more important. So I wanted to just throw an example out here of what potentially could happen. Let's just say you had a $2 million fleet of new equipment got purchased, and the sales department made 5% on that. That's $100,000 that just ended up in the pocket of the sales department, and what it did is sort of inflated my cost to the rental department. And the challenge in that is that my financial utilization number is going to go down on an annual basis because I'm actually paying a little bit too much for the equipment. So I just throw the 5% number out there to show you what the impact might look like. Now, if you wanted to reward the sales department with a 1% or 2% transfer, just so that you know, that's where the profits would be showing up. As I studied the AED survey material, I did not find that the survey data showed that this was actually taking place. So I don't know whether any dealers are taking a cut at this particular point, or there wasn't enough of them that they reported it. So just understand that money could show up in the sales department if you decided, as you're loading the rental fleet, to take a percentage or two, it's there. So depreciation, this is probably one of the biggest issues for people to really understand the consequences of it. So depreciation, for those of you that don't know, I mean, basically, it's something that it allows us to deduct an expense from our profits earned by the company that we don't have to pay taxes on. Because in essence, the government is saying, we understand that you spend a dollar for a capital good, and it's going to wear out. And we want you to sustain your business, and we want you to buy more of those. So we're going to give you a tax credit, basically, or we're going to allow that as a credit against earned income. But you're going to have to follow some, in other words, if you buy a $150,000 wheel loader, you can't expense the wheel loader all in one year. We won't allow you to do that, because it's got a reasonable lifespan of probably seven to 10 years. So we're going to restrict how fast you can depreciate that unit. So what I find with dealers is that they oftentimes have a rent-to-sell fleet. And the rent-to-sell fleet typically is still in inventory. It's really not in a dealer-owned rental fleet. It's still on a floor plan of some type. And so if the dealer tends to rent that machine out, let's just say he rented it out for $1,000 for a week, oftentimes the dealer will book a percentage of that rental against depreciation. And so he doesn't really have any operating costs to speak of, because it's not part of a rental fleet. It's still new inventory. So on $1,000, he might write down $800 of that. Typically, I see dealers use anywhere from 70%, 75%, maybe 80% as a position of revenue-based depreciation. The alternative is time-based depreciation. And time-based depreciation is generally when you have this thing in a formal rent-to-rent fleet, and I'm going to book an expense against that machine every month, whether it rents or not. So one of the biggest things that I see in dealerships today is one of the reasons why rent-to-rent fleets tend to outperform in terms of utilization is because the manager of that fleet has depreciation as a cost that he has to outrun every month. Whether he rents it or not, he's got that cost. But in the sales side of the business, if it doesn't rent, I don't have any depreciation cost. So I'm trying to describe to you that there is a behavioral difference about how people will either push and seek after customers to rent equipment based on the depreciation strategy that we have. So let me back up one here. So residual value, the choice there is we can straight line depreciate something. And let's just say we depreciate a machine over five years. That means that we're taking it down 20% per year. The reality is that if that machine is still working at the end of five years, it really doesn't have a value of 0. Probably nothing ever goes to 0. It's probably going to have a residual value, which means that we're going to take the depreciation on this machine down to potentially a 10% or 20% salvage value, if you will. Residual. So the difference that this would make is if I took the residual value down to 10%, that means instead of depreciating 20% per year, I would be depreciating about 18%. And then if I decided to take the residual value down to 20% over five years, then my annual depreciation would be 16%. So the difference between 16 and 20 is huge. So it kind of depends on where you want to show the profit. So if I'm trying to show the profitability of my rental fleet according to what's really going on, then I want to show as much profit in the near term versus when I sell all of my assets in year 3, 4, or 5. And then that's where all the margin shows up. So when I indicate this off-balance sheet gain, what I'm really describing there is if you look at your operating statement and you have taken the decision to depreciate the machine to 20% per year, you're actually overstating the speed at which your machine's really depreciating, and you're understating profits. And the place that's really where that's going to show up is on your balance sheet is that your inventory is actually going to be worth a lot more than it shows on your balance sheet. And so all of these things drive net book value. And why is net book value important? Because net book value gets the sales department very, very excited. They are always looking at what's the net book value of that machine because they want to add a multiplier on there. And maybe they want to think they can get 15% more than that's on the books for, or 20%. The problem with that sales strategy is typically that just adding 15% or 20% to the net book value is not taking into consideration what the market value is. So I would recommend if you're managing a rental fleet and whatever choices have