Maximizing House Profit using Flex/Flow Calculations Part 4: How to calculate Flex performance.

I realize that Part 3 was a lot to take in for calculating flow.  Unfortunately, it isn’t going to get any easier with the flex calculations in this article and it is actually going to get a little more complex.  As stated previously, a flex situation is when you have fallen short of budgeted revenues and you are looking to see how well the property controlled their variable expenses. 

Here are the “Flex” calculations:

There are two ways to calculate your house profit target (HPT) when you are in a flex situation.  The first way has you determining how much you should flex or save.  To do this you multiply the revenue variance (RV) by the Flex goal percentage (GOAL%) to get the flex savings goal (FSG).  Now subtract the flex savings goal (FSG) from the revenue variance (RV) to get the house profit target (HPT).

           RV  x  GOAL%  =  FSG

           RV  –   FSG         = HPT

The second way to calculate the house profit target (HPT) is by far the easiest but it assumes the flex and flow goals equal 100% when added together.  See part 2 of this series for the reasoning behind why this should be the case.  To calculate the house profit target (HPT) just multiple the revenue variance (RV) times the flow goal percentage (FG%).  You will come up with the same numbers either way you calculate it assuming the flex and flow goals equal 100% when added together.  This is the most common (and easiest) way to calculate the house profit target when in a flex situation so I will be using this calculation in the examples to follow.

            RV  x  FG%  =  HPT

As in the flow part of the series, the next thing I recommend is determine if the property met the house profit target.  This gives you the first indication on whether you made the flex % or not.  This is calculated by subtracting the house profit target (HPT) from the house profit variance (HPV) to get the house profit goal variance (HPGV).  Remember that positive numbers for the house profit goal variance are great and negative numbers are never good.

            HPV  –  HPT  =  HPGV

To calculate your actual flex, you will need to subtract the revenue variance (RV) from the house profit variance to get the actual flex savings (AFS), then divide that by the revenue variance as a positive number (RVP) to get the flex percentage (FLEX%).  This gives you your actual flex percentage.

            HPV  –  RV    =  AFS

            AFS  ÷  RVP  =  FLEX%

Now let look at some examples of how this process works.  I am using a flex goal of 30% (therefore flow goal is 70%) in the calculations below.

Example #1:  This is a basic flex calculation.

Actual Revenue

Budgeted Revenue

Revenue Variance

$280,000

$300,000

($20,000)

 

 

 

Actual House Profit

Budgeted House Profit

House Profit Variance

$140,000

$150,000

($10,000)

Step #1 is to determine the house profit target.  We should multiply the revenue variance by the flow goal.  In this example, that would be ($20,000) x 70% which equals ($14,000).  ($14,000) is our house profit target.

Step #2 is to determine if the property met the house profit target.  We just subtract the house profit target from the actual house profit variance.  For this situation it would be ($10,000) – ($14,000) = $4,000.  In essence we are $4,000 above our target which means we saved more than we expected and is the first indication that we met our flex goal.

Step #3 is to determine our actual flex percentage.  We just subtract the house profit variance from the revenue variance to get the actual flex savings, and then divide the actual flex savings by the revenue variance as a positive number.  For this scenario it would be ($10,000) – ($20,000) = 10,000, then 10,000 ÷ $20,000 = 50% Flex.  The 50% flex is more than our goal, but we already had that indication from step #2.

Step #4 is always to analyze the financial statement to find efficiencies and inefficiencies.  In this case it would be to analyze your financial statement to determine if all fixed costs showed up appropriately.  Pay particular attention to variable expenses to determine what the property did well in saving the $4,000 and try to replicate it in the future.

Example #2:  This is a flex calculation with a huge negative flex percentage.  This is another scenario where the best of the best sometime question themselves when they get some of these numbers.  It isn’t good, but it is accurate.

Actual Revenue

Budgeted Revenue

Revenue Variance

$279,800

$280,000

($200)

 

 

 

Actual House Profit

Budgeted House Profit

House Profit Variance

$140,000

$150,000

($10,000)

Step #1 is ($200) x 70% giving us a house profit target of ($140).

Step #2 is ($10,000) – ($140) giving us a house profit goal variance of ($9,860).  At this point you know the property fell far short of the flex goal and that this isn’t going to be pretty.   

Step #3 is ($10,000) – ($200) = ($9,800) then (9,800) ÷ $200 (use RVP) = -4900% flex percentage.  If you don’t use the revenue variance as a positive number you will get a positive 4900% which doesn’t tell the story on this one.  It is calculated just like example #1 using different numbers and it is correct at negative 4900%.

Step #4 would include investigating the cause for the huge house profit goal variance when being so close to budgeted revenues.  This is obviously an extreme case, but you are probably looking for a large item that was not budgeted.  It is important to know why there is such a huge variance and in this example that is probably fairly easy to pick out by just looking at the variances for each line item.  I’m betting something will stick out to you. 

Example #3:  This is a really good financial statement showing an outstanding flex percentage. 

Actual Revenue

Budgeted Revenue

Revenue Variance

$280,000

$285,000

($5,000)

 

 

 

Actual House Profit

Budgeted House Profit

House Profit Variance

$140,000

$136,000

$4,000

Step #1 is ($5,000) x 70% giving us a house profit target of ($3,500).

Step #2 is the same as it has been in previous scenarios, house profit variance minus house profit target.  Remember that you are subtracting a negative here so the equation is $4,000 – ($3,500) = $7,500.  Example #2 was really bad, now this one is really good.

Step #3 is to find out your flex percentage.  $4,000 – ($5,000) = $9,000, then $9,000 ÷ $5,000 gives us a 180% flex.  That is a remarkable number because you basically saved $9,000 from top line deficit to bottom line profit. 

Step #4 is always to find inefficiencies or efficiencies in the financial statement.  Although the property missed revenues by $5,000, they managed to exceeded house profit by $4,000.  In this one you would want to find the areas that were budgeted with no expense or other large savings to determine if the financial statement will get hit with some expenses at a later date.  Don’t forget to focus on the variable expenses even if you find a missed bill or something of that nature.

As you can see there are a couple different ways to determine flex, but as with flow, the formulas are the same even when the numbers change.  I encourage you to grab a financial statement where the property missed the top line revenue and run these calculations.  If the flex number looks off, just rerun the calculations and stick with it after that.

Now that we know how to calculate flow and flex performance, this series is winding down.  In the final posting, Part 5, I will discuss some final considerations that can sway your numbers and probably your opinion of the desired performance.

Hospitably Yours,

Justin

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Filed under Expense Control, Justin Shelton

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