Just like your auto mechanic checks your car’s health you can completely review your hotel’s financial performance and get a clear reading on as many as 21 different flow thru performance points.
NB: This is an article from Hotel Financial Coach
Further to that you can even see what you need to do in most cases to correct the results! It’s what I call super revealing. And, the best point is you don’t need anyone’s help to do it because I’m going to give you the list!
Checking performance is a step-by-step exercise and we start at the most vital points. Failure to do this analysis is a costly error. By being diligent we can identify the areas that are affecting our financial health and that’s the first step in fixing the problem.
In this example the flow is measured to the same time period, year-to-date this year to year-to-date last year.
1: Overall flow thru. How much has the revenue increased or decreased compared to the prior year and how much has the profit increased or decreased? The rule of thumb here is 50%. Below 50% positive we have missed an opportunity to keep profits. Greater than -50% negative and we have not done an acceptable job mitigating costs when revenues have decreased.
2: Rooms flow. We expect to see 75% when revenues are up, even more if the increase comes largely from rate. Negative flow on reduced revenues will be low because of the highly profitable nature of rooms. But do expect and measure the amount of negative flow and target at least 25%.
3: Flow resulting from rate movement. Here is where we start to get more sophisticated. We need to calculate the effect of the rate movement relative to the number of rooms sold. Rooms sold this time period multiplied by the difference in rate to the last period. Then compare that number to the variance in rooms profit for the same period. If the variance between the impact of the rate and rooms profit is significant then you have a big hole in your profit that needs stitching up. Pay and expense are less affected by the rate movement—except for commissions. Rightfully so because when the rate goes up all boats float. Nothing has a greater positive impact on hotel profit than rate gain. Adversely, nothing is more devastating to profit than falling rates.
4: Flow resulting from occupancy. Same analysis we use for the rate but this time we multiply the difference in the number of rooms sold compared to last year times the average rate this year. Second only to the rate analysis we can lose considerable power if we are not capitalizing on the positive effects of the increased revenues due to occupancy. When our occupancy is backwards to the prior period, we likewise need to understand the amount and the effect. Expenses and payroll are much greater affected by swings in occupancy.
5: F&B flow thru. This is usually the biggest overall property drain on flow when revenues are up and to some extent it can play the biggest hero role when sales are backwards to the prior period. Let me explain. When revenues are up, we hope that the flow is 50% to profit. Why? Because of the cost of sales and the “larger than rooms” component of F&B payroll. When the revenues are down, the opposite is experienced, and we hope for a -50% or lower result. Remember the lower the negative number the better.
6: Food or beverage sales? Simply stated I believe 19 times out of 20 (you can argue this one if you like) that food and beverage outlets are less profitable than beverage-only outlets because the beverage-only outlet does not have a kitchen, they are only making drinks. Analyzing the mix of business is critical in a full-service hotel; outlets vs. banquets and food vs. beverage and liquor vs. beer, vs. wine must all be done in order to understand the actual results vs. the prior period result.
7: Banquets or outlets? The engine that drives profitability in most hotels is banquets. Have a great month in banquets and things in F&B just work. Have a slow month in banquets and you may as well put the whole F&B team in jail. Outlets typically do not make any money. This rears its ugly head when we don’t have banquet business.
8: Meal period mix. Depending on the kind of operation we can see different results based on the sales from breakfast vs. lunch vs. dinner. Also, the relationship between outlets vs. banquets plays out here as well. Which meal period is most profitable in banquets? Is it the dinner with five courses and wines or breakfast? Perhaps it’s coffee breaks? In F&B we have in some instances tremendous costs associated with certain types of business. Gala dinners can be expensive events to pay for as well as produce. Breakfast for 600 in banquets can be extremely efficient. Coffee by the gallon just might be the most profitable thing we sell. Understanding the volume and the contribution margin in all of this is what’s critical to measuring flow thru.
9: Flow that is affected by the average food customer cover. This is the sweet spot for F&B and the reverse can be devastating. In some big hotels we can service 100,000 covers a month and even more. A dollar up or down on the average cover has a significant impact on the profit picture. The same way we measure the effects from room rate we can measure the impact on the average customer cover.
10: The effects of the fluctuation in the number of food customer covers served. Measuring this is the same as what we need to do with occupancy in rooms. It will tell us the impact that volume has had on our revenues. As many costs in F&B are more variable than rooms, it is one to watch closely. A drop in covers should result in savings so long as the drop is in banquets or resulting from an outlet or meal period opening or closing. If the volume drop is incremental on the same outlet schedule this spells disaster. If the opposite is true, we stand to gain profitability.
