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When hotel occupancy and rates decline, managing Flow Through becomes critical. Understanding how to calculate Flow Through—especially when it turns negative—can help you maintain financial stability and profitability.
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 and How to calculate Flow Through
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 through when you already have an understanding of the difference and how to measure the impact.
Hotel Flow-Through Calculator
Flow Through Calculation + Free Flow Through Calculator:
- Determine Revenue Difference: Calculate the difference in revenue between two periods. For example, if your hotel’s revenue in January was $500,000 and $550,000 in February, the revenue difference is $50,000.
- Determine Profit Difference: Calculate the difference in Gross Operating Profit (GOP) between the same two periods. For example, if the GOP was $200,000 in January and $210,000 in February, the profit difference is $10,000.
- Calculate Flow Through: Divide the profit difference by the revenue difference and multiply by 100 to get the Flow Through percentage.
- Formula: (Profit Difference / Revenue Difference) × 100
- Example: ($10,000 / $50,000) × 100 = 20%
This 20% Flow Through means that 20% of the additional revenue generated in February was converted into profit.
How to Calculate Flow Through in Your Hotel’s Financial Statement
Calculating Flow Through is straightforward, but it’s essential to follow the correct steps to ensure accuracy.
Step-by-Step Guide:
- Identify Revenue for Two Periods: Begin by noting down your hotel’s revenue for the two periods you wish to compare. For instance, let’s compare revenue from March 2023 and March 2024.
- Identify GOP for the Same Periods: Similarly, note down the Gross Operating Profit (GOP) for those same periods.
- Calculate the Differences: Subtract the revenue of March 2023 from March 2024 to get the revenue difference. Do the same for GOP.
- Apply the Flow Through Formula: Divide the GOP difference by the revenue difference to find the Flow Through percentage.
- Example: If March 2023 revenue was $600,000 and March 2024 revenue was $660,000, the revenue difference is $60,000. If GOP in March 2023 was $250,000 and in March 2024 it was $270,000, the profit difference is $20,000.
- Flow Through Calculation: ($20,000 / $60,000) × 100 = 33.3%
A 33.3% Flow Through indicates that for every dollar of additional revenue, 33.3 cents were retained as profit.
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 Through is an essential metric to track during periods when your hotel’s revenue declines. It shows how effectively you manage costs when revenues drop.
Why It’s Important:
- Identifies Cost Control Issues: Negative Flow Through occurs when expenses rise faster than revenue decreases, leading to a negative impact on profits. Monitoring this helps you identify where cost controls are lacking.
- Measures Financial Health: Understanding Negative Flow Through allows you to gauge your hotel’s financial resilience during downturns, enabling you to take corrective actions.
- Improves Decision-Making: By calculating Negative Flow Through, you gain insights into the specific areas of your hotel’s operations that need improvement, helping you make data-driven decisions to maintain profitability.
How to Calculate Negative Flow Through:
- Revenue Decline: Start by calculating the decrease in revenue between two periods.
- GOP Decline: Then, calculate the decrease in GOP for the same periods.
- Apply the Negative Flow Through Formula: Divide the GOP decline by the revenue decline to determine the percentage of lost revenue that results in reduced profits.
Example: If revenue drops by $50,000 but GOP drops by $60,000, the Negative Flow Through is ($60,000 / $50,000) × 100 = -120%. This indicates that for every dollar lost in revenue, your hotel lost $1.20 in profit.
How is Negative Flow Through measured?
Negative Flow Through is typically measured by analyzing the relationship between revenue decreases and the corresponding decline in profits. This metric is crucial for understanding how well your hotel manages its costs during challenging periods.
Standard Flex Range: In the hotel industry, a typical Flex Range—the range within which costs can be adjusted relative to revenue changes—is around 30-35%. A lower Flex Range indicates that it’s more difficult to control costs when revenues decline, due to fixed expenses that remain constant.
Calculation Steps:
- Revenue Comparison: Compare your current month’s or year-to-date (YTD) revenue with the previous period.
- GOP Comparison: Compare the GOP for the same periods.
- Flow Through Calculation: Use the formula:
- Formula: (GOP Difference / Revenue Difference) × 100
- Example: If revenue dropped by $40,000 and GOP dropped by $50,000, then Negative Flow Through is ($50,000 / $40,000) × 100 = -125%.
This measurement tells you that for every dollar of revenue lost, your hotel’s profit decreased by $1.25, signaling a need for tighter cost controls.
When calculating the negative Flow through, there are different areas of your hotel you need to pay more attention to:
7 essential tips to improve your hotel profitability
Here are some valuable tips to ensure the smooth operation of your hotel
- Do a staffing and expense review, especially if your hotel has been up and running for 10 years.
- Review all your contracts: it is crucial to develop the habit of reviewing and revisiting your contracts instead of cancelling and negotiating them.
- 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.
- 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.
- 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.
- 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.
- 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:
- 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.
- 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
Every detail matters when it comes to managing your hotel’s finances. Understanding how to calculate Flow-Through—both positive and negative—can significantly impact your bottom line. Focus on the right metrics to ensure your hotel remains profitable, even in challenging times.
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