Like virtually any type of business, hotels and resorts are ultimately about creating a profit for business owners and stakeholders. But as many managers undoubtedly know, earning revenue is not the same as achieving a profit. First, there come bills, taxes, employee wages, and more expenses that hotels need to pay off before even thinking about any financial gains.
Yet whether running a major global brand or boutique hotel, profitability is perhaps the best indicator of hotel business health. It’s what allows hoteliers to determine if business growth is on track with organizational goals, and it’s also crucial to understanding what resources are available for making improvements to amenities and services.
So how do the industry’s hotel professionals keep tabs on their level of profitability and make it a central part of their revenue management strategy? The answer lies in understanding and leveraging a process known as the hotel flow through.
What is Flow Through in the Hotel Industry?
Flow through ultimately is what is used to identify what amount of revenue is left once all of a property’s financial obligations have been met. It importantly brings together all of a hotel’s profit performance from each revenue-generating department and allows an organization’s teams to identify any incremental growth or lack thereof.
A key benefit of performing a flow-through analysis is that it also provides hoteliers with the ability to compare performance predictions with actual results. Hotel revenue professionals often utilize flow through to see if they are on track with profitability targets, if they’re exceeding projections or if underperforming, why, and where in order to make adjustments.
How to Calculate Hotel Flow Through
To calculate the flow of their business, hoteliers begin by examining the difference in profit which is divided by the difference in revenue. Yet the key purpose of performing a flow-through analysis is to benchmark performance by comparing current results to those obtained during previous reporting periods.
This gives us the below formula to use when attempting to determine flow-through growth:
Flow through= (current period revenue – previous period revenue) / (current period operating profit – previous period operating profit)
The first step is to subtract current revenue from the revenue obtained during the previous reporting period being utilized as a benchmark. The same is done with profit, where current operating profit results are subtracted from the previous period’s profit numbers.
For the final step, hospitality industry professionals next divide the sum obtained for revenue by the sum obtained for profit in order to identify what their flow through is. This analysis can be performed for various individual departments or for a property/hotel brand as a whole, allowing hoteliers to gain either a granular or comprehensive overview of business growth.
How to Calculate Period Revenue
Before diving into performing a flow-through analysis, hoteliers first need to identify what their revenue results are both currently and for the previous period being used as a benchmark. This consists of adding up all relevant revenue-generating sources. If performing a property-wide review, this means not just including guestroom booking sales, but also others such as F&B.
When calculating revenue for guestrooms, hoteliers can leverage the Average Daily Rate (ADR) and multiply it by the number of rooms sold in order to determine how much revenue they received for the department. The formula used for this analysis is as follows:
Total room revenue= number of sold rooms x Average Daily Rate
How to Calculate Period Operating Profit
Calculating a hotel’s profit is a fairly straightforward process, which involves simply subtracting any and all relevant expenses from any revenue stream(s) under review.
If performing a property-wide analysis, hoteliers would need to include all revenues and subtract all costs, whether they operating or non-operating costs. Operating costs include any expenses required to provide a service, such as housekeeping for guestrooms or inventory restocking for F&B offerings.
If only seeking to identify profits for a specific department, hoteliers need only consider the revenue and expenses that are relevant for that specific operational area. Once equipped with the appropriate revenue and cost figures, hoteliers need only subtract expenses from revenue to identify their level of profitability for the period under review.
The same above-mentioned processes can be used whether seeking to identify current profit results or if aiming to determine profitability for previous periods.
Hotel Flow Through Calculation Examples
Using Marriott International’s revenue results for 2021 and 2020, we can see that the hotel brand earned $13.857 billion in revenue for 2021 while its performance in 2020 was $10.571 billion.
