FRONT OFFICE MANAGEMENT UNIT V

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 %

FRONT OFFICE MANAGEMENT UNIT IV

Forecasting Room Availability:

                Room availability is the actual or projected number of rooms not yet occupied or reserved on a given date. Because rooms continually turn over, is almost impossible to compute the exact number that will be unoccupied. A room availability report is an estimate base on information about past reservations and occupancy.

                The following information is required to prepare an accurate room availability report.

Room Inventory

Previously Night Occupancy

Departures

Reservations

Under Stay

Over Stay

Cancellation

No-Shows

Early arrivals

Room Inventory

The total number of rooms that could theoretically be sold on a given date is called rooms that could theoretically be sold on a given date is called room inventory. The inventory does not include rooms that are out of order for maintenance or redecoration or rooms that are currently under construction.

Previously Night Occupancy:

The total numbers of rooms were occupied by the guest on the previous night.

Departures:

A departure is a guest who is scheduled to check out on the current date.

Reservations:

The report must take into considerable that the total numbers of rooms for which reservations have been received for the current date.

Under Stay:

Guest who indicated their intention to remain inn the hotel but checked out before their scheduled departure date is called under stay.

Over Stay:

Guest who remains in the hotel beyond the scheduled departure date is called over stay.

Cancellation:

Reservation may be canceled for many different reasons. Bad weather and labour strikes almost always create high cancellation percentage. The average rate of a typical hotel is about 2% of reservation.

No-Shows:

Besides cancellation there is a small percentage of people who make reservations and never check – in. The average number show rate is about 5% of reservations.

Early arrivals:

There is also a possibility that a guest will check in prior to the estimated arrival date.

FORECASTING DATA

                                The process of forecasting room availability generally relies on historical occupies data as well as business already committed. Historical data is used to take some of the guess work out of forecasting.  To facilitate forecasting the following daily occupy data should be collected.

Number of expected room arrivals:

Based on existing reservations and historical trends for few reservations and on cancellations prior to the arrival date. 

Number of expected room walk-ins:

Based on historical records

Number of room stay over:

 (rooms occupied on previous night that will continue to be occupied for the night in                                               Question)

Based on existing reservation

Number of expected room no-shows:

Based on historical records

Number expected rooms under stays:

(checkouts occurring before expected departure date)

                                Based on historical data

Number of expected room check out:

Based on existing reservation

Number of expected rooms over stays:

(Check out occurring after the originally reserved departure date) 

          Based on historical records.

                Some hotels with a very high double occupancy percentage may be as concerned with guest counts.  For example, an all inclusive resort with a large amount of business from vacationing couples may want to forecast guest as well as room count activity.  Conventional hotels may often have the same concerns.

                Chances are good that much of information is available in reports, documents and other data sources at the property.  The hotels daily reports will likely be invaluable in this research these reports should summarized and stored in a way (that is) easily accessible.

                Over all these data are important to room availability forecasting.  Since they are used in calculating various daily operating ratios that help determine the number of available rooms for sale.  Ratios are a mathematical expression is a relationship between two numbers that is determined by dividing one by the other.  Most statistical ratios that applied to front office are percentage of no-shows, walk-in, over stays, under stays.  Occupancy history data from the fictitious property are used to illustrate the calculation of each front office ratio.  Manager should look for consistency in ratios.  Consistency may roughly the same ratio every day or identifiable patterns without consistency, forecasting ratios and projecting operating performance very difficult.

Percentage of Walk – in:

                PERCENTAGE OF WALK-INS

% of Walk-ins =   Number of room walk-ins x100                                                                                                                                                                                      Total number of rooms arrivals

                The percentage of walk-ins is calculated by dividing the number of rooms occupied by walk-ins for a period by the total number of rooms’ arrivals for the same period.

                                                                             

                                                                                                     

                                      

                Walk-ins guest occupy available rooms that are held for guests with reservations often, hotels can sell rooms to walk -ins guest at a higher rate, since these guests may have less opportunity to considered to alternate property.  Front desk agents are some times asked to show a guest groom to a walk-in guest which tends to be much more effective than trying to sell rooms over the telephone or through a website.  Walk-in guest sales help to improve both occupancy and room revenues.  However, from a planning perfective, it is generally considered better to have reservations in advance than to count on walk-in traffic.

