Why Leasing Companies Go Broke

John W. Rollins cites eight reasons why many newcomers to the leasing field are going broke. His reasons are vital to all leasing operators and those considering entry since they have a bearing on the entire industry.

The results of AF first national survey of the renting and leasing industry published in January pointed up a serious problem facing the industry: many newcomers are entering the field and many of them are going broke.

To ascertain some of the problems facing new leasing companies-actually the newcomers problems concern the entire industry since a newcomer who fails reflects upon the entire industry-AF went to an expert, John W. Rollins, president of Rollins Leasing Co. Rollins, a vice president of the American Automotive Leasing Assn., served as lieutenant governor of Delaware from 1952 to 1956.

Rollins told AF many new leasing companies fail to recognize the small profit margin that the industry operates on and as a result many are going out of business.

"While it has been generally recognized that the leasing field operates on a very thin profit margin, few of the more recent leasing companies have realized just how thin this margin actually is," Rollins explained. "It is rarely measured in a percentage of the sales dollar, but rather in a fraction of one per cent of the sales dollar. The implications of this, of course, are now beginning to take their toll."

According to Rollins, there are eight major reasons why some leasing companies are going broke.

First and foremost is that many new car dealers operate dealerships and leasing organizations as one unit. Rollins contends that leasing and new car sales are two distinct kinds of businesses that "fit together as poorly as oil and water."

"The major objective of a dealership is to get the vehicles off the floor. Once this is done the worries are pretty well over," he explained. "In leasing it's just the opposite. Once the car is leased, management's concern for the use and profitability of that car just begins."

MAINTENANCE IMPORTANT

Another inconsistency between selling and leasing is the matter of maintenance, Rollins said. The serv­ice manager of a dealership generally wants to en­courage as much maintenance billing as he can. In this way, he absorbs his overhead and makes a con­tribution to profit.

"Often times, in a dealer-leasing operation, lessees are encouraged to over-maintain their cars," Rollins said. "The repair work is done on an 'internal ticket' and never gets to be charged back into the leasing account."

The second reason why Rollins feels many leasing companies go broke is closely related to the dealer­ship type operation-using leasing to increase sales of new cars.

Rollins noted that many auto dealers have turned to leasing as a means of increasing sales. In a num­ber of instances, he said, the cars are leased to people who cannot afford to buy them. This kind of busi­ness transaction almost inevitably leads to problems, he feels.

"It is a cardinal rule of good leasing that the best leasing customer is the man who can afford to buy," he said. "Leasing customers with bad credit generally fall behind on their bills and often saddle the leasing company with vehicles that have to be reclaimed when it is least convenient to do so."

Rollins has some good points concerning auto dealers and leasing but it doesn't mean that new car dealers have no place in leasing. Some of the largest-and financially successful-leasing companies in the country are associated with new car dealerships. The key is that the leasing operation should be treated as a separate entity.

The third point on Rollins' list is rather obvious-poor pricing.

In almost every instance where a leasing company is failing, poor pricing is at least a contributing fac

tor. Competition often drives companies to match low bids whether or not the price can fully absorb the costs of the operation and provide a reasonable profit.

MANY CONSIDERATIONS

Rollins pointed out that it is important for a price to take into consideration allowances for depreciation, interest on borrowed money and the costs of insurance, license fees, repairs, delivery expenses, tires and over­head on personnel and plant equipment.

"Leasing pricing, like all other pricing policy, has to be based on modern cost accounting which sepa­rates fixed and variable components," Rollins said. "It must reflect the profit contribution not only by speci­fic types of vehicles but by customers as well."

In addition, according to Rollins, the pricing form­ula must be sufficiently flexible, reflecting economies affected by the leasing organization as well as new higher costs that could not be anticipated at the time the lease was signed.

Failure to separate good business from bad business is the fourth point noted by Rollins.

Rollins contends that not every sales dollar has the same profit content. Some clients are very hard on their cars, thus reducing the ultimate resale price of the used car as well as increasing maintenance costs during the life of the lease contract. It is essen­tial for a leasing company that is going to remain in business to be able to know which clients are profitable and which are not, he said.

"In addition, it is important to know why unprofit­able clients are costing the leasing company money and what can be done about it," Rollins continued. "Sometimes a program to identify a few problem drivers in a client company can turn a loss situation into a profit one."