Looking at Marriott’s profits for the same time period, the brand was able to achieve an annual gross profit of $2.801 billion in 2021 and $1.459 billion in 2020. Using these numbers, we can determine incremental bottom-line profitability growth by utilizing the flow-through formula:
Flow through= (2021 revenue: $13.857 billion – 2020 revenue: $10.571 billion) / (2021 profit: 2.801 billion – 1.459 billion)
Once the calculation within the parenthesis has been performed, this leaves us with:
Flow through= $3.286 billion revenue / 1.342 billion profit
The end result is $2.45 billion, which is ultimately the incremental profit that Marriott International was able to add to its bottom line when benchmarked against the results achieved during the previous year.
Intercontinental Hotels Group
We can likewise perform a similar analysis for Intercontinental Hotels Group (IHG) by analyzing the brand’s performance for 2021 and 2020.
With regards to revenue, IHG received $2.907 billion in 2021 while it received $2.394 billion in 2020.
For gross profit, it received $2.421 billion in 2021 and $2.04 billion in 2020. Together, this provides us with the necessary financial data to perform the below flow-through analysis:
Flow through= (2021 revenue: $2.907 billion – 2020 revenue: $2.394 billion) / (2021 profit: $2.421 billion – 2020 profit: $2.04 billion).
Once the arithmetic has been performed, we can see that IHG was able to obtain $1.35 billion in incremental profitability growth in the space of a year.
For Hilton Worldwide, 2021 saw the renowned hotel brand earn $5.788 billion in revenue while 2020 resulted in receiving $4.307 billion.
Profitability-wise, Hilton earned $5.109 billion in 2021 and $3.687 billion in 2020. This provides us with the following flow-through formula:
Flow through= (2021 revenue: $5.788 billion – 2020 revenue: $4.307 billion) / (2021 profit: $5.109 billion – 2020 profit: $3.687 billion)
The final result indicates that Hilton Worldwide was able to obtain $1.04 billion in incremental profitability growth in 2021 when compared to 2020 results.
How to Include it in Your Hotel Financial Statement
With flow through serving as a comparison and to identify trends in profitability, it is typically included in financial statements that are making a year-over-year review of performance. Flow through can also be utilized to make comparisons on a monthly, weekly, or even daily basis when relevant to business needs.
Another way that flows through is used is to make comparisons between what was budgeted and the actual results achieved. This importantly allows hoteliers to determine if they are on track with their revenue management goals, if they are exceeding them, or if they are underperforming in any areas which require a shift in strategy.
What is the Normal Flow Through for a Hotel?
While achieving optimal flow-through performance may vary depending on a hotel’s own revenue management goals, hospitality professionals can look to overall industry performance which can serve as a valuable guide and benchmark.
For hotel operations as a whole, the industry typically experiences an average incremental profitability growth of 35 to 60 percent. When just analyzing guestroom profitability growth, the industry averages around 60 to 75 percent, while F&B operations alone typically experience 35 to 50 percent growth.
How to Keep it at a Desirable Level
When it comes to increasing a hotel’s incremental profitability, implementing an effective upselling strategy is by far the best method for giving sales numbers a substantial boost. This is especially the case when leveraging AI-based upselling solutions that can personalize offerings according to individual interests and which can target guests at the best time to make a sale.
With guestrooms, for example, a modern upselling platform can automatically determine if a guest has a history of purchasing experience upgrades, and can share details on available room upgrade promotions prior to arrival and while travel itineraries are still being planned.
This not only increases the likelihood of a sale but also avoids guests from becoming frustrated when they arrive, with sales pitches typically being the last thing they wish to hear after a long and tiring journey.
Adopting an automated upselling solution doesn’t just work to increase guestroom booking sales, but can also be leveraged to increase incremental profitability growth for virtually any offer that a hotel makes available. Examples can include upselling a property’s spa services, meal packages, tour guides, amenity rentals, and more.
Maína is the Head of Business Development Americas at UpStay. She graduated in Hotel Management and in German language and completed an MBA in Digital Marketing and E-commerce. She is a professional from the hospitality industry with experience as Distribution Director of a Brazilian group of 30 hotels and the Americas Director of an international Sales & Marketing representation company.
Maína considers herself an excellent communicator. She is a native speaker of Portuguese and speaks 4 other languages: English, Spanish, French, and German.