Throughout this course we have talked a lot about depreciation, and rightly so, because it's the biggest expense that a rental department has. What I want you to really understand is that the depreciation charges have everything to do with the size of your fleet, and they have nothing to do with the amount of revenue that you generate every month. So you could look at an operating statement one month, and you could see that your depreciation expense was over 50% of your total revenues, and you can look another month, as you see in example 2, and see that it was only 47%. And the way that works is, in this example, you've got a $10 million fleet, and with a 5 year straight line depreciation, that means that we're going to have a $2 million per year expense of depreciation. And so if one fleet is working at 38% financialization, and you're grossing $3.8 million in revenue, but then you put $2 million worth of expenses against that, just the depreciation, that's 52.6% of your total revenues. But in example number 2, you'll see that that same $10 million fleet was working harder, making more money, and so it had $4.2 million worth of revenues. And so now we take the $2 million worth of depreciation expense, divided by the $4.2 million in revenues, and we get 47.6% expense, basically the depreciation against the revenues. Now let's take a look at interest expense. Interest expense can actually be calculated two different ways. In smaller companies and privately held companies, most of the time, the interest on the rental fleet has to do with the actual debt on the fleet. So in this example, we're going to say that a $10 million fleet, 60% of it is financed, that gives us $6 million worth of debt at a 4% annual interest rate, means that we're going to have a $240,000 per year interest charge, and basically $20,000 a month. If you happen to be owned by an equity company or a publicly held company, they may be charging you the cost of capital. And that means that everything you have has debt service on it, because they are in the business of making money on money. So your $10 million fleet has 100% debt service on it, and at 4% annual interest, that means it's $400,000. And so that comes across as $33,000 a month interest. You still have the $10 million worth of equipment, just like the other example, but as you can see, it's a 50% difference in the amount of interest charged against your rental fleet each month. So you may be up against one of those two scenarios as rental manager. I want you to make sure you understand how the interest calculations are computed. We talked a little while ago about the profits being able to be shown in different departments, and I'd like to give an example of what can take place in the parts department, and actually why the parts department should really get excited about the rent-to-rent department even being in existence. Because let's just say, in our examples throughout, we have suggested that the maintenance and repair costs, and this is parts only, typically are somewhere between 6% and 8% of rental revenues. So if you've got a rental fleet that's generating $4 million, that means that your parts cost might be somewhere around $320,000 a year. And if the parts department is getting a 20% markup on that, that means that $80,000 can be showing up in the parts department as a result of generating profit from the rental department. Now let's take a look at the service department. So let's say the average shop labor rate is about $100 an hour, actually it's more. The AED survey that I have referenced a number of times indicates that most shops are giving their rental department about a 10% discount. So what I want to show you is the difference between if you had your own service technician to do the common work, or what I'd call the PM stuff, versus having the service department do it. So the first example is I hire a pretty decent qualified technician for $25 an hour. He's not highly trained, he hasn't been to factory schools. And if I put my employment carry costs on there of about 30%, I now have a cost per hour of about $32 an hour for my own service tech. That's a hard cost. Okay, so this person works 40 hours a week, 52 weeks a year, and they come in at $67,000 is what it costs me. But if I was to take that same number of hours, and I had to pay a shop rate of $90 an hour, now I'm spending $187,200. That's if I had a full time in the shop all the time. So you can see the disparity in that. That's basically a $120,000 difference that I'd be paying over into the service department, or I could keep it in the profitability of the rental department. So you need to know the numbers, you need to know the math, and be able to make a smart decision about how you want to pay for your routine maintenance and service.

depreciation expense

fleet size

revenue

interest expense

routine maintenance