Starting a business is like solving a complex equation. On one side, we have revenue; on the other, costs. Subtract the expenses from the revenue, leaving you with a profit. Profit is the ultimate goal of any business, but getting there requires careful planning and understanding of the various factors that can impact a company's profitability.
Understanding these financial dynamics is crucial for those considering a venture into the bike rental business. So let's delve into this more deeply, starting with a closer look at how to calculate profitability.
In its most elementary form, profit is the financial gain achieved when a business's revenue exceeds its costs. However, the road to profitability is more complex than a straight line. It's a multifaceted journey that navigates myriad income streams and expenditure factors, which can dramatically sway a business's bottom line.
One way of looking at the profitability of a business is through a profit and loss statement. This financial report provides a snapshot of your business's revenue, the costs it incurs, and the profit (or loss) it makes over a specified period.
In the next section, we look at the most typical sources of income and expenditure for a bike rental business.
In a bike rental business, the primary source of revenue comes from the simple equation: the number of orders multiplied by the average rental price per booking.
Different types of bikes and varying locations will command different rental rates. For example, high-end mountain and road bike rentals can cost upwards of $80/day, while more basic city bikes for commuting might only be around $30/day. The niche you specialize in depends on your target audience and their needs.
Imagine a rental business that falls somewhere in the middle of the high-end and low-end markets, with a daily rental rate averaging $60. They have a fleet of 10 bikes and operate from March through October, with their peak season running from May to September.
In the off-peak months (March, April, and October), we estimate a 40% occupancy rate. For the shoulder season months (May and September), the occupancy increases to 70%. In the peak season months (June to August), the occupancy reaches 90%—the entire fleet would rarely be available simultaneously due to maintenance needs and other factors.
We'll calculate the estimated revenue based on these factors, considering the occupancy rate during different months.
Apart from bike rentals, these businesses could also sell guided tours. This can be particularly profitable if the target audience consists of tourists looking for more curated experiences. However, remember that offering tours takes capacity away from the bike rental inventory since the bikes used on tours can't be rented out to other customers. A guided tour can be priced at roughly double the price of renting a bike.
Additional revenue can also be earned by renting or selling accessories like bike bags, GPS devices, and other equipment. Offering these add-ons can enhance the customer's experience and increase the average order size, thereby boosting revenue and, ultimately, profit.
Income from equity affiliates is less common in bike rental businesses, especially for small-scale operations. This income stream refers to earnings from companies in which your business has a significant but non-controlling interest. For example, you might own a percentage of another company that offers biking tours.
Other income could come from various sources like advertising income (if you allow advertisements at your rental premises), interest income from any business savings, or small-scale side hustles alongside rentals.
The cost of sales in a bike rental business usually includes expenses related to fleet maintenance. Regular wear and tear on bikes require periodic service and occasional parts replacement. Safety is paramount in this business, so ensuring your bikes are in excellent condition is non-negotiable.
In a bike rental business, operational expenses encompass many categories. Let's dive deeper into each of them:
Rent of Premises: Costs vary based on location and type of building. A bike rental business does not necessarily need a fully equipped commercial space. Even a construction site container can serve as a retail space. For a cheaper option, monthly rent could be as low as $300, whereas premium locations might cost upwards of $3,000 monthly.
Rental Equipment: In our example, we'll classify the investment in the bicycle fleet as an operating expense, simplifying our calculations as the total cost impact is reflected in the financial year the investment is made. The cost of the fleet will depend on the type and quality of bikes you're offering for rental.
Staff Salaries: Especially during the peak season, you'll need extra hands for bike maintenance and customer service. According to Glassdoor, a bike mechanic's salary in the US is around $25/hour. If you hire a mechanic as a full-time, seasonal worker from May to September, their monthly salary will be around $4,000. A single mechanic, who can service a bike in 30-60 minutes, can handle approximately 8-16 cycles in an eight-hour working day, considering lunch and breaks.
Software and Admin Tools: Essential tools include a website, bike rental software for inventory and order management, a POS system, and an accounting system.
Marketing: As a new business, you must invest in marketing. The initial investment may include the following:
An ongoing customer acquisition budget of $ 300/month is a good start, focused on one channel like Google.
Utility Bills: Utility bills depend on location and usage, but a typical monthly sum could be around $200.
Insurance: A bike rental business needs broad insurance coverage. Here are the average monthly costs of a small bike rental business insurance coverage according to Forbes' research:
Now, let's summarize the operational expenses of our example bike rental business in a table. The numbers are very much ballpark figures. In your financial plan, of course, you should enter more precise estimates of costs.
