We are working together to try to get a better understanding of financial management as it pertains to the rental department. So I wanted to take this time to make sure that we have a common understanding of what financial terms are that you'll hear from time to time. We also need to make sure that you understand financial statements and what they are. And internal charges, we need to discuss the idea of one department charging another department. So internal charges may be things that are coming from the service department or parts department. And then you need to be highly aware of industry benchmarks and how they relate to expenses within a dealership and then specifically towards rental. So starting with our definitions, let's take a look at general ledger. You may have heard that term before. There's an example in the graphic there on your screen, but the general ledger is all the individual accounts needed to record the assets, the liabilities, the equity, the revenue, the expense, and the gain and loss on transactions of a business. In the GL accounts, these are unique identifying account numbers, and these numbers may range from a simple three-digit code or a more complex version that identifies individual departments and subsidiaries. And I can tell you from experience, the more detail that your business will take the time to put in place, the more you'll understand about how your business works and you can put the costs and you can put the income and expenses exactly where they belong. So I'm a big fan of making sure you have things broken out by department. And since rental is, in many cases, a new department, it needs to have its own set of expenses or GL codes. They don't need to be grouped with any other department. And the same thing goes for income. Now when we think about a chart of accounts, that's the listing of the names of the accounts that a company has identified and made available for recording transactions in its general ledger. The graphic on the right-hand side there is actually a very simple listing of chart of accounts. But as you can see, there's accounts for assets, there's accounts for liabilities, and there's accounts for expenses and revenues. And so your company probably has a more complex listing of the chart of accounts. But it would be a good idea for you as the rental manager to ask for a printout of the chart of accounts so that you can go through and check and make sure you understand which of these GL accounts are actually going to pertain to the rental department. And you may find that some of them that you really need don't exist and a GL account needs to be created so that you can get a better, more granular look at how your business is really operating. And then all of these things come together in a P&L statement. And that aggregates the revenues, the expenses, and the profits or losses of a business. This report portrays the financial results of a business for a specific period of time, such as a month or a quarter or a year. Another name for a P&L statement is also an income statement. Now when we talk about financial statements, you've heard of a profit and loss statement, and then there's something called the balance sheet. And why is a balance sheet important to you? As a rental manager in charge of the rental department, the rental fleet is considered an asset of the company. And so you're going to see on a balance sheet the assets of the company. And if you'll look in the example on the screen there, you have something called current assets. And those are things that are very liquid, generally associated with cash-related items. And then you can see into property, plant, and equipment. And that's where the rental fleet, whatever the value of the rental fleet is, that's where it would show up. And then over on the liability side of this example, you would find the debt service that goes with the financing associated with the rental fleet. So the balance sheet is the place that shows all the company assets. That's where you're going to find the original cost of the rental fleet. You're also going to see how much depreciation has been booked against the fleet. So a balance sheet of all the financial statements, it's the one that is reported at the end of a period, while the income statement and the statement of cash flows cover the entire reporting period. So a balance sheet is a snapshot, if you will, at the end of a particular period. And it shows how much cash you have in the bank. It shows how liquid your company is. And it shows all the assets, less the depreciation. It also shows how much debt service the company has. And then in the lower right-hand corner, you'll see equity. And that shows basically the earnings of the company since it's been in business and basically the value that has been created by this enterprise. Now let's talk for a minute about the difference between assets and inventory. And it can be very confusing sometimes at an equipment dealership. But generally, an asset is defined as a resource that is owned or controlled by the company. And it can be used to provide future economic benefit. In other words, assets are items that a company uses to generate revenues. So rental equipment, a rental fleet, in fact, would be an asset. The company owns it. There may or may not be debt service against it. Now inventory, on the other hand, inventory is typically things like parts and merchandise. And it can be new machines. It can be things that the company doesn't own at this point. The company may have some type of floor plan program going on from the manufacturer. So when we talk about equipment being available, generally new inventory or parts and merchandise is considered inventory. To specifically talk about rental machines, we really should be calling those things assets. And thus, a rental manager is an asset manager, not so much an inventory manager. Say, for instance, like a parts manager would be or a new machine, the sales manager. Some additional terms that you need to recognize when you see them and understand what they're talking about is the cost of goods sold, the cost of the merchandise that was sold to the customers. It's the cost of the goods sold is reported on the income statement when the sales revenues of the goods sold are reported. It also typically includes any additional costs necessary to get the merchandise into inventory. So, for instance, your new machines or even your parts as they come in, there may be a freight charge associated with those things. And so the cost of goods sold would include the machine and potentially any freight that was involved to get the merchandise to your store. And when you sell the machine, you've got the retail sales price, less the cost of goods sold, which would be the price of the item, less any freight. And then whatever's left over, that is considered your gross profit. The second point on this screen is cost of goods sold for rental. So this is something you really need to know when we talk about gross profit on a rental fleet. This is the depreciation plus the repair and maintenance on that equipment. Okay, so make sure that you really understand this. This is also is how this is reported in the AED cost of doing business survey. So when you see numbers and it says that rental, rent-to-rent is making 30% gross profit, what it's telling you is that the depreciation and the maintenance and repair are equal to about 70% of the revenues that are being brought in. ROI, another calculation, return on investment. And that's an expression of the profits earned on a particular asset or group of assets. And so as rental manager, you are responsible for the ROI on the fleet. We already mentioned earlier about OEC. That stands for original equipment cost of a particular machine, or you could be talking about your entire fleet. And then depreciation, that's the reduction in value of a fixed asset due to wear and tear or decline in the market price and obsolescence. A few more definitions that you need to be very familiar with. Gross profit, that's the actual profit made from the sale of a machine before any overhead expenses are applied. So gross profit is the difference between what you sold it for and taking out the cost of goods sold, the COGS, C-O-G-S, and then that gives you your gross profit to which then you can pay your overhead expenses. GPM is gross profit margin. Okay, so then we're taking the gross profit that we made and divide that by the original cost of the machine, and that'll give you an idea of the gross profit margin. So we had a few slides back where we were showing the gross profit margin on new machines, and it was like 11 to 12% gross profit margin. And that's how that's calculated. The gross profit divided by the original cost of the machine. And then lastly, absorption factor. So this is a term that is very common within equipment dealerships today, and it's the idea of adding up the parts revenues, service revenues, rent-to-rent gross profits, and dividing that by the total operating expenses to come up with a percentage. And it's measuring the extent to operating expenses that are being covered by the gross profit earned from those activities that we just mentioned. The higher the factor, the less dependent the firm is on equipment sales, which may fluctuate sharply year to year. So if you think back about the chart that we showed showing the different gross profit margins of all the activities, parts sales, service, and rental, the sale of new machines was the weakest in terms of gross profit margin. So a dealership is trying to establish itself having service, parts, and now rental. And if those three things can come close to paying the bills, paying all the overhead, then you're not as dependent upon those skinny margins that are coming from sales, and then potentially having to get even more aggressive in your pricing to just try to make payroll or pay the mortgage payment. So the absorption factor is a big deal in the dealership business.

financial terms

rental department management

general ledger

chart of accounts

profit and loss statement