Understanding Flowthrough

If you are currently working in hotels, you may have heard the term flowthrough.

If you have not, it is a term that helps your hotel compare numbers easily and see if your are making as much profit as you should.

Hotels have industry standard flowthrough benchmarks that you can compare against.

Explanation

Suppose you made 1 lac rupees extra from your budget by selling more rooms. How much incremental profit did you make? That is the question flow through analysis tries to solve.

Think about it this way. Suppose you got a 8 % salary hike, but your tax bracket moved from 20 % to 30 %. Even though you got an increase, you will have less money in your bank account because your expenses or taxes increased.

So in this case, logically, it may make sense not to take the salary increase or take less increase to be within the 20% tax bracket so that you can take more money home.

Because at the end of the day, it is about how much you take home.

A hotel owner also has a same expectation. If you say you made more revenue, their automatic expectation will be that you will give them more money. But if you gave them less they will not be happy.

Formula

If you understood the example, lets look at the formula.

It is Difference of Profit / Difference of Revenue

This difference can be compared with any 2 figures viz. Actual vs Budget or This year vs Last year.

So if you are comparing flow through for the month of August, the calculation will look like

(Actual Profit – Budgeted Profit)/ (Actual Revenue – Budgeted Revenue)

You can use this for any department or the entire hotel.

To calculate your flow through, use the calculator below. You can also bookmark this post and return often whenever you need to calculate this.

Flowthrough Calculator

Why is this important?

Any revenue in hotel is dependent on price and volume.

Room Revenue = ARR ( Average room rate or Price) * Occupancy ( Volume)

Food and beverage revenue = APC ( Average per cover) * No of cover ( Volume)

When revenue increase happens due to increase in price, the flow through should be higher.

When the revenue increase happens due to increase in Volume the flow through is lower since there is variable cost that increases in the form of in room amenity or food cost

So using the example of the taxes above, sometime it may make sense to let go of a particular business if the increased revenue is coming in through increased volume.

You may have heard of many deal sites offering restaurant reservation at very cheap pricing. Their offer was that we will increase your covers, however it ended with many restaurants running in loss as the higher volumes came with higher cost.

So it makes sense to take business with higher flowthrough.

In a typical hotel flow through can range from 35-60%. Rooms can range from 60 – 75% and Fnb from 35-50%

How else can you use the flow through. Have you heard of this concept before. Share your thoughts about this post in the comment below.