Interest expenses are the costs of borrowed money. If you take out a loan to start your business or buy more bicycles, you'll need to pay interest, impacting your profitability.
Currently, the Small Business Administration-backed loans in the US have an interest rate of 12.5% (as of May 2023) when the loan is paid off in under seven years.
So if you take out a loan of $20,000 with a three-year repayment period and pay 12.5% annual interest, your monthly interest expense during the first year is around $181 on average. You can use, for example, this calculator to estimate the interest expense.
Like any business, a bike rental shop is responsible for paying taxes. This includes income taxes, employee payroll taxes, and potential sales tax on rental fees.
The exact amount depends a lot on your location, but as a general rule, setting aside 30 to 40% of your net income per year is recommended to cover your federal and state taxes.
Depreciation is the method used to allocate the cost of tangible assets over their useful lives. In a bike rental business, assets such as bicycles and equipment depreciate over time. While depreciation isn't an out-of-pocket expense, it's an actual cost that affects your profitability and tax obligations.
Since, in our example, we have classified the equipment as an operational expense, it is not depreciated. If you capitalize rental equipment on the balance sheet, it is depreciated over its estimated useful life. This may be appropriate, especially for bikes in the higher price range. For example, if you think that one bicycle will serve three years of rental use, you will depreciate the bike's purchase price over three years.
Now, let's take a closer look at the profitability of a bike rental business through a hypothetical example. Just so you know, the figures presented are only estimates and are based on rough averages. The purpose of this example is purely educational and illustrative. It's important always to do your own calculations and make informed decisions based on your unique business circumstances.
In its first year, the business generated a significant revenue of $97,380 through its bicycle rental services. The maintenance costs, including bike servicing, repair expenses, and spare parts, totaled $16,230. Deducting these costs from the revenue gives us a gross profit of $81,150 and an impressive gross margin of 83.33%. This suggests a high markup on rentals, which is typical for the rental business model.
The operating expenses amounted to $57,896.60, resulting in an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of $23,253.40 and an EBITDA margin of 23.88%. This means that approximately 24 cents are turned into EBITDA for every dollar of revenue.
Since the total cost of the bicycles is expensed in the year of purchase and not spread over multiple years, there is no depreciation or amortization. Interest expenses for the year totaled $2,171.96, which is related to the interest on the business loan. After accounting for this, the Earnings Before Tax (EBT) amounts to $21,081.44, giving an EBT margin of 21.65%. This implies that about 22 cents of every dollar of revenue become pre-tax profit. With a tax rate of 30%, the business owes $6,324.43 in taxes.
With a Net Profit of $14,757.01 and a Net Profit Margin of 15.15%, it is evident that the business has been operating efficiently. The management should endeavor to maintain and improve these margins for sustained growth in the future. Furthermore, the company can reinvest its net profit to fuel expansion and growth.
In the second year, the business increased its fleet size. Despite a decrease in occupancy rate, the revenue increased to $154,746 due to an overall increase in orders and boosted marketing efforts.
The rise in the number of orders and the subsequent increase in maintenance costs led to the rise in the cost of sales, totaling $28,370.10. Nonetheless, the gross profit remained impressive at $126,375.90, and the gross margin stood at 81.67%.
The operating expenses totaled $75,699.92, which includes an increase in various costs. Staff salaries increased due to the hiring of a bike mechanic and a junior bike mechanic for the peak season. Insurance costs went up because of the more extensive fleet of bikes. Marketing costs also increased as the business decided to boost its marketing efforts and invested in website optimization. After subtracting the operating expenses, the EBITDA is $50,675.98, leading to an EBITDA margin of 32.75%.
There is no depreciation or amortization for the year because the cost of the bicycles was classified as operational cost and expensed in the year of purchase instead of spreading over multiple years.
Interest expenses decreased to $1,396.44 because of the reduction in the loan balance. After accounting for this, the Earnings Before Tax (EBT) amounts to $49,279.54, giving an EBT margin of 31.85%. With a tax rate of 30%, the business owes $14,783.86 in taxes for the year.
After accounting for all expenses, including taxes, the business has a Net Profit of $34,495.68, more than double the profit from the first year. The Net Profit Margin of 22.29% indicates that the company keeps about 22 cents of every dollar of revenue after all costs, expenses, and taxes.
Despite increased operating expenses and a lower occupancy rate due to an increase in the number of bikes, the business significantly increased its revenue and profitability in the second year. This could be attributed to the business's effective marketing strategies and the high demand during the peak season. Since demand does not automatically increase as supply increases, the management must constantly consider ad evaluate new growth strategies.
In the third year, the business expanded its operations by opening a new branch, which led to a significant increase in rental revenue to $252,126. This increase was made possible by a substantial investment in 10 new bikes and increased marketing efforts.
