FRONT OFFICE MANAGEMENT
TOPIC –10
PLANNING AND EVALUATING
OPERATIONS
10.0STRUCTURE
10.0Introduction
10.1 Management Functions
10.2 Establishing Room Rates
10.3 Forecasting Room Availability
10.4 Budgeting for Operations
10.5 Evaluating Front Office Operations
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LEARNING OUTCOMES
Upon completion of this topic, you should be able to:
1.
2.
3.
4.
5.
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List out the various functions of the hotel management
Evaluate how hotels establish room rates
Explain the process of forecasting room availability
Define the concept of operational budgeting in hotels
Evaluate Front Office operations
TOPIC 10
Planning And Evaluating Operations
10.0INTRODUCTION
Every organisation, including hotels, have various targets and goals which it
strives to achieve. These objectives are pre-planned at the start of a period
and the actual results are evaluated at the end of the period. Hotel planning,
implementing the various services and tasks, and assessing the operations of
the hotel are the responsibility of the hotel management.
Planning, also known as ‘forethought’ is the process of thinking about the
future and organising activities in the manner required to achieve such desired
goals. It also involves the creation and maintenance of a plan so as to meet
the desired objectives, such as employing personnel with required skill sets.
Planning is an integral procedure, forming part of project management and
time management. It involves the preparation of a sequence of action steps
to achieve some specific goal or target. If this is done effectively, it helps in
reducing substantial time and effort for achieving such goals. This requires the
management to formulate an alternate course of actions and select the most
efficient measures to attain the goal.
The goals may be long term or short term in nature. Long term goals include
enhancing the level of customer service and satisfaction; whereas short-term
goals include aiming to achieve 90% occupancy or certain revenues within a
stipulated month.
Evaluation refers to the process of determining the worth and significance of an
organisation or employee considering certain standards. Evaluation assists an
organisation, programme or initiative to assess the goal or formulate alternatives
that help in decision-making, or achieve the objectives and assess uncompleted
actions. The primary purpose of the evaluation process is to reflect upon the
current situation and identify future changes in addition to getting insight into
existing initiatives.
There is a very close relationship between planning and evaluation. Both are
two different perspectives on the same process or function. Planning refers
to eyeing the future while evaluation is looking and improving on the past
actions.
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For any planning to be effective, it should include evaluating the past while
drafting the new plan for the future. To plan something correctly and to
measure its effectiveness in the long term, one must determine and consider
the existing status and only then, plan on setting the desired future targets.
This close relationship of planning and evaluating is more popularly known
as the planning-evaluation cycle. Since, both the functions are inter-linked
with each other; there are various phases of the management cycle, which are
claimed by both the planners and evaluators. The first stage of the cycle, which
is the planning stages, sets the potential future targets, actions, goals and the
best means for implementation.
Depending on the type and size of the hotel and the objectives and issues to be
addressed, the planning process involves any of the below-mentioned stages:
• Formulation: This is with regards to the problem or issue to be addressed;
• Conceptualisation: This involves taking into consideration the major
alternatives for achieving the targets or goals;
• Detailing: Considering the various alternatives conceptualised and their
potential impacts, if any;
• Evaluation: This involves reviewing each of the alternatives and after that
selecting the best possible one; and
• Implementation: This refers to implementing the selected alternative.
Though all of the above steps are involved mainly in planning, a lot of
evaluation work also takes place. Therefore, often evaluators are trained in
assessing alternatives by using various methodologies such as concept mapping.
These methods help in conceptualisation and detailing.
The Evaluation phase also has various stages forming part of it, which include:
• Formulation: This involves formulating the major goals and objectives;
• Conceptualisation and Operationalisation: This is one of the main
components involved in evaluation such as the program, people, place and
setting, measures;
• Design: Involves designing and drafting the assessment;
• Detailing: This involves describing in detail how the various components
of people, program, will be effectively coordinated;
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• Analysis: Involves analysing all qualitative and quantitative information;
and
• Utilization: Involves using the actual results derived from the evaluation.
