# Tag Archives: Flex

## Maximizing House Profit using Flex/Flow Calculations Part 5: Final Considerations.

This is the last post in the series and I wanted to discuss some items that should be considered when reviewing flex/flow numbers.  Each period is unique and should be evaluated that way.  It is impossible to discuss all of the different issues that can skew flex/flow numbers from month to month, but I am going to discuss a couple situations below that will be helpful in analyzing flex/flow calculations.

How did we get the extra revenues?

This is one of the most critical situations to consider when reviewing flex/flow numbers.  As discussed in part one, there are a lot of expenses that are budgeted and measured based on per occupied room (POR).  However, flex/flow measures the dollars from the revenue variance to the house profit variance.  So what would happen if the property exceeded revenues for the month but sold fewer rooms than budgeted?  Well if you consider that your POR costs should have been lower due to fewer rooms sold, the additional revenue had to come from either ADR or another revenue department, so your flow through percentage should actually be higher than your goal.  The opposite is also true if you exceeded revenues by selling more rooms than budgeted while the ADR was less.  The rooms sold will cause the POR costs to increase but the lack of ADR will hurt the flow through percentage because you got less revenue per room sold.  The same should be considered when you fall short of revenues as well.  There are numerous scenarios on this, but the point is that you should consider how you got the revenue variance to determine if the goal should have made and if the goal should have been higher.

Approach the small variances with caution.

This was purposely shown in example #2 for parts 3 and 4 of this series.  You will see that the smaller the revenue variances, the more likely you are to get an outrageous number in the flex/flow calculation.   If I told you that your property just flowed -500% for the month and nothing else; what would your reaction be?  I am guessing it wouldn’t be “great job and keep up the good work” but should it be?  What if upon further review of the statement you found that the revenues were over \$200 and every other line item equaled budget, but you had a \$1,000 extraordinary expense and that alone caused the house profit to be under \$1,000 and the flow through to be -500%.  I think you would agree that this is not as bad as the initial -500% flow number would lead you to believe.  In my experience working with flex flow numbers, my general rule is the smaller the revenue variance the less effective the calculation.  Therefore it should not be taken literally without some further investigation.

In closing, I hope this series gave you another tool to manage your property.  As stated in part #1, the goal with flex/flow calculations is to measure the efficiency between additional revenues and bottom line profit.  Thanks for reading the series and stay tuned for posts in the future that will range widely on operational hotel topics.  If I can assist in any way, feel free to contact me directly at jshelton@springwood.net

Hospitably Yours,

Justin

Flex/Flow Calculations Poll #1

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Flex/Flow Calculations Poll #2

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## 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

## Maximizing House Profit using Flex/Flow Calculations Part 3: How to calculate Flow performance.

At this point, it is fair to say that you know the difference between Flex and Flow and you have an idea where your goal should be for each.  If not, please review Part 1 and 2 of this series.  With that knowledge and understanding under our belt we are ready to discuss the calculations.  First, I am going to give you the formulas and then I am going to play out 3 different flow scenarios with some brief explanations of each.

To calculate what your house profit target (HPT) should be based on your flow goal is really simple.  Multiply the revenue variance (RV) by the goal percentage (GOAL%) to get the house profit target (HPT).

RV  x  GOAL%  =  HPT

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 flow % 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).  Positive numbers for the house profit goal variance are great and negative numbers are never good.

HPV  –  HPT  =  HPGV

To calculate your actual flow, just divide your house profit variance (HPV) by your revenue variance (RV) and that equals the flow percentage (FLOW%).  This gives you your actual flow through percentage.

HPV ÷ RV = FLOW%

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

Example #1:  This is a basic flow calculation.

 Actual Revenue Budgeted Revenue Revenue Variance \$300,000 \$280,000 \$20,000 Actual House Profit Budgeted House Profit House Profit Variance \$150,000 \$140,000 \$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 short of our target.

Step #3 is to determine our actual flow percentage.  We just divide the house profit variance by the revenue variance to get the number.  For this scenario it would be \$10,000 ÷ \$20,000 = 50% Flow.  The 50% flow is less 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, paying particular attention to variable expenses to determine if the property could have saved the \$4,000.  There could be a fixed cost overage or something unexpected that caused this as well, but the goal is to focus more on what can be controlled.

Example #2:  This is a flow calculation with a huge flow percentage.  The best of the best sometime question themselves when they get some of these numbers.  The question usually sounds something like this, “it that even possible?” and the short answer is yes.

 Actual Revenue Budgeted Revenue Revenue Variance \$280,200 \$280,000 \$200 Actual House Profit Budgeted House Profit House Profit Variance \$150,000 \$140,000 \$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 far exceeded the flow percentage goal, but by how much?  Let’s see…

Step #3 is \$10,000 ÷ \$200 giving you a flow percentage of 5000%.  I know what you’re thinking, “Is that even possible?”  It is calculated just like example #1 using difference numbers and it is correct and therefore possible.

Step #4 would investigate the cause for the huge house profit goal variance with so little additional revenue.  This is obviously an extreme case, but you are probably looking for a large item that was budgeted but wasn’t used.  Maybe an electric bill or franchise bill was missed.  It is import to know why there is such a huge shortage because chances are pretty good that the expense has hit in a previous month or will be hitting at a later date which will give you a financial statement equally as bad.

Example #3:  This is a really bad financial statement showing a negative flow percentage.