been made on the depreciation and whatever choices have been made on the depreciation schedule that really from the sales perspective, I don't think they need to know. They should be more concerned about what's market value on that machine. But at the end of the day, rental is another distribution path for equipment to get on the street so that you can maintain market share. So your choices are you can sell brand new. You can sell machines that have a few hours on it. Or what rent to rent is is really taking a machine and maybe getting it to where it's got 1,500 hours or 2,000 hours. And then you're selling it. And now we've got a totally different price point. And there's a bigger audience waiting on that. So I want you to see what happens here with this graph. So on the top left, if you see where it says 100%, that is the cost that we pay for a piece of equipment. The number to the north of that that says 112%, the national average for AED dealers is somewhere between 11% and 12% margin on the sale of a new machine. So that's the difference that I could make day one. If I sold a machine, I'm going to make 11% or 12% the first day that that's brand new. I want you to follow the purple line first. And the purple line is suggesting, just like a brand new car, when you drive it off a lot, the first year it falls fast. And so we're going to make the assumption in this case that that is dropping by a total of, I think, it's somewhere between 20% and 22%. So we're falling to where the price now is 87% of what it was brand new. So that's 12% plus 13%. I'm making a suggestion that that one-year-old machine has dropped in value by 25%. Your market may be less. But the idea is that it drops very fast the first year. The second year, I made the assumption that it dropped another 15%. And then it starts to retard. And so you can see this line drop very, very fast the first couple of years. And then it starts to plateau out. So out there in year 5, 6, and 7, it's hardly dropping in value at all. OK. I want you to be able to look at the left-hand line, the light blue one. And you can see that at the end of year 3, we have written that machine down. The book value at this point is 28% of what it was when we bought it in three years. So we've been very, very aggressive. And if you follow the difference between the purple line and the light blue line, you would see that the gap is pretty consistent from day 1 all the way through going in towards year 2. And then it starts to get bigger. But if we use a five-year depreciation, and that's kind of the lime green, you see that at the end of year 1, it's very, very tight. We're only going to make a 7% spread on that machine. I'm going to make less money on it after one year than I could have day 1. And this is what I see dealers struggling with, is they put a machine in rental, and they're actually selling it too soon. This needs to move out into the future where the margins get better. So when I look at the AED survey results, I see things on used equipment where dealers are only making 13% to 15% on used equipment. The reality is it's sort of like a garden. You need to hold it longer because the margins get sweeter. It gets better out here after you get through the first two-year period, and then things start to jump up. And I believe you should be targeting your used equipment prices. Your margins, gross margins, need to be north of 20, and 25 is better. So it has a lot to do with the choice that you make about depreciation. So to give you an example, if you had a $10 million fleet, and you used straight line depreciation, that would be $2,000 per year. You're writing that fleet down. OK, if you've got $10,000 fleet, and your annual financial utilization is 38%, then you've got $3.8 million in revenue, and your biggest expense item is depreciation, $2 million divided by the 3.8. My depreciation expense is 52%. Well, that's a big number because now we've got to layer on our personnel costs, our overhead, our interest, maintenance, and repair, and those types of things. But what I want you to see is that the way that we can make that expense become less as a percentage is by making the equipment drive more revenue because the cost of the equipment's the same. So if you take the same fleet of equipment, and you were able to get 42% financial utilization, now all of a sudden, my depreciation expense is 47%. So I've dropped it by 10% because the equipment's working harder. So I want you to know that depreciation is a function of the equipment cost. It's not a function of the revenue generated by the equipment. So now let's look at interest. That's another big expense category. So we're starting with a $10 million fleet. And you see the two columns there. I've got actual debt, and then I've got cost of capital. So as a former business owner, I have a $10 million fleet, and I buy some equipment, and I have a debt service against that. And over time, I'm paying that debt down. So typically, I tried to keep a balance of about 40% equity and about 60% in debt. So the reality is my debt was about $6 million. And let's just use a 4% interest rate. On an annual basis, my interest cost would be about $240,000, which would mean about $24,000 a month would be my interest. I sold my business to an equity company. An equity company tends to think a little bit differently than do some dealers today and privately held companies. Equity companies expect to get a return on every dollar deployed. And so whether it was actual debt or not, everything in my business had a cost of capital associated with it. So in fact, as long as I had a $10 million fleet, I was always going to have a $10 million cost of capital. So here we go at the same 4% interest. So that meant my annual cost of capital is $400,000, which meant, so here's two scenarios. The fleet size is the same, one of them when I'm getting charged for actual debt, $24,000 a month. And