10.1
MANAGEMENT FUNCTIONS
The management of the hotel is the brain that makes all the strategic decisions
and formulates the various courses of the actions for the future. They assess
the reports provided by the Front Office auditor with respect to the occupancy
percentages, revenues, seasonal trends, most and least profitable revenue centres
and other critical information.
It is the management that provides the various departments of the hotel with
a defined strategy on how to increase the sales of the hotel while maintaining
enhanced customer services. They also take steps to improve the loyalty of
the guest with the hotel brand while offering membership plans, loyalty
programmes and other promotional tactics to their frequent guests.
Guests frequently visiting the hotel or location for business purposes may be
given additional amenities such as complimentary Wi-Fi, stationery provisions,
sufficient plug holes for laptops and charges, breakfast, and so on, to increase
sales and loyalty. Certain hotels group such as Accor even have tie-ups with
airlines so as to provide guests to redeem and add their miles to the card.
The management functions commence from the planning stage for devising
the strategic plans for the hotel and conclude with the evaluation and review
of the plans. This helps to check how the planned actions have yielded good
results. The various functions of the management are explained below:
• Planning: This is the first stage of the management functions where the
managers determine the goals and action plans of the departments that
are specific, realistic and measurable. The management even devises
the various strategies and tactics to achieve these objectives in the most
profitable manner.
• Organising: The manager handles organising in such a way that all the
works are divided among the various staff members. The works should be
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allocated in such a way that it is distributed fairly among the staff so the
jobs are completed in a timely and efficient manner.
• Coordinating: Various resources in the form of materials, machines,
or manpower are required to achieve the goals. The manager has the
responsibility of bringing all the resources together and coordinating with
them to attain the planned goals.
• Staffing: The plans devised by the management may involve employees
with special skills and technical know-how. Hence, the manager handles
the recruiting of applicants, select the most qualified one for the task and
position and schedule such employees.
• Leading: A leader is a person who encourages and influences his followers
to work willingly and strive to achieve a common goal. It is the task of
the manager to lead the staff by motivating and disciplining them. He may
also allot specific training to the staff to complete their duties in a more
efficient way. The manager also supervises and oversees the works of the
staff members so as to guide them wherever and whenever necessary.
• Controlling: More than often, the planned goals do not match the actual
results. This difference may be negative or positive for the hotel. It is
the function of the management to ensure that the real outcomes of the
Front Office operations closely match already planned targets. Reviews
on a regular basis may be conducted to give the employees the required
directions and advice.
• Evaluating: The functions of the management conclude with the evaluation
and reviews of the actual results of the planned targets and goals. This
assessment helps to re-assess the goals and set modified Front Office goals,
if necessary.
CHECK YOUR PROGRESS
• List out the tasks undertaken by the management that fall under the
purview of each of the above function heads. Illustrate with examples,
wherever possible.
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10.2
ESTABLISHING ROOM RATES
Every hotel has various categories of rooms for its guests. These are mainly
dependent on the structure, size, room amenities and furnishings of the rooms.
Typically, room types include single, double, twin or suites. Various hotels
even offer family rooms and presidential suites. Each guest room and room
type are assigned a specific rack rate. City hotels establish the rate of every
room as a rack rate that is dependent on the number of persons occupying
the room and the room type. Whereas, resorts have rack rates too dependent
on the occupants, view, location.
All the rooms are expected to be sold at such rack rates by the Front Office
staff except when the guest has availed the rooms at special rates displayed
in third party websites, offers, promotions, corporate rates, group rates, day
rates, package rates or even complimentary rates. The combination of all the
rates offered at a hotel is also the rate structure.
Room rates are determined by various factors such as operating costs, inflation,
competition, projected sales and revenues, price sensitivity factors, efforts of the
sales and marketing teams, advertising and promotions by the hotel, among
others. The hotel industry is highly competitive and many decisions made by
the management on the room rate increase or decrease depend on the actions
of the competitors. It is the responsibility of the managers to fix such rates so
that it does not negatively impact the profit and loss statement of the hotel.