                Note that other ratios can dramatically affect the walk-in ratio.  Example, if a hotel has 10 no-shows beyond forecast it may accept more walk-ins than usual to make up for the last business.  When this information is tracked for historical purposes, it is essential that the other ratios also be tracked to show how they affect one another.  One effective way to predict walk-ins is to know what is going on in the market place.  Their will be a better opportunity for walk-ins (and a higher rate).  If near by hotels are experiencing high demand.

Percentage of Over Stay:

  The over stays represent rooms occupied by guests who stays beyond their originally schedule departure dates.  Over stay guests may have arrived with guaranteed reservations or as walk-ins.  Over stays should not over confuse with over stays.  Stay over rooms are room occupied by guests who arrived to occupy a room before the day in question and whose scheduled departure date isn’t until after the day in question.

                The percentage of over stays is calculated by dividing the number of expected room check outs for the same period.  The number of expected room check out equals the number of actual check outs on the books minus under stays plus over stays stated another way, the numbers of expected room check outs is the number of  rooms shown by the front office system or the manual count of occupied room as due for departure.

                                                Number of over stays rooms

% of over stays      =______________________________________________ x 100                                                                                                                                   Room check outs – under stay rooms + over stays room

                               = 47 / 346 – 33 + 47 x 100

                               = 47 / 313 + 47 x 100

                               = 47 / 354 x 100

                               = 13.06 %

                To help regulate room over stays, front office agents are trained to verify an arriving guest’s departure date at check-in.  Such verification can be critical, especially when the hotel is at or near full occupancy and there are no provisions for over stay guests.  Over stay may also prove problematic when specific rooms have been blocked for arriving guest.  This is especially important for suit or rooms that may have special importance to an incoming guests.

Percentage of Under Stay:

Under stay represents rooms occupied by guest who checks out before their originally scheduled departure dates.  Under stays guests may have arrived at the hotel with guaranteed or non-guaranteed reservation or as walk-ins.

                The percentage of under stay is calculated by dividing the number of under stay rooms for a period by the total number of expected room check outs for the same period.

                                                   Numbers of under stay rooms

% of Under stay    =  ______________________________________________  x 100

                                    Room check outs – under stays rooms + over stay rooms

                              = 33 / 346 – 33 + 47 x 100

                              = 33 / 346 + 47 x 100

                              = 33 / 360 x 100

                              = 9.17 %

                Guest leaving before their stated departure date create empty rooms that typically are difficult to fill.  Thus, under stay rooms may represent permanently lost rooms revenue.  Over stay, on the other hand, are guest staying beyond their started departure date and may best room revenues.  When the hotel is not operating at full capacity, over stays result in additional, unexpected room revenues.  In an attempt to regulate under stay and over stay rooms, front office staff should.

Confirm or reconfirm each guest’s departure date at registration.  Some guests may already know of a change in plans, or a mistake may have been made in the original processing of the reservation.  The sooner data are corrected the grater the chance for improved planning.

Present an alternate guest room reservation form to a registered guest, explaining that an arriving guest holds a reservation for his/her assigned room.  A note card may be placed in the guest room a day before or the morning of the scheduled day of the registered guest departure.

Review group history, many groups, especially associations, hold large closing events, for the entire group on the last day of the meeting.  Guest may make reservation to improve attending the final event.   However changes in plans or other priorities may required guest’s to leave early.  While it is difficult for the hotel to hold guest to the number nights they reserved.  Managers may be better able to plan for early departure, based on the groups departure history.  Some hotels that have a lot of association business or a history of transient guests departing before their schedule day may apply the reservation deposit to the last of the night of the stay not the first night.

Contact potential over stay guests about their scheduled departure date to continue their intension to check out.  Room occupancy data should be examined each day, rooms with guest expected to check out should be flagged.  Guest who have not left by check out time should be contacted and asked about their departure and intensions.  This procedure permits airlines an early revised count of over stay and allow sufficient time to modify previous front office planning if necessary.

FORECAST FORMULA

                Once relevant occupancy statistics has been gathered, the number of rooms available for sale on given date can be determine by the following formula.

Total Number of guest room

(-) Number of out order rooms

(-) Number of rooms reservation

(+) Number of  rooms reservations (x) % of  no show

(-)Number of rooms over stays

(=) Number of rooms available for sale

Note that this formula does not include walk-ins.  They are not included because the number of walk-ins a hotel can accept id determined by the number of rooms that remain available for sale.  If a hotel is full due to existing reservations, stay over and other factors.  It can’t accept walk ins.