The maintenance cost rose to $51,307.64 due to the larger fleet size and the aging of the bikes. Yet, the business maintained a high gross profit of $200,818.36 and a gross margin of 79.65%, slightly lower than the second year.
The business faced increased operating expenses, totaling $134,761.52, due to several factors related to opening a second store. Noteworthy expense items include:
Despite these higher operating costs, the business increased its EBITDA by 30 percent, reaching $66,056.84 in EBITDA, translating to an EBITDA margin of 26.20%.
As in previous years, no depreciation or amortization was reported for this year. The interest expenses decreased further to $518.19 due to the reduction in the loan balance. This left the business with Earnings Before Tax (EBT) of $65,538.65, corresponding to an EBT margin of 25.99%. With a tax rate of 30%, the business incurred taxes of $19,661.59 for the year.
After accounting for all expenses, including taxes, the business posted a Net Profit of $45,877.05. This implies a Net Profit Margin of 18.20%, meaning the company retains around 18 cents of every dollar of revenue after all costs, expenses, and taxes.
To summarize, the business showed a positive growth trajectory in its third year, with significant revenue and net profit increases despite adding a new location and associated expenses. The success of the expansion will hinge on maintaining high occupancy rates at both locations, managing costs effectively, and leveraging efficient customer acquisition strategies to increase demand.
While the net profit margin has decreased slightly from the previous year, the business's overall profit has increased, indicating a successful scaling strategy thus far—the decision to increase marketing spend and open an additional location paid off.
However, the business must continue to monitor its costs, particularly those associated with maintenance, staff salaries, and rent, to ensure continued profitability. In the future, it must also be considered that the original bikes are coming to the end of their useful life in rental use. To continue to grow, these must be replaced with new ones. The proceeds from the sale of used bicycles can partly finance this investment. Other sources of growth include expanding into year-round operations by offering bike maintenance services when there is no demand for the rental shop. Guided tours and additional product sales can also provide expansion opportunities.
As our hypothetical bike rental business case shows, bike rentals can be a profitable venture. With effective marketing, strategic expansion to new locations, and investment in new equipment, bike rental businesses can predictably increase their revenue and net profit. But that doesn't mean the groundwork shouldn't be done properly! Here are some factors that affect bike rental companies' profitability.
Predictable growth: If there is a demand for bike rental services in the region, the increase in turnover is quite predictable and proportional to the number of bicycles. In addition, the high gross margin means that the higher the volumes, the more profit will flow into the net result, as operating costs will not increase in the same proportion.
Simple cost structure: The straightforward cost structure of bike rental companies contributes to the predictability of their growth and margins. The primary expenses include personnel and maintenance of the bikes between rentals, alongside costs related to the cycles and the shop space.
Straightforward paths to expansion: Bike rental businesses thrive on volume—with high gross margins and predictable growth, the key to maximizing profits lies in renting out inventory as quickly and efficiently as possible. As such, entrepreneurs should always look for ways to boost rental numbers, whether by expanding an existing location or opening new ones.
Relatively low start-up costs: Although it's not free to get started and bikes cost money, it costs relatively little to open a bike rental shop compared to many other businesses. The simplicity of the business model also makes it easier to get started quickly and make money. You can finance your start-up costs with a loan, by looking for investments, or with your savings.
Potentially high demand: Cycle tourism and the bike rental industry are growing at double-digit annual rates, creating an excellent platform for setting up a bike rental business.
However, there are also challenges to overcome:
Maintenance Costs: Maintaining your bike rental fleet is crucial to ensure its longevity and profitability. As your fleet ages, maintenance costs are likely to increase, and spare parts and labor will be necessary to keep them in top condition. Therefore, it's also essential to regularly assess and maintain your inventory. Don't underestimate the resources required for maintenance, as it's a critical factor in your business's success.
Seasonal Business: Bike rental businesses often face the challenge of seasonality. In our example, the company only focused on rentals and shut down during winter, which means that during the peak season, you have to work longer hours to cover the expenses during the winter months because not all costs stop when the biking season ends. To counteract seasonality, consider offering other services, such as bike maintenance during winter. This can help generate revenue and keep the business afloat during the off-season.
Market Saturation: Business can only flourish with demand. And often, there is competition if there is much demand for something. That's why it's vital that you do your market analysis carefully before jumping head-first into the bike rental business. Marketing and branding also play an essential role in the operation of a successful bike rental business.
In conclusion, bike rental businesses are profitable and show strong potential based on the financial analysis. However, continued success will require careful management of costs, strategic expansion, and a focus on maintaining high service quality and customer satisfaction.