There are many approaches to establishing the room pricing. However, most
hotels use the below three popular approaches to creating the room rates:
Market condition approach:
Under this approach, the management shall compare their hotel with similar
hotels in the same geographical market and find out the various rates they
are charging for the same rooms and products. These hotels are known as a
‘comparative set.’ This set usually comprises of 6-10 hotels that are similar in
size, location, property rating, identification, brand.
This approach follows the principle of “only charging what the market
shall accept.” This can be found out by comparing the rates offered by such
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comparative set of hotels for the same dates that are available on public
websites. The hotel’s internal teams can also make blind calls and ask for the
availability and rates on specific dates.
A competitive analysis can be done by answering the following questions:
• How are the hotel’s rates different from the competitors?
• Are the rates lower or higher than the competitors’?
• Are the rates affecting our sales and profitability?
• Are there any new market trends emerging in the market?
One can determine future rates by occupancy and pricing trends, industry
reports that provide comparative rates for hotels as well as confirming the
same on public hotel websites.
Though the approach takes into considerations the market factors and
environment, it fails to look into factors such as the value of the hotel property,
construction costs for a new hotel as compared to an older one and the positive
impacts that the sales team may accomplish.
Rule of thumb approach
In this approach, the rate of the room shall be calculated as $1 for every $1,000
incurred on the construction and furnishing costs of the room, assuming a 70%
occupancy rate.
For example, if the construction costs of a 200 room hotel is $10 million, then
the average rate per room would be $50. The rates of the various room types
would differ depending on the category; however, the minimum average rate
would be $50.
This approach, however, fails to take into consideration the inflation, the
contribution of other facilities and services that may improve the hotel’s
desired profitability and assumes that a certain level of occupancy rate is
always maintained.
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Hubbart formula approach
This approach was developed by Roy Hubbart in 1940 by the American Hotel
Association. It considers operating costs, desired profits and demand for the
rooms to be sold. The procedure of calculating a room rate under this approach
is as follows:
• Calculate the hotel’s targeted profit by multiplying the rate of return (ROI)
by the hotel owner’s investment for constructing the hotel
• Hotel’s Targeted Profit = ROI x Investment
• Calculate the profits before tax by dividing the desired profit by one minus
hotel’s tax rate
PBT = Desired Profit/ (1-Hotel Tax Rate)
• Calculate the fixed expenses and management fees. This calculation includes
assumptions of estimating depreciation, interest and financial expenses,
hotel property taxes, insurance, amortisation, building mortgage if any,
land, rent, and management fees.
• Calculate the overall operating expenses considered without distribution.
This includes estimations of administrative and general expenses, data
processing expenses, human resources expenses, transportation expenses,
sales and marketing expenses, operation and maintenance expenses, and
electrical energy costs.
• Include assumptions of non-room operating departmental income or loss,
such as restaurant department income or loss, telephone department income
or loss.
• Calculate the room department income that is the sum of profits before tax
(PBT), fixed charges, management fees, undistributed operating expenses
and other operating department losses less other department incomes.
Income = PBT + Fixed Charges + Management fees + Undistributed
Operating Expenses + Other Department Operating Losses – Other
Department Incomes
• Determine the required room’s revenue plus other direct expenses of payroll
and related expenses plus other direct operating expenses.
• Calculate the average room rate by dividing the room department’s revenue
by the expected number of sold rooms.
Average Room Rate = Room Revenue / Number of Expected Sold Rooms
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Singles Sold Daily = Rooms Sold Daily – Number of Double Rooms Sold Daily
Doubles Sold Daily = Double Occupancy Rate x Total Rooms x Occupancy
Singles Sold Daily = X + Doubles Sold Daily x (X + Y) = (Average Room Rate)
x (Total Rooms Sold Daily)
Where: X = price of singles; Y = price differential between singles and doubles;
(X + Y) = price of doubles. ("Planning and Evaluating Operations.” n.d.)