 Actual Revenue Budgeted Revenue Revenue Variance \$285,000 \$280,000 \$5,000 Actual House Profit Budgeted House Profit House Profit Variance \$136,000 \$140,000 (\$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.  Some of my mathematically challenged colleagues look at the numbers and in their head come up with (\$500) because the difference between \$4,000 and \$3,500 is \$500 but that would not be correct.  Our equation is (\$4,000) – \$3,500. Not to get too far into math class, but because the \$4,000 in this case is negative and you are subtracting a positive number you actually get (\$7,500) as the house profit goal variance.  Example #2 was really good, now this one is really bad.

Step #3 is to find out your true flow percentage and given what we know from Step #2 it isn’t going to be pretty.  (4,000) ÷ 5000 gives us a flow of -80%.  That is negative 80% flow through because you spent \$7,500 more than your goal.

Step #4 is always to find inefficiencies or efficiencies in the financial statement.  Although the property missed house profit by \$4,000, the house profit goal variance was negative \$7,500 and we should be looking for that amount of expense variances because of the additional revenues generated.  This is the opposite situation from Example #2 because you are looking for double posted bills and things of that nature.  Don’t forget to focus on the variable expenses even if you find a double posted bill or something of that nature.

As you can imagine there are literally trillions of flow situations that can happen, but the formulas are the same no matter the numbers.  I would encourage you to grab a financial statement or two or ten and run these formulas to see how you did.  Are there some inefficiencies that can be improved to meet the goal set in Part 2?

In Part 4 we are going to discuss the scenarios where you fell short of budgeted revenues.  The flex formula is a little different and gets more complicated, but like flow the formulas do not change only the numbers going into it.

Hospitably Yours,

Justin

## Maximizing House Profit using Flex/Flow Calculations Part 2: How much should “Flow” to the bottom line?

The answer to this question can be as simple or complicated as you wish to make it, but you will want to set a goal you find acceptable based on the parameters discussed in this post.  Please keep in mind that I am speaking in generalities and there are certainly a number of ways to get a final answer.

Where do I start?

Start with a full year financial statement in hand and you will want to identify every line item to determine if it is a variable or fixed cost.  The fixed costs would be the items that do not fluctuate based on the number of rooms sold for a given period.  Some examples of these costs would be associates that are on salary, cable or satellite service, billboard advertising, and other items of that nature. When going through this process you are going to have to make some decisions. For example, maintenance expenses; some of these can be either fixed or variable.  My belief is that each room and piece of equipment should be kept on a set preventative maintenance schedule regardless of occupancy, which results in accounting for most of the maintenance expenses, including most wages, as fixed expenses.  The other train of thought is that if your occupancy is down you can cut your maintenance expenses because your rooms and equipment isn’t getting as much use so it will not need it.  In this case, some of those expenses would be considered variable.  This is but one example you will need to consider when going through this process.  How you account for these items is completely up to you and how your properties are run.

I have determined what is fixed and variable, now what?

Don’t go throwing those numbers around just yet; in Part 3, I will discuss how to calculate flow to improve performance.

Hospitably Yours,

Justin

## Maximizing House Profit using Flex/Flow Calculations Part 1: What is Flex/Flow?

It is surprising how many hotel managers, operators, and owners do not have an understanding or an appreciation for flex/flow calculations.  The flex and flow percentages are a measure of efficiency when managing revenue shortages or overages through the financial statement to the house profit line.  While I certainly remember what it was like to just be happy to exceed bottom line; I have seen the light when it comes to maximizing it using these calculations as a guide.  If you were over \$15,000 in revenues and only \$1000 on the house profit line, would you be happy?  If so, you should keep reading this series and you’ll see why you shouldn’t be satisfied so easily.  Technically speaking these flex/flow numbers and goals will vary from hotel to hotel based on their variable costs.  In this series, I will give you an understanding of flex/flow, how to determine goals for each, and how to calculate it based on your goals.

What is the difference between Flex and Flow?

Determining if the property is in a flex or flow situation is very easy.  Just look at the revenue variance for the given period and use that as your point.  If the property is over budget they are in a flow situation and therefore you are looking for how much you flowed through to the bottom line.  If the property finished less than budgeted revenues, they are in a flex situation and as a result you are looking to see how well they flexed or controlled their variable expenses.  I realize that some companies look at both situations as flow.  Personally, I like to make the distinction between each situation.  You will see in part 2 the goals are most likely different for each situation and it makes it a little easier to grasp when they are each separated.

Why is Flex/Flow important?

We have to face the reality that some expenses are fixed and some are variable.  The majority of the rooms’ department expenses should be based on Per Occupied Room (POR).  This means that if you rent more rooms than budgeted you will have more POR cost and conversely if you rent less rooms you should have less cost.  An easy illustration of how this works is bath soap, assuming the property has it in every room.  If the property doesn’t rent the room tonight, the soap will still be there tomorrow.  As a result we can conclude there is no cost for soap in that room for the day because you don’t have to replace it.  If you had sold that room, you would have to replace it and costs would be associated with that.  Another example is room attendant wages, continental breakfast, and the list goes on and on.  This is the theory behind POR costs.  The more rooms you sell the more of those expenses you are going to have.  We all instinctively know this, yet some fail to measure it.  The flex/flow calculations give you a way to measure that efficiency.

In Part 2, I will give you some ideas on how to establish a flex/flow goal.

Hospitably Yours,

Justin