The economics of running a rental business (updated)

You might know already that I run Tapprs, an online photography & travel equipment rental place.

Thought I will share my view of the economics of running such a business, at least at a small scale such as it is now.  Tapprs is still in the validation phase, but the numbers shown here should be relevant even if scaled up. All numbers are actuals, except for revenue.

Disclaimer: I have no accounting background and there could be mistakes on my part. Please do point it out if you find any.

Initial funding:

Assume that the operations began on June 1.

As the sole owner, I put in Rs 1 lakh as equity capital. This is free money (don’t have to pay interest on it). And then I lend Rs 2lakh to the business from my pocket which I charge an interest of 12% annually (realistically, no one would lend to such a business without collateral and interest rates will be much higher).  That means Tapprs would have an interest payout of Rs 24000 every year on it until paid back.

Source of Funds

Equity capital 100,000
Loan capital @ 12% 200,000
Total 300,000

Use of funds:

Tapprs needs to start. For which, I do these transactions on June 1.

Item Expense
Purchase of equipment 200,000
Domain 450
Total Initial Expense 200,450


So, at the end of the day, my balance sheet looks like

Assets Equipment* 200,000
Cash 99,550
Liability Loan from Prem 200,000

* – Equipment is considered as Capital expense and is depreciated within 2 years (photography equipment is worth a life time of say 2-3 years, aggressively depreciated) and not considered as revenue expense (and not fully expensed).

Equity has dropped by Rs 450 because the domain expense is virtually worthless at least as of June 1.


Fortunately for Tapprs, a website is all is needed to run business and WordPress is free. These steps are taken to make Tapprs operational.

  1. Tapprs has only one employee. Prem, the founder agrees to take a salary of just Rs 6000 for everything he does at Tapprs, including janitorial work.
  2. A website is designed based on WordPress. Prem does it and does it free of cost. (lets say in exchange for Tapprs letting him use the equipment free of cost whenever he needs them 😉 ).
  3. Hosting is done from Prem’s account. Again, Prem offers it free of cost. But for our case, lets expense it. And say, it costs Rs 150 a month (cheapest option with Bigrock).
  4. Once the website is done, Facebook and Twitter are used for promotion and Prem’s friends are the victims of his constant broadcasting of Tapprs’ marketing stuff. 🙁
  5. Tapprs starts getting a few Likes on Facebook. And a few take notice of the rental options.
  6. Equipment is insured at the premium of 3% of equipment cost.
  7. A 6% overall loss provision is made to handle other equipment losses. (On inventory size of 2L, it works out to 12,000 a year).

Now the business is fully operational. Let us say Tapprs did reasonably well. But do we know it is enough? How much should Tapprs make to be ‘PROFITABLE’?

I will not get into what Tapprs actually made. But let us see with the above in mind, how much Tapprs has to earn every month to be profitable.


Assets Equipment inventory 200,000
Cash 88362.5
Liability Loan from Prem 1,000,000
Revenue ? ? ?
Expense Domain + 37.5
Hosting 150
Prem’s salary 6000
Rent allowance 2000
Misc 1000
Internet 950
Insurance + 500
Loss provision + 1000

* : Rent & logistics allowance. Currently Tapprs runs out of Prem’s home. For which a small allowance of Rs 2000 is paid. Its not high. But it could rise sharply if Tapprs moves to a proper location. Keep this in mind.

+ : Annual expenses apportioned monthly.

So, the operating expenses are around 11637.5. Not bad.. on the face of it.

Hey wait! That is not all!!!

The above figures are before Depreciation, Interest payment and tax (if any).

Assets like camera lenses go down in value quickly. Let us depreciate the assets down to zero within a very aggressive period of 2 years. (Camera equipment is obsolete faster than most other equipments).  Which works out to 200,000 / 24 = 8333 per month (though depreciation is done yearly, I like to provision for it monthly). THIS IS NOT A CASH EXPENSE, but is deducted out of Assets.

Also, Tapprs needs to pay an interest of 12% for the 200,000 taken. This works out to roughly 2000 per month (actually less, but lets keep things simple).

Now, the above statement before tax, but after depreciation and interest becomes:


Assets Equipment inventory 191,667
Cash 86362.5
Liability Loan from Prem 1,000,000
Revenue ? ? ?
Expense Domain + 37.5
Hosting 150
Prem’s salary 6000
Rent allowance 2000
Misc 1000
Internet 950
Insurance + 500
Loss provision + 1000
Depreciation + 8333
Interest 2000

* – tax not calculated yet.

Tapprs has to earn ~22,000 net just to stay out of red! And above that… the tax component starts kicking in as well.

That is the cost of running the business (on this inventory size).

Now, what does that mean?