This Hubbart formula not only allows hotels to calculate scientifically the room
rates as well as what the banker’s return on investment should be, but also
helps the hotel to set target rates rather than estimating the actual average
prices.
CHECK YOUR PROGRESS
Review various assumptions required for estimating the room rates such as
occupancy, inflation, construction costs. Calculate the room rate under each
of the three approaches.
10.3 FORECASTING ROOM AVAILABILITY
There may be various times of the year when the hotel’s rooms are booked and
fully occupied, especially during on-season/peak season. Weddings, corporate
events, seminars usually book the entire hotel for a period. Hence, it is advisable
that a guest pre-registers and reserves his room in advance rather than be a
walk-in customer.
It is the responsibility of the management to forecast room availability for the
purpose of undertaking various strategic decisions and devise actions for the
future. It refers to forecasting the number of rooms available for sale on any
future date. This forecasting helps to manage the reservation process, guides
the Front Office staff to handle room management in a more efficient manner
and can be used as a device to forecast occupancy percentages. It is also
useful in scheduling necessary number of employees for an expected volume
of business.
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Room availability forecast is an integral aspect of taking managerial decisions
for which the following data is needed:
• Number of expected room arrivals
• Number of expected walk-ins
• Number of expected guests staying over
• Number of expected room no-shows
• Number of expected room under-stays i.e. checking out earlier than the
stipulated period.
• Number of expected room check-outs
• Number of expected room over-stays i.e. beyond the earlier reserved dates.
Such data helps the Front Office to conduct and calculate the daily operational
ratios which helps in getting a better estimate of the daily hotel revenues such
as:
• No-show percentage = Number of no-show rooms/ Number of rooms
reserved
• Walk-in percentage = Number of walk-in rooms/ Number of room arrivals
• Over-stays percentage = Number of overstay rooms/ Number of expected
check-outs
• Under-stays percentage = Number of under-stay rooms/ Number of
expected check-outs
It is critical for the management to track and forecast the available rooms for
any future date so appropriate measures and steps may be taken. This can be
done by using the below formula:
Forecasted Rooms Available for Sale = Total Guest Rooms – Number of
Rooms Out of Order - Number of Stay-over Rooms – Number of Reserved
Rooms + Number of No-show Rooms + Number of Under-stay Rooms –
Number of Overstay Rooms
Under the manual and semi-automated systems, the room availability for
forecasting purposes is calculated considering the demand and need of the
rooms. It also varies from a three to ten-day forecasts. However, under the fully
automated and computerised systems, forecasts can be done at any moment of
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time for any future period. This is because computers and the relevant software
run forecasts on a room count basis, hence eliminating the labour work and
human error margins.
TRUE OR FALSE
1. Forecasting room availability is not important for the hotels = TRUE or
FALSE;
2. No-show percentages are calculated as Number of No-show rooms/
Number of rooms Unoccupied = TRUE or FALSE;
3. Computerised systems are better than manual systems for forecasting =
TRUE or FALSE;
4. Over-stays percentage = Number of Overstay rooms/ Number of expected
Check-outs = TRUE or FALSE;
5. Room forecasting varies from a three day to 10-day forecast = TRUE or
FALSE
10.4
BUDGETING FOR OPERATIONS
Budgets are quantitative forms of a plan for a given period. It usually includes
targeted sales volumes and revenues, costs and expenses, assets, liabilities, and
cash flows. These budgets provide a defined target and goal for the hotel
management and staff to aim to achieve. For example, earning $10 million in
a six month period or increasing the profit margins to 30.
Hotels prepare their annual budgets at least once a year that may be reviewed
and re-assessed based on the performance calculated at regular intervals. Profit
plans are also formulated that address all the sources of revenues and the
application of funds in the form of expenses for the following calendar year.
These annual operating budgets of the hotel represent standards and targets
against which the management can evaluate the actual operating results and
take corrective actions. The coordination with all the management personnel
is vital in closing and finalising the annual budget.