if it happens to be a cost of capital approach, my cost is hugely different. It's almost 50% more. And this is associated with what? It's associated with the cost of the inventory, not my revenue. So take a look at how interest might show up on an operating statement. $10 million fleet, 60% debt. I've got $288,000 in interest expense. Here's my revenue generated, $3.8 million. When I divide that back, my interest expense for that fleet is 7.5% on an annual basis. So I want you to put things in perspective. My biggest expense item was depreciation, and that's usually anywhere from 30% to 50%. Then we fall all the way back. We're not talking about labor costs in this thing, but interest expense is going to be one of the next highest percentages of expense you'll have. And here, through the cost of capital approach, that turns out to be 10.4%. So that's a big number. So now, many of you are probably real focused on the parts and service piece. So let's look at what happens with parts pricing. So typically, in the rental industry, the service department is not a profit center. So all the technicians in the service department at a major rental company, they are a fixed cost. What is not a fixed cost is the parts consumption. So when a machine is not renting, it has no parts consumption. So parts and maintenance is always associated with the rental revenue being generated. And so since the labor is fixed, then most of the time when rental companies are describing their maintenance costs, what they're really describing is their parts cost. They are not factoring in, like a dealer does, a work order with labor associated. And they've got parts costs and labor. And then that rolls up against the machine. Because in essence, what we're doing there is we are making this internal charge. And so the money, the service department could, in effect, get rich off of the rental department. I'm going to talk to you a little bit more details about this. So let's take a look at if you had a $4 million revenue. And again, parts cost is a function of revenue. And I used kind of an industry norm for most dealers today or people in the equipment rental business. We're trying to stay less than 10% on our maintenance and repair costs, which again is parts. So I'm going to use an 8% number. That would mean that I would spend on an annual basis about $320,000 on parts. So if I had a parts department that was getting a margin on that $320,000, which is said that it's typical that they do that, then the parts department is going to make about $80,000 on the rental department. So when you are evaluating how's my rental department really doing around here, what we need to understand is what is its impact to the sales department, new and used? What is its impact against the parts department? What is its impact against the service department? And as long as you know what those numbers are and where they are, it really doesn't matter to me where you show it up on your operating statement. You just have to be conscious of the fact that the rental is generating profit, and it is also generating profit in other departments. So just so you had some idea, you could do it in your head. If somebody says, I'm doing $2 million worth of rental, you could easily do that in your head. 8% of that, what's that number? That's $160,000. And if the parts department's making 20% on there, hey, $40,000 is what the rental is doing for the parts department. Easy equation that you have an understanding. Let's take a look at the parts and service, and we'll look at shop labor. So for Easy Math, I'll use $100 an hour. And we talked about the AED survey indicating that there's about a 10% internal discount. OK. So what I want to describe to you is a fixed approach to labor versus using the service department. And either way works, but I want you to really understand this expense. So as I said, in a traditional rental operation, the technicians are all a fixed cost, meaning whether I've got anything for them to do or not, they are on my payroll every week. And let's just use an example of $25 an hour for an employee, and then I've got an employment burden cost of about 30%. So this technician costs me about $32.50 an hour. He works 40 hours a week, 52 weeks a year. More or less, his cost is about $67,000, and I have him 40 hours a week all the time. OK. In a shop situation, now I'm actually outsourcing my labor to this internal department, and they're going to charge me $100 an hour less the 10% discount. So now I've got $90 an hour working for me. OK. And if I take the 90 times the 40 times the 52, now that technician, OK, there's no parts involved in this, and that technician is now costing me $187,000 a year versus 67 if he was fixed and he was assigned to the department. So one of the recommendations that I make to dealers is the following. Maintaining a rental fleet, in many cases, is a lot of preventive maintenance. It's almost like running a car through a Jiffy Lube. I can go see the dealer maybe for the 100,000 mile service, but I might pick Jiffy Lube every 3,000 miles to get in and get out and get some basic routine service done. That technician at Jiffy Lube has not been to the General Motors training academy and learned how to tear an engine down. That's not what he does. And so one of the things that I see dealers doing is they're running every time a machine comes back from rent, a work order gets created on it, it gets in line, and it stands in line just so that we could potentially have a high-priced tech do a standard checkout. I've even seen dealers a few years ago that were charging $90 an hour for the machine to get washed. OK, well, it's real hard to make money if we rent the machine for $200 a day and I get tagged $90 just to clean it. So to me, it's a misrepresentation of value. And so the service department is over there making money at the expense of the rental department who's