EVALUATING FRONT OFFICE OPERATIONS
Evaluating
the result of front office operations is an important management function. Without thoroughly evaluating the results of
operations, managers will not know whether the front office is attaining
planned goals. Successful front office
managers evaluate the results of department activities on a daily, monthly,
quarterly, and yearly basis. The
following sections examine important tools that front office managers can use
to evaluate the success of front office operations. These tools include.
The daily operations report
Occupancy ratios
Rooms revenue analysis
The hotel income statement
The rooms schedule
Rooms division budget reports
Operating ratios
Ratio standards
THE DAILY OPERATIONS REPORT
The
daily operations report, also known as the manager’s report, the daily report,
and the daily revenue report, summarizes the hotel’s financial activities
during a 24 hour period. The daily
operations report provides a means of reconciling cash, bank accounts, revenue
and accounts receivable. The report also
serves as a posting reference for various accounting journals and provides
important data that must be input to link front and back office automated
functions. Daily operations reports are
uniquely structured to meet the needs of individual hotel properties.
Room
statistics and occupancy ratios from an entire section of a typically daily
operations report. Enriched by commends
and observations from the accounting staff, statistics shown on the daily
operations report may take on the more meaning.
For example, statistics about the number of guests using the hotel’s
valet parking services take on added significance when remarks indicate that
valet sales are down while occupancy is up.
The front office manager may assume that the front office is not
properly promoting available guest valet parking services.
The
information provided by the daily operations report is not restricted to the
front office manager or hotel general manager.
Copies of the daily operations report are generally distributed to all
department and division managers in the hotel.
OCCUPANCY RATIOS
Occupancy
ratios measures the success of the front office in selling the hotel’s primary
product: guestrooms. The following rooms
statistics must be gathered to calculated basic occupancy ratios:
Number of rooms available for sale
Number of rooms sold
Number of guests
Number of guests per room
Net rooms revenue
Generally, these data are presented on the daily operations
report. Occupancy ratios that can be
computed from these data include occupancy percentage, multiple (or double)
occupancy ratio, average daily rate, revenue per available room (Rev PAR),
revenue per available customer (Rev PAC), and average rate per guest. Computed occupancy percentage and average
daily rate may also appear on a property’s daily operations report. These ratios typically are calculated on a
daily, weekly, monthly, and yearly basis.
The
front office system typically generates occupied rooms data and calculates
occupancy ratios for the front office manager, who analyzes the information to
identify trends, patterns, or problems.
When analyzing the information, the front office manager must consider
how a particular condition may produce different effects on occupancy. For example, as multiple occupancy increases,
the average daily room rate may also increase.
This is because, when a room is sold to more than one person, the room
rate for two people in a room is usually not twice the rate for one person, the
average room rate per guest decreases.
The
following sections examine how daily occupancy ratios are calculated for the
Gregory Hotel. Rooms division data
needed for the calculations are as follows.
The Gregory Hotel has 120 rooms and a rack rate of $98. (for
simplicity, we will assume in this example that this rack rate is applicable to
both singles and doubles)
Eighty-three rooms were sold at varying rates.
Eighty-five rooms were occupied by guests. (Rooms sold does not equal rooms occupied by
guests because, on this particular day, single guests occupied two rooms at a
complimentary room rate, thereby generating no rooms revenue. Note that the handling of complimentary rooms
may differ among hotel properties)
Ten rooms were occupied by two guests, therefore, a total of
95 guests were in occupancy.
$6,960 in room’s revenue was generated.
$7,363.75 in total revenue was generated, including rooms,
food, beverage, telecommunications, and other.
OCCUPANCY PERCENTAGE
The
most commonly used operating ratio in the front office is occupancy
percentage. Occupancy percentage relates
the number of rooms either sold or occupied to the number of rooms available
during a specific period of time. It is
important to note that some hotels use the number of rooms sold to calculate
this percentage, while other hotels use the number of rooms occupied to
calculate the statistic. Including
complimentary rooms in the calculation can change certain operating statistics,
such as average room rate. Using rooms
sold, rooms occupied both is valid, depending upon the needs and history
property. This discussion will use rooms
occupied to illustrate the occupancy percentage calculation.