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The hotel’s annual operation budget is usually divided into monthly plans
or even weekly or daily plans. This facilitates better control and monitoring
of the actual results. This also allows the management to take immediate
measures to make improvements such as training, skill enhancements, which
may aid in the better achievement of results. For the purpose of making a
revenue budget, availability of historical financial data is necessary to make
comparative changes.
In the hotel industry, one of the major departments is the Front Office. Most of
the expenses incurred in this department are directly linked to the total room
revenue. In other words, it means more the revenue, more the expenses, and
less the revenue, lesser the expenses. By using historical data, one can calculate
the approximate percentage of room revenue associated with each expense
item, such as labour, materials, inventory cost, bathroom items cost, decor cost,
bedroom linen cost, labour taxes, reservation costs, and many such items.
In the preparation of the Front Office annual budget, the Front Office Manager
is expected to coordinate with the accounts department so as to estimate only
the revenue from rooms and directly related expenses. Post obtaining the same,
the hotel controller along with the general manager shall then revise the budget
and make suggestive changes.
Various steps are involved in formulating and creating the budget of the Front
Office. The three main steps involved are:
Forecasting Room Revenues
Historical financial data aids the Front Office Manager to forecast room
revenues and make relevant assumptions. This data includes details of past
room revenues, past rooms sold, past average daily rate and past occupancy
rates.
Forecasting Direct Expenses
Front Office managers are responsible only for their individual department’s
direct expenses or variable costs. These managers can also take references from
the historical financial data that depict the trends of the variable cost to room
revenue ratios so as to estimate department expenses.
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Refining Budget Plans
At times, the external environment and factors may change significantly in an
unexpected way. For example, change in Government policy with regards to
hotels, natural disasters, epidemic disease outbreaks. In such a case, the actual
operating budgeted figures are appropriately revised.
It is the responsibility of the Front Office Managers to track regularly and
monitor the progress of the budgets by way of regular monthly, quarterly or
half-yearly reviews. This allows one to take corrective steps at the earliest level
without having to fall back at the time of annual reviews.
CHECK YOUR PROGRESS
Prepare a weekly budget for your house and include details of grocery costs,
electricity, water, etc. which are directly involved in calculating the direct
expenses involved. Consider your revenue or your parent’s revenue as the
source of income.
10.5
EVALUATING FRONT OFFICE
OPERATIONS
It is the responsibility of the Front Office Manager to evaluate continuously and
review the results of the various departmental activities on a daily, monthly,
quarterly, and yearly basis.
Evaluation and reviews help the manager to make constant improvements to
produce effective results.
Various tools and items can assist in evaluating the progress of the departments.
These tools include:
Daily Operations Report
This report is also known as the Manager’s Report, the Daily Report or the
Daily Revenue Report. The report is a summarised version of all the hotel’s
financial activities during a 24-hour period. It also provides details of cash and
bank reconciliations, revenues, and accounts receivables. Moreover, the report
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acts as an important data that assists in linking front and back-office computer
functions.
Occupancy Ratios
Occupancy refers to the number of rooms occupied by stay-in guests during
a period. The occupancy ratios measure the success of the Front Office staff
in selling guest rooms, i.e. the hotel’s primary product. Besides, this ratio,
the Front Office also uses other ratios such as check-out percentages, stay-in
percentages. Various other ratios include:
• Occupancy percentage = Rooms occupied / Total rooms available for sale
• Multiple Occupancy percentage = Rooms occupied by more than one
guest/ Total rooms occupied
• Average Guests per Sold Rooms = Total guests/ Number of rooms sold
• Average Daily Rate = Total revenue from rooms/ Total rooms sold
• Average Rate per Guest = Total revenue from rooms/ Total guests
Rooms Revenue Analysis
The Room Rate Variance Report helps to monitor the room revenue. This report
lists those rooms that have been sold at rates other than their rack rates, i.e.
corporate rates, family rates, package rates, promotional rates. Another form of
revenue analysis is the Yield Statistic. This is the ratio of the actual revenues
earned to the total possible potential revenue that would have been earned if
all the rooms were sold at rack rates.