really struggling to try to show a profit at this point. So my recommendation to dealers today is let the high-priced guys do the high-priced things. Let them do all the field service. But for the normal spin of a machine coming back from rent, somebody's got to wash it. Somebody's got to fuel it. Somebody's got to go through a standard checkout procedure. That doesn't have to be a high-priced guy. And I think one of the ways that you can improve profitability in your rental department, plus the spin or the turnaround time, is to potentially have one or two or three guys that are on the payroll for the rental department. And all they do is they may take a bucket off one machine and put it on another. They're staging things, getting it ready for rental. And they are servicing routine grease, oils, lubricants, those types of things that doesn't really require a lot of training. And you can manage your costs better. Damages. So most of the dealerships that I work with, they have some type of rental protection program or loss and damage waiver, as it has affectionately been known. So usually, when I start looking through their numbers, I'm looking to see, how much money did you take in in this rental damage program? And then, what were the expenses against that? And most of the time, I don't see any expenses charged against it. Most of the time, they show the income. And the expenses got put back against the maintenance and repair costs of the machine, which, in my opinion, is not appropriate accounting. Because I can have something fall off a truck. I could have a canopy get dented. I could have somebody bend a boom. And that is not a normal wear and tear issue. And so that may distort my maintenance and repair costs against the income generated by that machine. And it would lead me to a bad conclusion that that particular brand and that particular model, I can't make any money on that. But it actually was all of that was a catastrophic event that happened. So this gets into, how do you write work orders? And then, does the service department know that if, in the opinion of the service department and the rental manager, that the damages associated with this machine, in fact, were covered by our rental protection plan, then when I write up the work order for the repair for the parts and the maintenance, the labor, that that should be going against the income account of the loss and damage waiver. That's where the money is sitting that we accumulate throughout the year to repair and maintain the integrity of our rental fleet. That's what it's for. So it'll show a less net profit in your loss and damage waiver account, but it'll actually be a more accurate accounting of the expenses. So if that is not covered by the damage waiver, then you obviously have the option of billing the customer direct. And then again, do you handle that almost like a retail sale of services, or are you charging the damages against the machine anyway, which, again, is going to heighten or inflate your maintenance cost on that particular machine, and it really shouldn't be that way. So now we're working our way through the lifecycle of this equipment. And now we are into, let's just say, year three and four. And I want you to see the margins that we're talking about. So if you focus on the five-year straight line number, at year three, I've got a 40% book value against a market value of 61%. So I've got a 21% spread there. In year four, I've got a 27% spread. So that should be a good margin for us to make on a sale of this used equipment. But I'm going to have to do some things to get this thing ready for sale. So if I was selling this thing in year four, and I've got 27%, I'm probably going to ask my used equipment manager, let's take a look at this machine and see, in your opinion, what do I need to do to make this top-shelf sales material? And most likely, we might have to do some cosmetic things to the machine. And we know that could be everything from tires. It could be the seat. It could be glass. It could be mirrors. It could be paint job. But I need to not get carried away. And usually, the used equipment manager is going to help me establish of, why don't we spend $2,000 on it? And let's see how far that goes and make it look better. So we've got these costs going on. I've got the net book value. Then I've got my make ready. So I need to look at, what parts am I going to put on there? What's my service labor? And then I've got my sales commission that's going to be paid. And then I've got a marketing expense. And maybe you've got something else that you might have in your place. So let's just say I've got 22% that I'm going to make on this deal. So is the rental department entitled to anything because it got to hold the machine and it maintained it during its lifecycle? Or does it flow straight out to the used apartment right at book value? That's a question to be had. So if potentially I might even consider taking the cost of that, I might retain or get back the cost of that extended warranty. It's already on the machine. And that costs me an extra $3,000 on the front end. I'm in the rental department. I'm no longer, I never got any benefit of that anyway. I may choose at that point to say, hey, I'd like to recover that extended warranty program on there. And now it's still on the machine, but the rental department got the credit back for that or some proration of that thing. So the idea here is that the rental department is generating profits. It flat out is. And it starts from the time we get the machine through the whole time that we're holding the machine till the time that we sell the machine. And those profits show up in different departments. As we said, the sales department will see some profitability either on the new or at least certainly on the used as it rolls out. The sales department might get credit for the extended warranty either on the front side