11: Beverage sales mix. F&B is a complicated child, especially compared to rooms. In F&B not only do we have outlets vs. banquets and competing meal periods to analyze, we have completely different cost of sales and contribution margin profiles in liquor, beer and wine. Take one month where our mix swings from 40% liquor and 20% wine to a month where we sell 40% wine and 20% liquor, and your results are toast.
12: Other F&B income. F&B also has a wild side. Other income! Tasty little things like audio visual commissions, gratuities, rentals, pass thrus and labor charges just to name a few. Understanding the make-up and the variance to the period you are comparing it to is essential. Depending on your hotel’s F&B it usually has by far the most revenue and profit variables to analyze. Understanding these and what makes them tick is the trick you need to master and maximize profitability.
13: Minor operating departments. Depending upon the variety and size of these operations we need to pinpoint one by one the variance in revenues and profits. Zeroing in on the performance here is useful because many times a big part of the game can be won or lost here. Don’t overlook what might appear to be the small stuff. Negative results from miscellaneous departments add up. Like the saying goes, look after the pennies and the dollars look after themselves.
14: Sundry income. Here is where the flow thru impact is amplified. A dollar of revenue here is almost always also a dollar of profit. That translates into 100% flow thru. It can be like a P&L explosion that produces amazing results one way or the other. I have seen many GOP flow thru comparisons that have been seriously affected one way or the other from such events as attrition or foreign exchange. Normally when we see overall flow thru at greater than 100% it’s because of the impact from a sundry income event.
15: Administration and General. What is the effect of the movement in salaries + wages and expenses in this overhead department? In a normal hotel A&G expenses s/b no greater than 6 or 7 percent. Better still if they are lower. Lower the better – right? We want to measure the variance in overall A&G costs and determine how many points of GOP they represent. This is where we can see the “drag” that our overheads can produce. In this example revenues are up year over year (YoY) by $250,000 and A&G expenses are up by $50,000. That translates into a loss of 20 points of flow. Too many moves like that and patient is dead. A simple adjustment in the credit card commission calculation, bonus payments, legal fees or relocation costs can quickly spell disaster.
16: Sales and Marketing. Just like A&G above. What we do here, and the timing, can have a profound effect on our flow thru. Items like media spend, quarterly bonuses, loyalty point adjustments and head office invoices can wreak havoc on the flow thru. The trick here is having a DOS that’s on top of their spend and timing.
17: Maintenance aka “POMEC” & Energy. The same as their brother and sister above: The game can be lost quickly if we have a building repair hit or a large HVAC cost. Bad accruals on the energy side catch up the following month and can deal a critical blow. Spending here when the house is slow makes sense but watch out for the impact. Being creative with the plan is what’s required.All three overhead departments essentially act the same. They almost always cost more than the prior period and they tend to spoil the GOP flow thru party. Keeping a very close eye on these potentially delinquent individuals is paramount to a successful flow.
18: Supplemental payroll. These are items like sick pay, bonus, vacation pay, and holiday pay. Watch out here for adjustment and make sure the matching principle is alive and working well. A surprise here in an otherwise solid month is a mistake you want and can avoid.
19: Benefits. Alas, the icing on the payroll cake. Benefits are either a direct function of payroll dollars like employment insurance or government pension or they are pay-as-you-go programs like workers compensation and medical plans. Either way these are big bucks and they are amplified by payroll spend and they are also susceptible to one-time adjustments that can kill your profit picture. Stay on top of your accruals and timing to avoid these unsightly events ruining your flow. Managing the balance sheet as well as the P&L is a must.
21: Rooms Productivity. This is perhaps the most useful tool in the whole story when coupled with the same discipline in F&B. We know payroll accounts for on average 50% of every dollar of revenue. Without a productivity measurement you are stuck with the resulting dollars and no indication as to whether your operations team carried their weight or sunk your ship. Creating this tool and using it in your financials is what the pros do.
22: F&B Productivity. The last point on our checklist. In a full-service hotel, it’s the biggest artery. Like rooms productivity, without having this measurement you are flying without radar and by the way it’s always cloudy.
To wrap this one up
It might seem like the amount of detail here is overwhelming. Perhaps, but consider this. All the information you need to do this analysis is available and you already have most of it at your fingertips. What you are missing is relatively easy to add and the value you will gain in the ability to manage your hotel is immense. Go big or stay home!