It means

  • inventory has to earn at least 10% on its worth (at the non-depreciated cost of Rs 2L). Else you are losing money. (However, as inventory keeps increasing, the % needed keeps dropping.. call it the economics of scale. You could take more debt, buy more equipment and try to rent it out.. but beyond a level… a poor month can wipe you out because of the heavy interest portion).
  • to make the entire business worth the effort, lets say you want Rs 15,000 at least every month as net profit on investment of this size (also, the nature of the business is such that it may not take more than 1-2 hours/day once things settle down). Let us not think of scaling up, making more money, etc for now. Just minimal viable case for Tapprs to function. In that case, Tapprs has to earn Rs 37,000 every month on its current inventory to keep you minimally happy.  That is almost 18.5% of initial inventory (37k/200k) value. IN ONE SINGLE MONTH! If you charge 1% of cost per day for rent, it means all your items have to go out for atleast 18.5 days EVERY MONTH!!! That is a utilization rate of almost 60% (18.5/30days). Whew! Tough ask!!!
  • Tapprs has a cash of around 86000 which could be used to purchase more items. BUT… will it make sense to wait for 2-3 months to see if the current inventory is making any money at all? And more importantly, is the inventory earning money at a profit? What is the cost of the sale? We have decent understanding of it now.. but it really has to be seen over at least a few months.
  • With scale comes benefits (and pains too). If we raise the inventory to say 2.5L, you need only 15 equipment rental days to make 37500 as you now have more items to make money from. That’s a relatively slightly easier 50% utilization rate. Maybe Tapprs should scale up a bit. BUT, remember, your depreciation will be higher too (roughly 10400 now, ie) 250,000/24months ) and that has an implication on net profit. Now, this can be handled by 1 more day of equipment rental roughly.. ie) 16 day utilization in a month.
  • the trick lies in quickly scaling up… on profitable items… and making sure the items are rented out on a decent no of days. And not simply scaling up on every item.. they could lie on the shelf indefinitely… adding dead weight.
  • if you think you cannot meet your utilization day ratio… scaling up is a foolish thing to do and your debt burden will force you out soon.

Let us 5x the business.

  • Take 8,00,000 loan (again from Prem at 12%). Now total loan is Rs 10Lakhs.
  • Purchase equipment for 8L.
  • Employ 1 person @ 8000 per month for handling things like delivery, pickup, etc.
  • And of course, you need to raise Prem’s salary for 5x’ing! (Now, things start sounding murky).
  • Still run from home. Running from a rented premise is still unviable.

Now, that part looked easy-peasy! Lets see what happens to our numbers.

Assets Equipment inventory 958,333
Cash 58363
Liability Loan from Prem 1,000,000
Revenue ? ? ?
Expense Domain + 37.5
Hosting 150
Prem’s salary 10000
2nd employee’s salary 8000
Rent allowance 2000
Misc 3000
Internet 950
Insurance + 2500
Loss provision + 5000
Depreciation + 41667
Interest 10000

* – tax not calculated yet.

Now, you have 10Lakhs worth of equipment (depreciated in a month to 958333) to make money from.

  • you have to make at least 84,000 to be profitable. Which is roughly 28% utilization rate (8.4days @ 1% rates/30days).
  • let’s say you need at least 40,000 to be happy for taking this risk. Then, you really need to make 125,000 every month. That is 12.5 rental days at 1% rates. Or a utilization rate of ~40% (12.5/30days). This is for ALL equipment. Of course, realistically, a few may perform very well and a few badly. The average at any cost has to be around 40%.  And you have tax to pay as well.

How to raise profits:

  • increase utilization. Looks difficult, given that photography rental is mainly a weekend activity.
  • reduce expenses. Hmm.. I can cut Prem’s already low salary. He won’t be happy. The best way is to pay off Prem’s loan soon.
  • depreciate equipment slower. No way! I want to depreciate it within 2 years. After that, if you manage to still keep the item.. its good as free.
  • reduce internet, misc, insurance expenses.
  • procure items at a much better price. Comes with scale.
  • RAISE RATES!!! I am experimenting with rates now. But I might raise it a bit and also lower it and try different combinations. Raising rates should not affect utilization rates.. which to me is more important.
  • You suggest to me!

Working capital:

An issue in the above 5’xing could be ignoring working capital.

You notice that cash left is around 58363. And though our expenses are 83304.5, the actual cash expense is 41,637.5 because the depreciation isn’t a cash expense.

That means, you really have only one month’s worth of cash in the bank. A bad idea!

Ideally, I would prefer 2-3 months worth of working capital. And also our model is such that revenue will also significantly pay for working capital and we do not really work on receivables as money is immediately charged from customer. But I could pay Prem at the end of the year though. However, realistically, if you had a loan from outside and if the payment is monthly.. you better watch your cash to meet monthly expenses.

That is because, even profitable businesses run out of working capital.

My thoughts:

  • will try to keep it running as a part-time, but serious venture.
  • will try to scale slowly from internal revenues. But will not plonk down any more capital from my pocket.
  • loving the exposure I am getting on marketing, customer service, pricing & strategy, risk management, financial management of a small biz, etc. But is it worth the effort? Am weighing the benefits.
  • might even shut it down in 2012, I have other profitable things to do.