or the backside. The parts department is going to make money while we have this thing. And the service department is going to clearly make money. So if you are struggling trying to figure out why is our rental department not showing more profit, I would challenge you to kind of follow the process all the way through. Track a machine that comes in and see how the numbers are flowing and where's the profit ending up just so that you have either a confirmation of this is working exactly how we expected it to, or maybe we need to make an adjustment somewhere because this department is maybe abusing its privilege. I mean, I've actually seen a dealership where the accounting office was seemingly always getting phone calls from the service department on invoices. You need to book that against rental. You need to book that against rental. You know the truck boxes we just bought for the truck out there? We need to book that against rental. My point here is you can't have a both ways service department. Either it's an internal customer, and so you have to buy your own machines, you have to buy your own trucks, you have to buy your own mechanics, and then you sell those services across the aisle. But all of those fixed costs that you choose to add, service department, you need to eat them and then apportion them out to me as the rental department as I use those services. So we are getting close to the end of the program here, and I would like to invite any questions that you might have so far. I haven't seen any come across, but I hope that we have helped shed some light on maybe some things that have bothered you. So I'll give it a minute or two and see if anybody has a question. Okay, I don't see anything coming across. I would like to bring to your attention that there are a couple more webinars planned by the AED Foundation later this year. In November, we're going to be taking on the question about machine salesman versus a rental salesman. Can it be the same person doing that job? And then in December, we're going to be talking about setting rental rates. As I travel around and talk to people, everybody wants to know, what is the formula? Just give me the formula for setting the rental rates. And I would suggest to you that it's not quite that simple. And so we're going to dive in to determine is setting rental rates more science, or is it art form? And then in about a month, I'll have a live presentation for a couple of days in Las Vegas talking about the characteristics of a profitable rental fleet and the processes. Excuse me, Larry? Yes. There were two questions. Do you want me to just read them for you? Please. Sure, the first one is, what should rental charge service and sales as an internal cost? OK. So I have a question. I'll repeat, it's what should the rental department charge back to potentially the other departments? And that's a great question, because it does go both ways. Sometimes the service department can't get something fixed for a customer, if I understand the question correctly. And so they need to reach over to the rental department and say, hey, you need to give this customer a machine, because we've got his in here, and it's taking a little bit longer to fix. Or the same question could come from the sales department. Hey, we've got a customer that is going to buy this, and we're waiting for the finance to be approved, or the machine hasn't come in, and he's needing a unit right now. And so, excellent question. Because the margins are pretty strong in the rental, I do think that all of this needs to be measured, OK? So we don't write a ticket and let anything go for zero value. Even though the customer may not pay a nickel, that department got to use the assets that are in the rental department to take care of their business. So I would suggest probably somewhere at least a 20% or 25% discount. And you may even go as high as 40%. I think it's a very good goodwill gesture. But do not let those departments, the sales department or the service department, abuse the rental department by taking all your stuff and putting it out to solve problems that they can't solve, and then you can't make money with your fleet. So hopefully that was the essence of the question. All right, the second question is, how do you recommend if you have a union-only shop for service repairs? OK, that's a great question. And I'll have to say that I've never had a union-only shop. And so that's a difficult one for me to field that question. And so I'm not going to pretend to know the ins and outs. I understand the protection that they're looking for, and they don't want service activities to go around them. It needs to funnel through them. And so I guess I would just have to try to negotiate internally. And as I said, speed is more important to me as a fleet manager than the actual cost. Because if I don't get the services that I'm expecting, the 10% discount or whatever was being given to me, it really doesn't yield anything to me. So I would probably start with saying, I don't mind paying whatever your listed shop price is, but here's the expectations I have for turnaround. And when I get in the queue, it needs to come out according to that. If I can get preferential treatment, I would love that. But just because it's a company-owned asset should not take me to the back of the line. That's where the thinking goes a little awry with some dealer service department. Got a couple more minutes. I thank you for your questions, if there's any still out there. And OK, so any of the events that we're talking about, whether it's rental-related seminars or webinars, you can go to aednet.org to register. And I thank you very much for your attendance and your support of our education program here at AED.

rental fleet internal charges

profitability

equipment rental business

expense

acquisition costs

depreciation

interest

parts and service

damages

disposal costs