Sometimes
out-of-order rooms may be included in the number of rooms available. At properties that evaluate management
performance partly on the basis of occupancy percentage, including out-of-order
rooms in the number of rooms available provides the manager with incentive to
get those rooms fixed and recycled more quickly. Including all rooms also provides a
consistent base on which to measure occupancy. Conversely, not including
out-of-order rooms may allow managers to artificially increase the calculated
occupancy percentage simply by improperly classifying unsold rooms as
out-of-order. Some properties do not
include out-of-order rooms because the rooms are not available for sale. Also, to the extent that the occupancy
percentage is used to evaluate the performance of front office staff having no
control over out-of-order rooms, including those rooms may unfairly penalize
the front office staff. Regardless of
the approach chosen, it should be used consistently.
The occupancy percentage for the Gregory Hotel is calculated
as follows:
Number
of rooms occupied
Occupancy Percentage
=_________________________ X 100
Number of rooms available
=
85 / 120 X 100
=
70.8%
MULTIPLE OCCUPANCY RATIO
The
multiple occupancy ratio (frequently called the double occupancy ratio,
although this phrasing may not always be accurate) is used to forecast food and
beverage revenue, indicate clean linen requirements, and analyze average daily
room rates. Multiple occupancy can be
calculated by determining a multiple occupancy percentage or by determining the
average number of guests per room or occupied (also called the occupancy
multiplier or the multiple occupancy factor).
The
multiple occupancy percentage for the Gregory Hotel is calculated as follows.
Number of rooms occupied by more than one guest
Multiple occupancy percentage
=______________________________________ X 100
Number
of rooms occupied
= 10 / 85 X 100
= 11.8%
AVERAGE DAILY RATE (ADR)
A measure of the
average rate paid for rooms sold, calculated by dividing room revenue by rooms
sold.
ADR = Room Revenue / Rooms Sold
AVERAGE RATE PER
GUEST:
Resort hotels, in
particular, are often interested in knowing the average rate per guest (ARG). This rate is computed inclusive of every
guest in the hotel, including children.
The
average rate per guest for the Gregory Hotel is calculated as follows:
Total Room Revenue
Average Rate per Guest =
_____________________
Number of Guests
= $6,960 / 95
= $73.26
YIELD MANAGEMENT:
Hotel yield management systems have developed as a separate
add-on to normal reservation systems.
They work by calculating how full the hotel is likely to be on a given
date in the future. This is done by
constantly measuring previous occupancy and booking patterns and projecting
them forward into the future.
The
reservation is then advised whether or not top take a booking, and at what
rate. This has the effect of smoothing
peaks and troughs of demand and ensuring that rooms are sold at the best
possible price. In a period of low
demand. Sunday evening for example, the
system would recommend accepting a rate lower than rack to ensure the booking
and gain revenue for the hotel. It
should be recognized that the hotel room can never be sold twice like an
airline or coach seat, it is perishable.
If a room is not sold on a particular night then it is never sold. This is because there are two elements, space
(the room) and time (the date).
Concept of yield management:
The
word yield means to produce or give forth an output or return, and the term
yield management means output. When applied to accommodation, the term means
the management of revenue generation from rooms.
Measuring yield:
It is
divided into two types:
Actual Revenue.
Potential Revenue.
Actual Revenue.
The revenue generated by sale on discounted rate.
Potential Revenue.
Revenue which could be generated if all rooms were sold at
rack rate.
Uses of yield management
Yield management has now caught on in the hotel industry. It
id imperative that hoteliers understand the importance of the basic factors of
yield management, room rate category, room inventory, and group buying power.
The goal of revenue management is twofold: to maximize profit for guest room
sales and to maximize profit for the hotel services.
