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.