Is your venture making a  profit?

Now, you could be a library owner, a toy rental store or even my competitor renting out photography equipment! Have you given a thought if your business is running profitably or not? Considering net profits and not just operational profit.

As a reader, what do you feel? Anything that I am wrong on? Anything that you think that should help Tapprs?

Will await your comments. Will try to answer them as best as I can. Well, except about the revenue Tapprs made ;-).

Thanks for reading!

16 thoughts on “The economics of running a rental business (updated)

    1. :-). Gee! All that heavy struggle-reading of Intelligent Investor and Ben Graham during my initial days of job is put to use here. There are a few glaring holes in my method.. but still, I enjoyed it.

  1. good read for sure!
    it is an interesting enterprise and you have done a nifty work opening your books 🙂
    all the best, I am sure it is going to work out great for you.

  2. Excellent analysis; only you can decide if the numbers are going to work, as you press on with this. But remember…it is always a great experience to do something like this.

    One usually expects a small business to break even in a 24 to 36 month period….there will be unexpected bonuses…and unexpected obstacles.

    Of cours I still cannot forgiv you for imitatiting Yahoo and laving out that “e” 🙂

  3. On an irrelevant note, I seriously consider, you should do your Masters in Finance & Accounting, considering some of your latest posts, have been so crystal clear on the accounts side.

  4. @ Harish: I have asked that question a thousand times now. Do I need an MBA? If yes.. Finance?

    But given that I am not too keen on a job, I guess I don’t need an MBA. Perhaps a course in accounting is what I need to refine my knowledge.

    But yeah, of late, my interest has sided with Marketing and if I do an MBA, perhaps it will be on Marketing :-).

  5. @Deepa: I am a guy who favors non-commodity businesses or those that can turn commodity into non-commodity biz. Like Pidilite (Fevicol), Asian Paints, etc.

    And I don’t prefer capital intensive ones.

    As of today, both are concerns for me in Tapprs.

    But at the same time, I so want to do this because of the intellectual exercise it is in risk management, equipment handling, financial management, etc.

    If you ask me, I would love to run Tapprs as a friendly rental company that actually runs in the background like an insurance company. There may be damages and losses in future.. but you price it ‘in’. But I have been having difficulty in figuring out an optimal pricing strategy. Therein lies the fun :-).

  6. @Deepa: 36 months will be unacceptable for a rental biz because that is too close to obsolescence. I am trying to see if that can be done in 1-1.5 years. Many int’l renters seem to sell equipment after 1 year.

  7. Hey Prem,
    Have you thought about working with photographers conducting wildlife/nature photography workshops?(like Kalyan Varma). These workshops are usually full and this is a good place where people would want to rent lenses and try them out. The workshop gives them a good opportunity to use the lenses extensively. I guess more people would be willing to rent their lenses for such occasions.

  8. Hi Sudhindra,
    Hmm… yes. Been thinking of tie-ups. Not just on workshops, perhaps on tours as well. Will take my time on that. First, I need to validate the pricing strategy before I reach out to others.. once I commit on a tie-up, playing with prices becomes tough.

    But yes. That should happen soon.

  9. Well done math here! May be you would be more successful in western market than here. Good to hear you are learning a great deal. As I always say, starting off is the biggest hurdle, now that you have done, I guess you should consider factoring your learning in your business! Had you gone for a B-school would have learnt the ‘practical’ situation that you are under going here? The price you are paying here is peanuts as compared to B-school learning ( I understand there are other things to consider and I MAY be exaggerating here But still. . . ) 😉

    Great to know your thoughts and admiration is for the sharing. How many dare to DO it, right? 🙂

  10. 🙂 Thanks Pramod. Yes, the learning is awesome!

    Yup, you can’t learn things practically in an MBA. You can only ‘read’ about it.

    Well, reg the sharing, I don’t know. I just feel its much better having a few details out in the open than in my database. Perhaps the feedback I might receive will help me. 🙂

  11. Hey Prem,

    Nice to see your financial calculation on this online business… ! You might be right, I would suggest you to go through “SECRETS of the Online Travel Business” by Matt Zito, though he talks about online travel & rental business (which is my favorite) you can relate to your rental online business. Anyway I will send you the PDF format of that tip book to your gmail soon. Hope you will get some more tips on this business..

    For more details you can even visit his website.


    1. Hey Arun,
      Thanks for dropping by! Nice of you to email me that book. Looks very interesting! Thanks a bunch buddy! Lets catch up over email. Hope things are nothing short of awesome at your end!

  12. Fascinating stuff!

    I am a photography enthusiast who happened upon your site… made me really think about equipment rentals as a business… sounds risky but a lot of fun 🙂

    Keep going, and I do hope you grow really big!

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