What is Rev-GOP conversion?
Rev-GOP conversion is a measure of whether the costs are under control.
Your conversion or flow-thru goal is the expected GOP if all revenue variances flow into profit at the expected level. It indicates whether any extra sales are flowing efficiently into profits or whether costs increase too much.
For example, if revenues are $50,000 higher this month than forecasted, how much of the $50,000 should make it through to the profit line? How much will flow? Monitoring this provides a simple overview of cost efficiency – are costs increasing too much when additional revenue is made?
The measure has most value when checked after month end, once the final level of costs is known.
What does the Rev-GOP conversion show?
- The Gross oper. profit line is the Live forecast GOP for the end of the month. For past months it shows actual GOP.
- The conversion goal is the expected GOP if all revenue variances flow into profit at the expected level as set in settings.
- The last line minuses the conversion goal (target GOP) from your Live forecast GOP (expected GOP) to indicate whether you are on pace, near pace or behind pace compared to the conversion goal. In the example below, their GOP is expected to exceed their conversion goal by 11.7K.
How does it work?
The conversion calculation starts from the last approved forecast or budget. During the month revenue as tracked in Live forecast gradually deviates from the forecast. This measure tracks whether any improvement in revenue is having the expected effect on GOP, or, if Live forecast is lower than forecast, whether GOP has gone down by the expected amount. So it is a measure of whether the costs are under control. If Revenue is up and the conversion is negative then the extra business in not profitable enough, or lots of extra costs have been incurred.
For this to work well it is important that the settings accurately reflect the marginal profit expected from sales at that volume level. Because it is only looking at the small variations from the forecast the fixed business costs should already be covered. It is only the variable costs relating to that revenue that should be in the measure.
How to set a conversion goal?
To set the conversion goal you need to look at the main revenue streams and consider what level of direct/variable costs arise from a change in revenue for each. Room revenue is split further between changes in ARR and changes in occupancy. For occupancy we set an actual amount for the expected costs of using the room.
Click on the settings icon in the top right corner to view the targets. Conversion targets are set at chain level. It is possible to adjust these for individual property, but we recommend using the chain standards for consistency. The chain settings should be static. Contingent on group policies, these can be reviewed every few years typically by the head office.
See below for a detailed description of each target setting:
ARR% flow to GOP: When average room rate is higher than forecast, what percentage of that additional revenue should flow through to GOP? There may be some additional costs due to increased room rate, for example, increased third-party commissions, credit card commissions, centralized fees, and management fees. The rest of the additional revenue should flow directly through to GOP.
Occ cost of delivery: For each additional occupied room over forecast, how much extra do you expect to spend on that room? This can include housekeeping labor hours, electricity, linens, cleaning equipment etc. This value is input as a monetary value in your local currency and is deducted from the ARR% flow value to make up the total expected effect of room revenue variances on profit.
Food & Beverage % flow to GOP: For additional F&B revenue, what percentage do we expect to reach the GOP? Take into consideration food purchases and staff needed to supply the additional covers.
Other revenue % flow to GOP: For all other additional revenue, what percentage do we expect to reach the GOP?