Flow-through is not only a 'measurement of performance' but a tool that can be used to excel the performance in coming months....
The performance of any business unit can be measured by using 'Flow-through' technique by comparing with any pervious period or even budget. The actual performance can be varied, sometime Revenue and Profit both are better and sometimes not, even in few instances revenue compared to any specific period may be lower but business unit enjoyed higher profits. A very unique situation, it need to be reviewed carefully because it can turn out something different and can indicate that - everything that shines is not gold....
Now 'Flow-through' will not give a review of performance but indicates how serious the issue is. So it is a quick test to ascertain the gravity of situation and then the detailed review and dissection of cost & expenses explained it. So user need to prepare a quick 'flow -through' calculation, and then prepare comments - why the performance below or not reaching desired results.
Let's take example of a standard hotel where the owners wants to understand the performance of year compared with last year. He need to know how best the team is performing and taking care of his business whom he trusted? Now, there can be only four situations,
Revenue UP and Profit UP
Revenue UP and Profit DOWN
Revenue DOWN and Profit DOWN
Revenue DOWN and Profit UP
and for each situation, the calculation method is different. We have 70% growth in profitability if revenues up as a thumb rule and in case the business declines then Flow-through is calculated in negative , which is called 'recovery' and these percentage explain the Cost & expenses recovery in the adverse situation. the percentage of 'recovery' should be below -50% to ascertain that at least 50% of cost & expenses are recovered by efficiency of team and if it is over -50% then it need to be explained.
"Thumb rule of Flow-through is 70% if business is growing however if there is loss in revenue with adverse business situation then Flow-through shows a negative value, and is called 'recovery'. this signifies recovery of cost & expenses."
If we are not making best of any given circumstance then flow-through percentage goes down and this need to be explained by Managers to Owners/Investors - how team is managing cost & expenses. Why flow through is not showing a growth of 70%, what is extra cost or activity which has dented the growth of profit.
and if the business is growing where the flow-through shows a flat or no growth, it indicates that team is working for nothing. Let's say for example for Year 1 Revenue was $100,000 and next year 2 revenue grow to $120,000. Profit for business unit was $60,000 during Year 1 and next year 2 it is $62,000 is not an idle situation. because the growth in revenue $20,000 has given only $2,000 growth in profit which means followthrough is only 10% is not close to 'standard thumb rule' of 70%. Here, Manager need to explain to Owners the loss in growth. Now this additional revenue of $20,000 may be generated because of additional activity or having new outlet but the cost for having additional outlet is soo high that the profit increase is marginal and thus it need to be reviewed in detail , what need to be done to increase the flow-through percentage.
This make 'Flow-through' calculation a unique tool not only for Owners or Investors but for the Managers and even the team who is responsible to run business efficiently.
We all need to understand 'HOW MUCH BETTER IS BUSINESS UNIT HAS PERFORMED? If the market is having a steep growth and the profits not keeping the pace then something need to be done because surely there is a leak. and every Manager or Owner need to know what is the 'leak' and fix it because if these leaks are not traced and corrected in time then it can impact profitability of business unit beyond recovery.
Most of time, we hear that Managers during meetings or presentation mention that they are doing better than last year or budget but ....
Just by saying that we are doing better than last year or better than budget is not enough. We are living in a most competitive world and thus 'better' is not a good word in corporate world. This 'better' word need to be explained, the flow-though percentage to be explained, even the reason of better performance to be explained
Is calculating 'Flow-through' need any specific skill?
“Calculating Flow through does need a basic mathematical skill which almost every owner or Manager possess. The important part is how to make a stunning review for everyone.”
Create Relevant Content
Once the flow-through is calculated then the task is to prepare the comments explaining 1) the performance under review period which can be a one full year, month, quarter or many be fixed days e.g., New Year Event etc.
2) the achievement percentage whether it is 20% or 70%, the difference in the achievement percentage need to be explained by building the 'cost blocks' in line with last year or budget. These 'cost blocks' can be further dissected to ascertain the relevance of those cost in running business. Can these costs be replaced, substituted or may be eliminated to give extra push to bottom line. 3) higher the percentage = better the performance whereas if there is a loss in revenue or profit then the 'cost & expenses recovery' is measured in negative. This negative percentage can be reduced only if we reduce the 'fixed' component of cost. so, if any business unit is having a Generally below -50% is considered better recovery because it shows how much cost & expenses recovered in adverse situation and thus the impact of loss is minimal.
Get Started.... to stun your associates...
“Be original, show off your methodology, and tell everyone how well the business unit performed.”
Also, the review need to be more calculative, differences explained with 'cost blocks', fixed & variable component of cost to be ascertained with relevance and conclusion done.
Now the time is to start crafting your own flow-through calculation, adding your comments and suggestions to improve it in coming months or period. Good luck!
Nice article