Rollins cited inadequate financing as the fifth rea­son why some leasing companies are going broke.

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He said that many of the leasing operators facing hard times do not have sufficient backing to be able to borrow money at favorable rates. As an example he told of one small company that recently asked to be consolidated with Rollins Leasing that was paying 12 per cent interest for operating capital. According to Rollins, a company that is paying that kind of interest is a loss proposition from the start. Most suc­cessful leasing companies pay no more than 4½ to 6 per cent simple interest for money.

The sixth reason why many leasing companies are finding it difficult to survive is service.

LOSE CONTROL ON SERVICE

Some leasing groups lose their very best clients by being unprepared to service them out-of-state, Rollins said, noting that frequently an energetic small leasing company will send its salesmen to cover wider and wider territories. In doing so it often takes business distant from headquarters which requires every bit as much servicing as business in the company's back­yard.

"It is very important for a leasing organization to be capable of providing maintenance and repairs in all areas where the client company's vehicles operate," Rollins said. "Not to do this is to violate a central rule of leasing-service."

According to Rollins, the further away from home-base auto maintenance must be conducted, the more stringent must be controls to assure that the work is of a high quality and conducted at a reasonable price. It is very easy, under these circumstances, for main­tenance costs to get out of line and a slim profit mar­gin to be lost.

Used car sales is the next item on Rollins' list. When 100 or more cars must be disposed of at one time, a small leasing company may tend to panic, particularly if a slowdown in the local used car market exists. Distress selling may ensue, he said.

"It is important that a leasing company know the market for various models in all parts of the country," he said. "Often adequate knowledge of what different models will bring out-of-state can provide anywhere from 10 to 30 per cent additional revenue from used car sales."

Lastly, and perhaps the most important reason why leasing companies go broke is poor financial record keeping.

"Perhaps the most significant reason for leasing organization failure in the past couple of years has been the failure to keep good financial records," he said. "Unless a company keeps detailed and accurate records, management will not know until it is too late whether the operation is generating a profit or loss."

THIN PROFIT MARGIN

Precisely, because the profit margin in the leasing field is so thin, it is essential to keep minute record

of every cost and revenue item so that it is possible to spot unfavorable trends while something can still be done to remedy the situation.

"The secret of leasing, like so many other aspects of business starts with knowing costs," Rollins said. "It is amazing how many companies still operate on antiquated accounting methods.

"In addition to knowing all costs in minute detail, it is essential to establish profit objectives. Profit planning involves determining expected returns on in­vestments, returns on replacement investments and/or returns on anticipated investments. There has to be a way for measuring the profit desire other than as a percentage of sales.

"While the company's method of financing and its general operation may have a great deal to do with the percentage return thought adequate on net worth, some basic ground rules have to be established by the leasing company. Without specific and realistic profit objectives, it is difficult for a company to know whether it is progressing or going backwards."

Rollins said that it is a sad truism in the leasing field that "smallness" carries with it all of the prob­lems generally associated with small size in other fields but often without compensating benefits. The company with less than 1,000 cars under lease must really scramble to make a profit, he said-they must be "particularly shrewd in management of costs and choosy in selecting clients who are willing to pay a fair price for service obtained."

"In many instances, the company with 1,000 cars on lease needs almost as much personnel to administer the business as a company with 2,000 to 3,000 cars on lease," Rollins said. "There must be a person to super­vise the purchase of new cars and the sale of the old ones. There must be a man to watch the books to detect profit and loss problems before they are too far gone to salvage. Finally, there must be at least one person devoting his time to bringing in new busi­ness.

"We have observed in our company that, as sales have increased, the percentage of overhead per dollar of sales has substantially decreased. This has been accelerated by the use of mechanized accounting equipment as well as numerous systems and tech­niques that lend themselves to efficiency under con­ditions of relatively high sales volume."

Rollins cited collision and comprehensive insurance as an example of increased sales volume permitting lower overhead per sales dollar, noting that most large leasing companies now self-insure their clients, saving substantial costs.

TAX CONSIDERATIONS

Rollins said that the continuous tightening of tax and depreciation regulations by the federal govern­ment is going to be a further burden to the leasing industry as a whole.

"There have been a number of companies whose profits have been directly linked to depreciation prac­tices that will be unavailable in the future," Rollins said. "These companies will have to find other means of generating profit."