GOP Variance and Flow-Through: The Owner's Representative Has It Backwards
A 300-room hotel's monthly ownership package compares budget to actual. Budget: rooms revenue $2,900,000, F&B revenue $1,700,000, rooms departmental expense 25% of rooms revenue, F&B departmental expense 70% of F&B revenue, undistributed operating expenses $1,400,000. Actual: rooms revenue $2,650,000, F&B revenue $1,550,000, rooms departmental expense $683,700, F&B departmental expense $1,103,600, undistributed operating expenses $1,415,000. The owner's representative says the team "managed costs well" because GOP missed by less than revenue missed. The GM disagrees and asks for a variance analysis that separates volume effects from cost-control effects.
1. Compute budgeted and actual GOP, GOP margin, and flow-through. Interpret the flow-through.
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Budget
- Rooms departmental profit: $2,900,000 × 75% = $2,175,000
- F&B departmental profit: $1,700,000 × 30% = $510,000
- Total departmental profit: $2,685,000
- GOP: $2,685,000 − $1,400,000 = $1,285,000 → 27.9% of $4,600,000
Actual
- Rooms: $2,650,000 − $683,700 = $1,966,300
- F&B: $1,550,000 − $1,103,600 = $446,400
- Total departmental profit: $2,412,700
- GOP: $2,412,700 − $1,415,000 = $997,700 → 23.8% of $4,200,000
Variances
- Revenue: −$400,000 (−8.7%)
- GOP: −$287,300 (−22.4%)
- Flow-through: $287,300 ÷ $400,000 = 71.8%
Only 28 cents of every lost revenue dollar was offset by cost reduction; 72 cents fell straight to GOP. On a revenue decline, high flow-through is a red flag, not a compliment - it means the cost base did not flex.
2. Decompose the GOP variance into a volume effect and a cost-control effect. Is the owner's representative right?
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What volume alone should have cost
- Rooms revenue −$250,000 at a 75% contribution (25% variable cost) = −$187,500
- F&B revenue −$150,000 at a 30% contribution = −$45,000
- Expected GOP decline from volume: −$232,500
Actual decline: −$287,300 → $54,800 of unexplained cost slippage.
Bridge the $54,800:
- Rooms expense ratio 25.8% actual vs 25.0% budget → 0.8% × $2,650,000 = $21,200 unfavorable
- F&B expense ratio 71.2% vs 70.0% → 1.2% × $1,550,000 = $18,600 unfavorable
- Undistributed $1,415,000 vs $1,400,000 = $15,000 unfavorable
- Total = $54,800 ✓
The representative is wrong. GOP is only ~28% of revenue, so any revenue miss will always look "smaller" when expressed in GOP dollars. Flow-through strips out that scale effect and shows the team gave back 72 cents on the dollar. The only favorable item in the package is that departmental profit still flexed at roughly the structural rates; the overrun sits above and below that line.
3. What does 71.8% flow-through imply about the cost structure, and how should the reforecast be handled so the slippage is not buried?
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What it implies The cost base behaved as though revenue had not fallen. Costs that should have flexed did not: rooms payroll scheduled to occupancy, F&B labor and product cost not re-cut after the group mix shifted, and overhead nobody reforecast.
Reforecast discipline
- Flex the budget for the volume shortfall at the structural rates (75% rooms, 30% F&B). That part is legitimate.
- Do NOT re-baseline the cost ratios without a documented, one-time cause. Re-basing buries $54,800 of slippage in the new budget and next year inherits it as the standard.
- Assign named owners and monthly targets: rooms cost ratio ≤25.3%, F&B ≤70.5%, undistributed at or under $1,400,000.
- Test the specific drivers rather than the ratios: hours per occupied room, F&B covers versus labor hours, utility spend, and credit-card commissions (which scale with ADR, not occupancy - a rate-driven revenue mix change will lift this line for reasons unrelated to cost control).