Hospitality Financial Leadership: Negative Flow Thru
April 22, 2019 1:19pm
By David Lund
One of the most read articles I have written is on the topic of flow thru and how to use it in your financial statements. Understanding flow thru is not something that comes easily to most people immediately, but once you look at it and do the calculation it usually clicks. Once it drops in place you have got it for good. To take things one step further in this piece I am going to discuss negative flow thru.
Negative flow thru or retention is something that most people in North America have not had to deal with very much in the past decade. We have just crossed over a massive stretch of growth in our industry that was marked by 100 straight months of RevPAR growth. That’s some serious performance. With constant growth on revenues this almost always means growth in profits, not always, but let’s say 95% of the time when revenues are up over the same month or year-to-date to last year, GOP is up too. But what happens when the tables are turned? What should happen when revenues decrease compared to the same month last year or YTD to last year?
The basic and obvious answer to that question is nothing good comes from a decrease in revenues in your hotel. Many costs in your hotel are largely fixed. The biggest variable expenses are payroll at around 50% of total revenue according to a recent article by STR Trends, and it’s one area of the hotel that is not easily reduced. In many hotels at the beginning of a period of declining occupancy and/or rate, the negative flow thru is very high. It’s quite easy for it to exceed negative 100%. If we don’t react swiftly and if we fail to take the necessary actions, we can easily spend just as much on payroll and expenses before the decline and this spells disaster for the bottom line.
So how do we measure and calculate negative flow? The basic calculation is the same. What is the difference in this month’s or YTD revenues to last year and what’s the difference in GOP in the same period? Once we have this, we need to divide the difference in GOP by the difference in revenues. Like the example below.
Click on image to enlarge
In this example, we managed to “retain” just over 50% of the lost revenues as the revenue and GOP go backward. Another way to express this is we managed to save 50 cents of every lost dollar in revenue. Depending on where we lost the revenue, this will tell us how good a job we did.
In order to see where we lost the revenue, we need to do a bit of analysis. The screenshot below is from my enhanced flow thru cheat sheet.
You can see from the cheat sheet where “things” (revenues and profits) went.
Here are some targets that are a reasonable measure to strive for during a period of revenues reduction in your hotel.
To wrap things up – here are some saving ideas that might help. Nothing is ever applicable to everything, but a good list is always nice to have.
To wrap this one up, remember three things.
Tags: david lund,
hospitality financial leadership,
David Lund is The Hotel Financial Coach, an international hospitality financial leadership pioneer. He has held positions as a Regional Financial Controller, Corporate Director and Hotel Manager with Fairmont Hotels for over 30 years.
He authored an award-winning workshop on Hospitality Financial Leadership and has delivered it to hundreds of hotel managers and leaders. David coach’s hospitality executives and delivers his Financial Leadership Workshops throughout the world, helping hotels, owners and brands increase profits and build financially engaged leadership teams.
David speaks at hospitality company meetings, associations and he has had several financial leadership articles published in hotel trade magazines and he is the author of two books on Hospitality Financial Leadership. David is a Certified Hotel Accounting Executive through HFTP and a Certified Professional Coach with CTI.
For a complimentary copy of my guidebook on creating a finically engaged team in your hotel head over to my website, www.hotelfinancialcoach.com and don’t forget to email me firstname.lastname@example.org for any of my free hospitality financial spreadsheets.
Contact: David Lund
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