Measuring Vital Signs: Metrics That Matter for Equipment Finance Companies
by Samuel Oliva September/October 2016
Hospitals use data collected by a slew of monitoring equipment to track a patient’s vital signs, often sounding an alarm when something goes wrong. Samuel Oliva of ECS Financial suggests taking a similar approach to track the health of an equipment finance company by measuring the metrics that matter.
No one likes spending time in the hospital. Privacy is nil, the beds are uncomfortable and the experience often includes being hooked up to what looks like a server rack full of monitoring equipment — a heart rate monitor to track your heartbeat, a blood pressure monitor to watch your circulation, a thermometer to track your temperature and the list goes on and on.
These devices may be uncomfortable, but they play a critical role in patient health, working together to tell the hospital staff what’s going on with your body on a second-by-second basis. Most critically, they sound the alarm as soon as something, even if it is minor, starts to go wrong.
That’s exactly the role that well-defined financial metrics can play for a leasing company.
Metrics are a standard of measurement, a statistic or set of statistics, that can be used to determine the health of a given data set. In the hospital, your blood pressure, temperature and pulse — even the number of times you press the call button — are all metrics that the staff use to monitor your overall well-being.
In the world of commercial equipment leasing, similar data can be used to help managers gauge the health of their businesses. Further, metrics can assist in uncovering why certain things are happening and point managers to potential problems before they fully materialize.
As in the hospital, good business metrics pull together information from widely divergent sources — financial metrics, collection metrics, employee performance statistics from desktop tracking software, portfolio activity from its underlying database and more. Leaders can use this data to create dashboards that can tell them much more about their overall business than any one data point could on its own.
The trick is setting up, gathering and making sense of all this information.
Beyond Financial Statements
The truth is, the typical corporate reporting tools — the balance sheet and the income statement — provide only a partial view of the health of a leasing company. As a summary of a company’s assets, liabilities and top and bottom line, the information offered is high level and doesn’t divulge anything about what’s going on behind those numbers. They can show that a company had $1 billion in sales last year, but they can’t tell you that those sales were spread across many different products, 10 of which were more profitable than the rest.
Granted, corporate financials are one metric that executives need to consider, but it’s important to look beyond them. To get down to what is critical to running a business, you must look at more than just the financial statements.
This is where financial metrics come in.
Corporate leaders in the equipment leasing industry must have certain information, including how profitability compares to last year, how originations compare to the rest of the industry and how their default rate compares to expected results and/or industry standards. They also need to know how these numbers are trending, whether they’re positive or negative over time and how their progress measures up to both the industry and their own internal benchmarks.
Numbers That Matter
There are a number of different financial metrics that equipment leasing companies can use to assess their progress.
One metric a company could track is the number of deals completed year-to-date compared to last year. When automated on a real-time basis, these figures could be programmed to alert you to changes, good or bad, possibly turning red when sales fall behind and green when they pull ahead, making it easy to spot unfavorable trends.
But that’s just the start. A leasing company could also track its comparative internal rates of return, year-over-year originations, interest rate spread, portfolio statistics and more. That’s in addition to comparative metrics such as total sales, overall profitability, pipeline size, employee activity by functional area, collection metrics and residual realization.
Tracking industry and equipment type is a valuable exercise because it keeps the portfolio balanced. This was a common problem in the 2008 downturn, when leasing companies that were overexposed to construction equipment faced steep losses when leases defaulted. The demand and liquidation value for this equipment fell sharply and many companies were forced to sell repossessed assets at unexpected losses.
Implementing well-thought-out financial metrics creates a picture of the business that is far different from a traditional financial statement and more useful on a day-to-day basis.
But where does this information come from?
In today’s equipment leasing environment, data is entrenched in everything. Every time you sign a new deal, company databases capture data on the amount financed, down payment, security deposit, internal rate of return, vendor, lease term and more. Useful information also is obtained from portfolio tracking software, desktop monitoring systems and third-party data suppliers. What you end up with is a rich source of easily accessible information about the entire operation of the business.
How is this done? It requires setting up an automated system for capturing important information, which requires business process automation programmers.
Once a system is set up, it can pull information from different databases, aggregating data in dashboards that allow managers to quickly and easily see a snapshot view of the metrics that matter to them. This generally doesn’t involve the accounting department’s time or a team of full-time data miners, just qualified database programmers and corporate managers who know which metrics will truly have the largest impact on their businesses.
Not only does this take the heavy lifting out of metric gathering, but the results are more accurate, reliable and available in real-time. It’s like hooking a company up to various monitors at the hospital. Are your company’s vital statistics something you should be concerned about? The system can provide warning signs in advance and offer insights into how to correct the situation before it negatively affects the company.
For instance, let’s say a company has 2,000 leases in its portfolio. The metrics might show that 1,800 of those customers are paying on time and 200 are not. With an automated system in place, managers can easily trace back and determine the source of those clients, which salesperson originated those deals, which vendors are sending them the highest number of defaulting customers and other actionable information.
The trouble is, far too few companies are leveraging this type of information.
Equipment leasing company executives should be looking at their financial metrics on a monthly, weekly or even daily basis through automated alerts and clickable links. Does this seem like overkill? Realistically, failing to do this is like being asleep at the wheel of your own business.
Not knowing where you stand until you look at your financial statements is like getting on the road and driving without a map or a pre-trip checkup. How do you know if you’ll get where you want to go and that all systems will function as expected?
Financial metrics are just the beginning.
Here’s the bottom line: A well-run business should be looking at a vast number of metrics on a regular basis. Although this article cannot name every one, these essential reports include:
Employee metrics: Which salespeople are the most effective and why?
Vendor metrics: Which vendors refer the most clients who eventually default?
Portfolio metrics: Is the lease portfolio over or underexposed in any particular markets, to any particular vendor or in certain industries?
Financial metrics are critical, of course, but they are just one piece of the puzzle.
There is a world of data available to today’s businesses. The companies that will be tomorrow’s success stories are leveraging their metrics today to drive their businesses forward.