                 As an example, consider the hotel is a 120 room property where on April 1st there are 3 out of order rooms and 55 stay over.  On that day, there are 42 guests with reservations scheduled to arrive since the percentage of no-show has been recently calculated at 18.06 % the front office manager calculates that as many as 8 guests with reservation may not arrive (42 x .1806=7.59, rounded to 8 ).  Based on historical data, 6 under stays and 15 over stays are also expected.  The number of rooms projected to be available for sale on April 1st can be determined as follows.

Total number of guest rooms                                         120

( - ) Number of out of order rooms                                     3

( - ) Number of stay over                                                  55

( - ) Number of room reservation                                      42

( + ) Number of room reservation X  Percentage of

                               No-show                                                  8

( + ) Number of rooms under stay                                          6

( - ) Number of rooms over stays                                          15

= Number of rooms available for sale                                   19 rooms

BUDGETING FOR OPERATIONS

                The most important long terms planning function that front office perform is budgeting front office operations.  The hotels annual operations budget is a profit plan that addresses all revenue sources and expenses items.  Annual budgets are commonly divided into monthly plans that, is terms are divided into weekly ( some times daily ) plans.  These budget plans becomes standards against when management can evaluate the actual results of operations.

                In most hotel, room revenues are greater than food, beverage, banquet or any other revenues.  In addition, rooms division profits are usually greater than those of any other division.  There fore, an accurate rooms division budget is vital to creating the over all budget of the hotel.

                The budget planning process requires the closely coordinated efforts of all management personnel.  While the front office manager is responsible for room revenue forecast.  The accounting division staff will be counted on to supply department managers with statistical information process.  The accounting division staff is also responsible for co-ordinating the budget plans of individual department wide operations budget for top management’s review.  The General Manager and controller typically a budget report for approval by the hotels owners.  If the budget is not satisfactory, elements requiring charges may be written to the appropriate division managers for review and revision.

                The front office manager’s primary responsibility in budget planning are forecasting rooms revenue and estimating related expenses.  Rooms revenue is forecasted with input from the reservations manager’s, while expenses are estimated with input from all department manager’s in the rooms divisions.

FORECASTING ROOM REVENUE

                Historical financial information often serves as the foundation on which front office managers build rooms revenue forecasts.  One method of rooms revenue forecasting involves an analysis of rooms revenue from past periods.  Dollar and percentage differences are noted and the amount of rooms revenue for the budget years is predicted.

                For example,  the table shows yearly increases in net rooms revenue for the Emily Hotel.  For the years 2001 to 2004, the amount of rooms revenue increased from $1,000,000 to $1,331,000, reflecting a 10 percent yearly increase.  If future conditions appear to be similar to those the past, the rooms revenue for 2005 would be budgeted at $1,464,100 a 10 percent increase over the 2004 amount.

Rooms Revenue Summary for the Emily Hotel

YEAR	ROOMS REVENUE	INCREASE OVER DOLLAR	PRIOR YEAR  %
2001	$1,000,000	-	-
2002	$1,100,000	$1,00,000	10%
2003	$1,210,000	$1,10,000	10%
2004	$1,331,000	$1,21,000	10%

                Another approach to forecasting rooms revenue bases the revenue projection on past room sales and average daily room rates.  The table presents rooms revenue statistics for the 120 room Bradley hotel from  

2001 to 2004.  An analysis of these statistics shows that occupancy percentage increased three percentage points from 2001 to 2002, one percentage point from 2002 to 2003, and one percentage point from 2003 to 2004.  Average daily room rates increased by $2, $2, and $3 respectively over the same periods.  If future conditions are assumed to be similar to those of the past, a rooms revenue forecast for 2005 may be based on a one percentage increase in occupancy percentage (to 76 percentage) and a $3 increase in the average daily room rate (to $60).  Given these projections, the following formula can be used to forecast rooms revenue for the year 2005 for the Bradley Hotel.

Rooms Revenue Statistics for the Bradley Hotel

YEAR	ROOMS SOLD	AVERAGE DAILY RATE	NET ROOMS REVENUE	OCCUPANCY %
2001	30,660	$50	$1,533,000	70%
2002	31.974	$52	$1,662,648	73%
2003	32,412	$54	$1,750,248	74%
2004	32,850	$57	$1,872,450	75%

Forecast rooms revenue = rooms available X occupancy percentage X Average daily rate

                                       = 43,800                X      .76%                       X          $60

                                       = $1,997,280

                The number of rooms available is calculated by multiplying the 120 rooms of the Bradley Hotel by the 365 days of the year.  This calculation assumes that all rooms will be available for sale each day of the year.  This will probably not be the case, but it is a reasonable starting point for projection.  Note also that at some point occupancy will not be able to grow any further, and may actually decline.  For example, new competitors may enter the market, taking occupancy away from the hotel.  Management needs to anticipate this shift and adjust its forecast to take into account the  increased competition.  The same logic applies to projecting rate growth.  Hotel management may decide to hold or even reduce rates to maintain or improve occupancy when new competitors enter the market.