FORMULA 1: POTENTIAL AVERAGE SINGLE RATE
If Casa
Vana Inn had not varied its single rate by room type (for example, if all
single were $90), the potential average single rate would equal its rack
rate. When the single rate differs by
the room type, as in this case, the potential average single rate is computed
as a weighted average. It is computed by
multiplying the number of rooms in each room type category by its single room
rate and dividing the sum total by the number of potential single rooms in the
hotel. For the Casa Vana Inn, the
potential average single rate is
computed as follows:
|
Room Type
|
No. of Rooms
|
Single rack rate
|
Revenue at 100% Occupancy singles
|
|
1 bed
|
100
|
$90
|
$9000
|
|
2 beds
|
200
|
$100
|
$20,000
|
|
-
|
300
|
-
|
$29,000
|
Single room revenues at rack rate
Potential Average single rate =____________________________
Number of rooms sold at singles
= $ 29,000 / 300
= $ 96.67
FORMULA 2 : POTENTIAL AVERAGE DOUBLE RATE
If the hotel had not varied its double rate by room type,
the potential average double rate would equal its rack rate. When the double rate differs by room type, as
in this case, the potential average double rate is computed as weighted
average. It is found by multiplying the
number of rooms in each room type category by its respective double room rack
rate and dividing the sum total by the number of potential double rooms in the
hotel. For the Casa Vana Inn, this
computation is as follows:
|
Room Type
|
No. of Rooms
|
Double rack rate
|
Revenue at 100% occupancy doubles
|
|
1 Bed
|
100
|
$110
|
$11,000
|
|
2 Beds
|
200
|
$120
|
$24,000
|
|
-
|
300
|
-
|
$35,000
|
Double room revenues at rack rate
Potential average double rate =________________________________
No. of rooms sold as doubles
= $35,000 / 300
= $ 116.67
NOTE: For lodging properties basing potential revenue on
100% double occupancy, this
step is
all that is necessary to determine potential average rate ( see formula 5).
FORMULA 3: MULTIPLE OCCUPANCY PERCENTAGE
An
important element in determining a hotels yield statistics is the proportion of
the hotel’s rooms that are occupied by more than one person that is, the
multiple occupancy percentage. This
information is important because it indicates sales mix and helps balance room
rates with future occupancy demand. In
the case of the Casa Vana Inn, if 105 of the 210 rooms sold (at 70% occupancy)
are normally occupied by more than one person, the multiple occupancy
percentage is computed as follows:
105
Multiple occupancy percentage = _____
210
= 0.5 or 50%
FORMULA 4 : RATE SPREAD
In
addition to multiple occupancy percentage, another intermediate computation is
important to yield statistics. The
determination of a room rate spread among various room types can be essential
to use of yield decisions in targeting a hotel’s specific market. The mathematical difference between the
hotel’s potential average single room rate ( formula 1 ) and potential average
double rate ( formula 2 ) is known as the rate spread. For the Casa Vana Inn, the rate spread is
computed as follows:
Rate spread =Potential average double rate – Potential
average single rate
= $ 116.67 - $ 96.67
= $ 20
FORMULA 5: POTENTIAL AVERAGE RATE
A very
important element revenue management formulation is the potential average rate.
A hotel’s potential average rate is the collective statistic that effectively
combines the potential average rate, multiple occupancy percentage, and rate
spread. The potential average rate is
determined in two steps. The first steps
involves multiplying the rate spread by the hotel’s potential average single
rate to produce a potential average rate based on demand (sales mix ) and room
rate information. For the Casa Vana Inn,
the potential average rate is computed as follows.
Potential average rate = ( Multiple occupancy % X Rate
Spread) + Potential average
Single rate
= (.5 X
$20) + $96.67
= $106.67
FORMULA 6 : ROOM RATE ACHIVEMENT FACTOR
The
percentage of the rack rate that the hotel actually receives is expressed by
the hotel’s achievement factor (AF), also called the rate potential
percentage. When revenue management
software is not being used, the achievement factor is generally calculated by
dividing the actual average rate the hotel is currently collecting by the
potential average rate. The actual
average rate equals total rooms revenue divided by either rooms occupied (depending
on hotel policy). For the Casa Vana Inn, the room rate achievement factor is
computed as follows:
Actual
average rate
Achievement factor = _____________________
Potential average rate
= $ 80 / $ 106.67
= 0.750 or 75%
The
achievement factor is also equal to 100% minus the discount percentage. By calculating its achievement factor,
management discovers how much its actual room rates from varied from
established rack rates. In this case,
the discount is 25 percent.
