Flow-Through Analysis

Flow-through analysis measures the difference, or variance, between profitability and revenue. Typically used in the hospitality industry, it is a useful tool for owners, managers and investors analyzing performance within a property, department or chain. Calculating flow-through is a matter of simple arithmetic, and while the initial result is reported as a dollar amount, it's best utilized when expressed as a percentage.

How Flow-Through is Measured

Flow-through analysis is expressed as a ratio of gross operating profit to revenue that exceeds budget, according to the hospitality software provider, Aptech-Inc. For example, according to Aptech, if a property earns $100,000 revenue over and above budget, and the gross operating profit is $70,000 over budget, then the flow-through rate is 70 percent (in other words, 70,000 divided by 100,000). Other other factors may affect the flow-through rate, such as increased variable costs for staffing or utilities.

Using the Data

The flow-through rate on its own is little more than a mathematical exercise unless a manager reviews the entire budget and actuals to determine what outside events affected the rate. For example, one hotel manager stated that he uses a flow-through rate of 50 percent as his review red flag; flow-through of less than 50 percent indicates a need to capture more profit, according to Aptech. Top-level managers can also use the flow-through numbers to compare results among different properties or divisions, allowing them to see which group operates more efficiently.

Building Better Managers

At what point a flow-through rate becomes an area of concern for managers is a matter of debate. Nevertheless, once an area of concern has been identified, top management is able to communicate directly with the line manager in charge of the property or division; ideally, the line manager will be able to readily identify ways that the group can operate more efficiently without sacrificing guest service. As a result, many in top management feel that flow-through training allows line managers to work better.

Manual Vs. Automated Flow-Through Calculation

Managers who are interested in using flow-through analysis to determine flow-through rate can automate the process through software or calculate it manually. A top-level manager of a hotel chain may prefer an automated program because it will quickly calculate the flow-through for each property and produce a report comparing the rates for each. A single property may find that an automated program is unnecessary; however, although both methods exist, having an analyst review what external factors are affecting the rate will help the property manage its resources better.


About the Author

Lisa Bigelow is an independent writer with prior professional experience in the finance and fitness industries. She also writes a well-regarded political commentary column published in Fairfield, New Haven and Westchester counties in the New York City metro area.