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Power Your Profits Flow-Through Business Analysis, a tool for the times
 

Power Your Profits Flow-Through Business Analysis, a tool for the times

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What is flow through and why is it important to hotel operators? ...

What is flow through and why is it important to hotel operators?
Flow through is the formula that determines how much of your top line in flows through to your bottom line in hotel operations. Flow through is a measure of how effectively you as a hotel operator turn revenue into profit. Here are some tips to help you leverage flow through for greater profitability.

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  • So what is flow thru?The term flow thru gets its origin from a formula that determines how much of your revenue translates into your profit or simply how much of your top line FLOWS THRU to your bottom line.To the best of our knowledge, a formal definition of flow thru doesn’t exist, however these 2 statements best define the properties of flow thru.Flow thru is a measure of how effectively you turn revenue into profit.Flow thru is a measure of how much profit varies with respect to revenue
  • 1st clickIn taking a closer look at flow thru, we get a better understanding of the depth of this metric as it encompasses all aspects of your P & L.2ndFlow thru is the only metric that is devised by using variances as your main input.3rdIn order to calculate a variance, you need to compare 2 items. In regard to Flow Thru, this is Actual Data vs a type of comparative data typically prior year actual, budget or forecast.4thAs we dig deeper, we all know there are a number of elements that comprise total revenue and profitability
  • So how do we calculate flow thru???After conducting research and discussing with our client base, we’ve determined that a standardized formula doesn’t exist.However what we did determine was that conceptually most flow calculations are similar.There is no right or wrong way to calculate flow through. The right formula is the one works best for your organization. Just be consistent throughout your organization. As companies are beginning to use flow through as a component of performance reviews for management, it’s important that everyone throughout your organization uses the same methodology to derive flow thru.
  • As we previously mentioned, flow thru is a calculation utilizing variances. In our sample summary P & L, we first locate our total revenue variance and our GOP variance. Remember there are different variations of the flow thru calculation. In our example we are using variance to budget. Other variances can be utilized such as variances to forecast or prior year actual. Our example is also using GOP variance but it is up to your organization to determine how you measure bottom line profitabilityOnce we’ve identified our variances, we then need to apply the proper formula to calculate flow thru.
  • What is the right formula that we’ve been talking about???Probably the most confusing aspect of ft is the fact that there can be 4 different formulas depending on whether the variances are positive or negative.To demonstrate the 4 different scenarios, lets take a closer look at our illustration.As you can see our x axis represents the revenue variance and our y axis represents the profit variance.In our first scenario of positive revenue and profit variances, the flow through formula is simply dividing profit variance by the revenue variance.Next, when there is a positive revenue variance but a negative profit variance, we apply the following formula.In the 3rd scenario where revenue variance is negative but profit variance is positive, we apply the following formulaThat same formula is used in our last scenario where both variances are negative.These are the common formulas that Aptech has seen. Once again, there is no right or wrong way to calculate flow through. The right formula is the one works best for your organization.
  • Back to our previous example, we again see that the revenue and profit variances are both positive To calculate flow thru we will use our formula for that scenario which is profit variance / revenue variance. Inserting the actual numbers into the formula, we come up with a flow through % of 150.19
  • So what is flow through % actually telling us? In general, the larger the flow through % the better. Mathematically speaking, you always want a positive flow through, but just because it’s positive, doesn’t mean it’s necessarily good.
  • Now that we understand how flow thru is calculated, let’s look at a few examples.

Power Your Profits Flow-Through Business Analysis, a tool for the times Power Your Profits Flow-Through Business Analysis, a tool for the times Presentation Transcript

  • Client Webinar Series
    Power Your Profits!
    Flow-through business analysis,
    a tool for the times
    Cam Troutman – Vice President
    Sam Costa – Director of Customer Support
  • A measure of how effectively you turn revenue into profit.
    A measure of how much profit varies with respect to revenue.
    What is Flow Thru?
  • What is Flow Thru?
  • Standardized formula does not exist.
    Several variations, similar concept.
    The correct formula is the one that provides insight for your organization.
    Just be consistent.
    How to calculate?
  • How to calculate?
    Flow Thru
    Apply the proper formula
  • Proper formula?
    Revenue Variance – Profit Variance
    Profit Variance
    Revenue Variance – Profit Variance
    Profit Variance – Revenue Variance
    Positive Profit Variance
    Revenue Variance
    Revenue Variance
    Revenue Variance
    Revenue Variance
    Positive Revenue Variance
    Negative Revenue Variance
    Negative Profit Variance
  • Example…
    218,536
    Profit Variance
    145,503
    Revenue Variance
    = 150.19 %
  • Flow Thru Results
    Positive Profit Variance
    Always Positive
    Always Positive
    Positive Revenue Variance
    Negative Revenue Variance
    Negative Profit Variance
    Always Negative
    Positive or Negative
  • Flow Thru Analysis
    Using Aptech’s solutions to monitor Flow Thru
    Profitvue example
    Execuvue example
  • Client Webinar Series
    Questions & Answers
    Cam Troutman – Vice President
    Sam Costa – Director of Customer Support