As
shown below, the achievement factor can be used in one method of determining
the yield statistic. It is not necessary
to calculate the achievement factor, because the yield statistic can be
determined without it. Nonetheless, the
achievement factor is an important statistics in its own right because it
allows management to monitor and therefore better control the hotel’s use of
discounting. For this reason, many
hotels calculate the achievement factor as part of their revenue management
efforts.
FORMULA 7: YIELD STATISTIC
An
important element in revenue management is the yield statistic. The yield statistic calculation incorporates
several of the previous formulas into a critical index. There are various ways to express and
calculate the yield statistic, all of which are equivalent.
Actual Rooms
Revenue
Yield = ____________________
Potential Rooms Revenue
Room Nights Sold
Actual Average Room Rate
2. Yield =
___________________ X
_______________________
Room Nights Available
Potential Average Rate
3. Yield = Occupancy
percentage X Achievement factor
The first equation is used for a hotel
that offers all its rooms at a single rack rate, regardless of occupancy. When (as far more common) a hotel uses more
than one rack rate for different room types and / or occupancies, potential
rooms revenue equals total room nights available times the potential average
rate.
The
self-explanatory second equation is not demonstrated here. The third equation is illustrated below. For the Casa Vana Inn, the calculation is as
follows:
Yield = Occupancy Percentage X Achievement Factor
= 0.7% X 0.75%
= 0.525 or
52.5%
FORMULA 9: EQUIVALENT OCCUPANCY
Management
can use the equivalent occupancy formula when it wants to know what other
combinations of room rate and occupancy percentage provide equivalent net
revenue.
The
equivalent occupancy formula is very similar to the identical yield occupancy
formula, but takes marginal costs into account by incorporating gross profit or
contribution margin. The cost per occupied
room ( also called the marginal cost ) of providing a room is the cost the
hotel incurs by selling that room (for example, housekeeping expenses such as
cleaning supplies); this cost would not be incurred if the room were not sold (
as opposed to fixed costs, which are incurred whether the room is sold or
not). The contribution margin is that
portion of the room rate that is left over after the marginal cost of providing
the room has been subtract out.
To find
the equivalent occupancy, use either of the following formula (which are
equivalent versions of the same equation).
Rack rate - Marginal cost
Equivalent occupancy = Current occupancy % X
__________________________
Rack rate X (1-discount %) – Marginal
Cost
Equivalent
Current Contribution Margin
Occupancy = Current Occupancy % X
____________________________
New contribution Margin
Recall
the example discussed under identical yield statistics. Now assume that the Casa Vana Inn is currently
operating at 70 percent occupancy with an average rate of $80, and considering
strategies designed to raise its average rate to $100. Further assume that the marginal cost of
providing a room is $12. What occupancy
percentage must the Casa Vana Inn achieve to match the net room revenue it
currently receives?
Current Contribution
Margin
Equivalent Occupancy = Current Occupancy % X_________________________
New Contribution Margin
$80 - $12
= 70% X _________
$100 - $12
= 0.541
or 54.1 %
Recall
from the discussion of identical yields that the Casa Vana Inn needs a 56
percent occupancy to produce an identical yield statistic – that is, equivalent
gross revenue. However, the Casa Vana
Inn does not need to match its gross revenue to achieve the same net revenue,
since by selling fewer rooms ( at the higher price), it incurs fewer associated
operating costs.
Although
rack rates are raised relatively infrequently, discounting is a common practice
in the lodging industry. What is the
equivalent occupancy to 70 percent with an $80 average room rate if the average
room rate is discounted by 20 percent (to $64)?
$80 - $12
Equivalent occupancy = 70 % X _________
$64 - $12
=0.915 or
91.5 %
