If you are planning to start an equipment rental business, you may want to know how much profits you can make with this business. In other words, you must know how much revenue you must generate to reach break-even and make profits.
With a market size of $52 billion and over 5,900 businesses in the US, the average heavy equipment rental company has an annual turnover of $8,800,000..!
What does this mean for your business? How much revenues can you expect to generate? More importantly: how much profits can you realistically make with a heavy equipment rental business?
In this article we’ll look into the average revenues and profit margins of equipment rental companies in the US. We’ll also look into how you can accurately forecast your turnover and break-even point. Let’s dive in!
What is the average turnover for an equipment rental business?
As discussed in the introduction, with 5,973 businesses in the US and a total market size of $52 billion, the average heavy equipment rental business generates sales of about $8.8 million per year.
When it comes to owners’ pay, the average salary for the owner of a heavy equipment rental business in the US is $110,377 per year.
What is the average profit margin for an equipment rental business?
Calculating the average profit margin for an equipment rental business is difficult because it depends on type of rental business you are into.
For instance, small equipment businesses typically have higher margins: the gross profit margin for cycles can be as high as 70% for example. Instead, heavy construction and other equipment companies have gross margins of about 40% and net profit margins around 15-20%.
How much does it cost to run an equipment rental business?
In addition to startup costs, there are certain recurring costs involved in running an equipment rental business and they include:
- Rent: You need to pay rent for the warehouse where you will store your equipment
- Fleet maintenance: You need to spend a significant amount of money at regular intervals to maintain your fleet and keep them service-ready
- Staff costs: You need to pay salary to your staff
- Marketing costs: You must increase visibility of your business through advertisements and other marketing channels
- Utility bills: You must pay for electricity, water, gas, internet, etc., that you will use to run your business effectively
In general, you will be spending anywhere between $108,000 and $121,000 each month to run a heavy equipment rental company in the US with 35 heavy construction vehicles.
See below the example of a sales to net profit cost breakdown for a heavy construction business with $3,000,000 sales per year (~10% net profit).
As you can see, D&A expenses are with salaries the most important expense category for such businesses. It doesn’t mean these businesses generates high cash flow either: they most likely use the vast majority of this cash to repay the loan they took to acquire the machines and vehicles.
How to forecast profits for an equipment rental business?
In order to calculate profits for an equipment rental company, you must first forecast revenues and expenses.
Profits = Revenue – Expenses
Forecasting revenue for equipment rental businesses
Forecasting sales for such a business requires a few assumptions:
- the number of vehicles (or equipment)
- the average price per rental
- the utilization rate (how often a vehicle is rented)
For example, we can forecast the turnover of a heavy construction rental business as follows:
Revenue = Vehicles x Utilization rate x Average price per rental
For example, if you have 35 vehicles, used 50% of the time and at a rate of $10,000 per month per vehicle, monthly revenue is ~$175,000.
Forecasting expenses for equipment rental businesses
There are 2 types of expenses for a equipment rental business:
- Variable expenses: these are the COGS as explained earlier. They grow in line with your revenue: if your turnover increases by 10%, variable expenses grow by 10% as well
- Fixed expenses: salaries, rent, debt interest (or leasing) costs to acquire the equipment, marketing and all the other operating costs listed above
Calculating profits for equipment rental businesses
When we refer to profits, we usually refer to EBITDA (Earnings before interests, taxes, depreciation and amortization) as it represents the core profitability of the business, excluding things such as debt interests, non cash expenses and other non-core expenses.
In order to get to EBITDA, we use the following formula:
EBITDA = Revenue – COGS – Operating Expenses
We’ve included below the illustrative profit-and-loss of a heavy construction rental business (from our financial model template for equipment rental businesses).
Whilst EBITDA margin is about 30-40% at scale depending on the business, net profit margin can go up to 10-20% for the most profitable businesses (in line with the industry averages discussed above).
How to calculate break-even for an equipment rental business?
Break-even is the point at which total costs and total revenue are equal. In other words, the breakeven point is the amount of revenue you must generate to turn a profit.
Because you must at least cover all fixed costs (that aren’t a function of revenue) to turn a profit, the break-even point is at least superior to the sum of your fixed costs.
Yet, you also need to spend a certain amount for every $1 of sales to pay for the variable costs.
As we just saw, equipment rental businesses typically have a ~90% gross margins. Indeed, most expenses actually are fixed costs (salaries, D&A, marketing, etc.).
The break-even point can easily be obtained by using the following formula:
Break-even point = Fixed costs / Gross margin
Using the same example earlier, let’s assume your business makes $175,000 in turnover per month and has the following cost structure:
|Operating cost||Fixed vs. variable cost||Amount (per month)|
|Fleet maintenance||Variable cost||$12,000|
|Utility bills, other||Fixed cost||$3,000|
|Depreciation & amortization||Fixed cost||$40,000|
The break-even point would then be:
Break-even point = Fixed costs / Gross margin %
= $138,000 / 90% = $153,000
In other words, you need to make at least $153,000 in sales per month to turn a profit. Assuming the average price per rental is $10,000 a month, your break-even is 16 rentals per month. In other words, you make profits once you reach ~45% utilization rate (16 vehicles leased vs. 35 available).
How to increase profits for an equipment rental business?
There are various strategies to increase the profits of an equipment rental business such as:
- Stay up to date: Markets change as technologies evolve. Stay updated with recent changes in technologies, changes in customer demands, how much your customers are willing to pay, etc. Staying updated can help you to tweak your business operations to increase profits
- Prevent capital wastage: Don’t buy extra equipment unnecessary. If there is no demand, they will collect dust. Only when you know that there is a steady and constant increase in demand, invest in extra equipment
- Equipment maintenance: Spend well on maintaining your equipment. If they tend to fail during jobs, you will lose customers
- Go online: Maintain an online presence and register your business with Google My Business to ensure that potential customers can find you easily. Spend on digital advertising (social media, search engine, etc.) to increase brand awareness
- Equipment rental software: This will help to streamline your operations, schedule maintenance, track your equipment, etc. Increased efficiency reduces operational expenses and increases profits
- Payment options: Junk the old payment system and integrate multiple modern payment methods to help customers easily pay. Also, modern automatic payment systems help to keep a track of your finances
- Structured customer data: Use structured customer data to understand their requirement and preferences. Using advanced booking software help you to notify relevant customers about new arrivals, discounts, etc.
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