                This simplified approach to forecast to forecasting rooms revenue is intended to illustrate the use of trend data in forecasting.  A more detailed approach would consider the variety of different rates corresponding to room types, guest profiles, days of the week, and seasonality of business.  These are just a few of the factors that may affect room revenue forecasting.

ESTIMATING EXPENSES

                Most expenses for front office operations are direct expenses in that they vary in direct proportion to rooms revenue.  Historical data can be used to calculate an approximate percentage of rooms revenue that each expense item may represent.  These percentage figures can then be applied to the total amount of forecasted rooms revenue, resulting in dollar estimates for each expenses category for the budget year.

                 Typical rooms division expenses are patrol and related expenses, guestroom laundry (terry and linen), guest supplies (bath amenities, toilet tissue), hotel merchandising (in-room guest directory and promotional brochures), travel agent commission and direct reservation expenses, and other expenses.  When these costs are totaled and divided by the number of occupied rooms, the cost per occupied room is determined.  The cost per occupied room is often expressed in dollars and as a percentage.  The table presents expense category statistics of the Bradley Hotel from 2001 to 2004, expressed as percentage of each year’s room’s revenue.  Based on this historical information and management’s current objectives for the budget year 2005, the percentage of rooms revenue for each expense category may be projected as follows, payroll and related expenses 17.6%, laundry, linen and terry, and guest supplies, 3.2%, commissions and reservation expenses, 2.8%, and other expenses, 4.7%.

Expenses category as percentage of Rooms Revenue for the Bradley Hotel

YEAR	PAY ROOL & RELATED EXPENSES	LAUNDRY LINEN & GUEST SUPPLIES	COMMISSIONS & RESERVATION EXPENSES	OTHER EXPENSES
2001	16.5%	2.6%	2.3%	4.2%
2002	16.9%	2.8%	2.6%	4.5%
2003	17.2%	3.0%	2.6%	4.5%
2004	17.4%	3.1%	2.7%	4.6%

                Using these percentage figures and the expected rooms revenue calculated previously, the Bradley Hotel’s room division expenses for the budgeted year are estimated as follows.

Payroll and related expenses

$1,997,280 X .176 = $351,521.28

Laundry, linen, terry, and guest supplies

$1,997,280 X .028 = $63,912.96

Commissions and reservation expenses

$1,997,280 X .028 =$55,923.84

Other expenses

$1,997,280 X .047 =$93,872.16

                In this example, management should question why costs continue to rise as a percentage of revenue.  If costs continue to rise ( as a percentage, not in real dollars), profitability likely will be affected.  Therefore, one of the outcomes of the budget process will be to identify where costs are increasing as a percentage of revenue.  Then, management can analyze why these costs are increasing disproportionately with revenue and develop a plan to address the issue.

                Since most front office expenses vary proportionately with rooms revenue ( and therefore occupancy), another method of estimating these expenses is to estimate variable costs per room sold and then multiply these costs by the number of rooms expected to be sold.

REFINING BUDGET PLANS

                Departmental budget plans are commonly supported by detailed information gathered in the budget preparation process and recorded on worksheets and summary files.  These documents should be saved to provide an explanation of the reasoning behind the decisions made while preparing departmental budget plans.  Such records may help resolve issue that arise during the budget review.  These support documents may also provide valuable assistance in the preparation of future budget plans.

                If no historical data are available for budget planning, other sources of information can be used to develop a budget.  For example, corporate headquarters can often supply comparable budget information to its chain-affiliated properties.  Also, national accounting and consulting firms can usually provide supplemental data for the budget development process.

                Many hotels refine expected results of operations and revise operations budgets as they progress through the budget year.  Reforecast is normally suggested when actual operating results start to vary significantly from the operations budget.  Such variance may indicated that conditions have changed since the budget was first prepared.  While operating budgets are seldom changed once they are approved by a hotel’s management and owners, reforecast provides a more realistic picture of current operating conditions.