Negative Flow-Through, what is it, and how do we measure it?

At the beginning of a period of decline in occupancy and rate in many hotels, the negative Flow-through is very high. It is pretty easy for it to exceed negative 100%

In recent times, we have received several questions from hotel owners on the issue of Flow-through and how to implement it in their hotel’s financial statement. It is much easier to understand Flow through the moment you become familiar with the calculations involved.

This article will take you through all you need to know about negative Flow through and how it can benefit you.

How does Flow-Through work

Flow through, as it is fondly called, is a term used to measure how much made your hotel business compares one period to another. It comprises both revenues and profit. This is why it is called “Through.” Another common term used to describe this measurement is called “Retention.” 

Some hotel owners have suggested that it is best you increase the rate and overall revenues in your hotel, but it is also essential to know how much you will save and get in profits

Your ability to manage Flow-through, whether positive or negative, shows your understanding of your hotel’s financing profit model. Measuring Flow-through various departments and critical factors is the basis for understanding your hotel’s financial potential and your hotel’s financial results.

It is good to note that all the revenue streams in your hotel have two significant attributes: volume and pricing. It is easier to understand and measure departmental Flow when you already have an understanding of the difference and how to measure the impact.

How to include Flow through in your hotel’s financial statement

The way to calculate Flow through is quite simple 

• The first step is to find the difference in the revenue of different periods
• the next step is to subtract the profit from the same period.
• Divide the difference in revenues by the difference in profit

When comparing flow-through between two periods, it is necessary to include any event that had an impact (directly or indirectly) on the results. 

Negative Flow through

Negative Flow through (also known as retention) is often the redeeming feature when revenues are in your tilt backward. 

The negative flow-through is usually high in most big hotels during decline rate or occupancy periods. There is every possibility for it to exceed negative 100%.

In a negative flow-through, the revenue is positive, but the GOP is negative. It can also be seen as a situation where the revenue is increasing, but the profitability ratio is in a negative state.

In most cases, unless other factors are present, the cost-control ability in that period shows the potential for improvement.

Importance of Negative Flow through calculation

Negative Flow is a crucial term and calculation you need to know. Here’s why:

1. It helps you retain the profit loss when revenues go do
2. It gives you a vivid insight into the impact of decreased revenue on the profit margins
3. It shows you at what point the revenue was lost

How is Negative Flow-Through measured?

Measuring Flow through the range is sometimes challenging. In the hotel industry, the standard flex range is mainly in the 30-35% range. The lower the flex percentage, the more difficult it is to save money when revenue is low. The reason is because of some fixed expenses that do change. They remain static even when the hotel is flopping.

The actual measurement of a hotel’s financial management comprises a comparison of the hotel’s historical data and a few other crucial factors.

To measure and calculate negative Flow, find the difference in the current months or YTD revenues to the previous year, and the difference in the gross operating profits (GOP) in the same period

Once you have these, the next thing is to divide the difference in the gross operating profit by the difference in revenues. You will know the retention amount out of the total lost revenues at the end of your calculation as the GOP and revenue go backward.

Flow Through Calculation:

Flow-through = (Current period revenue – Previous Period revenue)) / (Current period operating profit – previous period operating profit).

When calculating the negative Flow, there are different areas of your hotel you need to pay more attention to:

7 essential tips to improve your hotel finances

Here are some valuable tips to ensure the smooth operation of your hotel

1. Do a staffing and expense review, especially if your hotel has been up and running for 10 years.
2. Review all your contracts: it is crucial to develop the habit of reviewing and revisiting your contracts instead of cancelling and negotiating them.
3. Enforce staffing guide: one other way to ensure the smooth operation of your hotel is to approve a staffing guide for all operating departments to enforce and ensure that they comply with productivity standards in their weekly activities.
4. Consider hiring a freeze: departmentalization is a significant challenge that keeps most hotels from running smoothly. To tackle this challenge, you may consider training managers and line positions. Be more innovative and creative.
5. Seek help: it doesn’t matter how long you have been in business; strength is not thinking you have it all figured out; instead, it is the opposite. One thing great manager do is ask for help to review their hotel’s operation. You can do the same.
6. Have reliable department managers: to ensure an efficient operation of your hotel, you need to ensure that each department manager is up to date with their respective expenses and has a plan for each month.
7. Review guest-facing expenses: the hotel business can be likened to a game of inches. It is therefore not advisable to be wasteful. Always review all guest-facing expenses like gifts and amenities.

Two important departments to consider when finding flow through

There are two major department that drive a hotel’s business. They include:

1. Rooms Flow: The rooms department is a major aspect of 99% of the hotels in the world. The key factors in this department are rate and occupancy. If the rate of your hotel’s room increases $10 over the same month last year, and you sell 18,500 rooms the current month at the same amount as last year, your room revenue increased by $185,000. 

The question is how much should be kept as profit. Another thing to consider is what else would need to increase to make up  for the additional room revenue? 

Sometimes, as a hotel manager, you may take it upon yourself to spend a little more in a month to catch up on some expense but that doesn’t mean it is directly related to the increase in rate. 

Another arm of room flow is occupancy. Let’s say your hotel this month witnessed an increase of 6 points in occupancy over the same month in the previous year. This resulted in an additional 300 rooms sold and an additional $45,000 in room revenue. 

The question is what should the flow be? With occupancy, it’s a bit more complicated. 

You do not need large amounts of additional resources at the reception, in reservations or in guest services. You however need to bring in some extra room attendants and housekeeping labour. Consume more amenities, guest supplies and probably should pay higher in reservations and commissions to 3rd parties. 

2. Food and Beverage flow: The food and beverage department require a broader calculation to see exactly what and where the results might be. Profitability characteristics are not the same between the food sales and beverage sales

Within food sales, the profitability of all the different meal periods, as well as distinguishing the relationship between outlet sales and banquets is essential. With beverage sales, the profit margins for beer, wine and liquor and need to be adequately understood. 

Final Thought

One important thing to keep in mind is that every tiny bit about your hotel counts, whether positive or negative. What matters most is what and where you focus on.