Yield Statistic = Actual Revenues from Rooms / Potential Room Revenues
Hotel Income Statement
This statement provides details of all the vital financial information about the
results of the hotel’s operations for a given period. The period can be the
calendar year or financial year or any other such period.
Rooms Division Income Statement
This statement, also known as Schedule forms part of the hotel’s Income
Statement and be referenced from the same. This schedule is prepared by the
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hotel’s accounting division and not the Front Office accounting staff.
Rooms Division Budgets Report
These reports are made on a monthly budget basis that helps in comparing
the actual revenues and expenses against the budgeted amounts. The report is
depicted both in currency value terms and percentage variances.
Operating Ratios and Ratio Standards
Operating ratios such as the occupancy ratios, yield statistics, assists managers
in reviewing and evaluating the success of the Front Office operations.
For ratios to be more meaningful, they should be compared against proper
industry and hotel standards. Other standards may include prior period’s
values, competitor’s standard and/or budgeted ratios.
FILL IN THE BLANKS
1. The Daily Operations Report is also known as ______________________,
_____________________________ or ___________________________
2. Operating
Ratios
______________________
include
_____________________
and
3. Yield Statistic is calculated as = ___________________________/ Potential
Room Revenues
4. The Schedule is also called the ____________________________________
Statement
5. ________________________ is the Ratio of rooms occupied by stay in
guests during a period of time.
SUMMARY
• The functions of the management commence from the planning stage
and conclude at the evaluation phase. Planning refers to thinking about
the future and organising resources so as to achieve the desired results.
Whereas, evaluation refers to reviewing the actual performance with the
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budgeted.
• The functions of the management include planning, organising, coordinating,
staffing, leading, controlling, and evaluating. Each step is extremely critical
to the success of the hotel.
• The hotel rooms are sold at various rates. The most common form is the
rack rate that refers to the rate at which the Front Office is expected to sell
the room unless various preferential rates or promos are used by guests.
• One can calculate and estimate room rates in many ways. However, the
three most common approaches include - Market condition approach, Rule
of thumb approach, and the Hubbart approach. Each approach has its
individual theories, pros and cons.
• It is imperative for hotels to forecast the room availability so as to obtain
a clearer picture of preparing the budgets and working towards the same.
The formula used for the same is:
Forecasted Rooms Available for Sale = Total Guest Rooms – Number
of Rooms Out of Order - Number of Stay-over Rooms – Number of
Reserved Rooms + Number of No-show Rooms + Number of Under-stay
Rooms –Number of Overstay Rooms.
• Budgets are quantitative forms of plans. Hotels prepare daily, monthly, and
annual budgets. Each budget provides direction to the management and
the employees for a given period. The three aspects of budget preparation
include forecasting of room revenues, forecasting of direct expenses, and
redefining the budget plans according to the external environmental factors.
• It is important for the management to evaluate the success of the actual
revenues with the targeted. Hence, various means are used for evaluation
that includes – daily monitoring reports, occupancy and operational ratios,
room revenue reports, division reports.
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KEY TERMS
Planning
Staffing
Evaluating
Coordinating
Organising
Budgets
Leading
Reports
Planning And Evaluating Operations
TOPIC 10
Occupancy Ratios
Operating Ratios
Income Statements
Profit and Loss
Market Condition Approach
Hubbart’s Approach
Room Rate Estimation
Room Availability
Forecasting
Rule of Thumb Approach
Direct Expenses
Construction Costs
Redefining Plans
Front Office
EXERCISE
Short Answer Questions
1. Assess the types of occupancy and operating ratios.
2. Outline the planning and evaluation functions of the management.
3. Define budgets? State how they help the management.
Long Answer Questions
1. Categorise the various functions of the management.
2. Identify how Room availability is forecasted.
3. Evaluate the processes that are most commonly used for estimating room
revenues
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References
1. tripadvisor.ca/FAQ_Answers-g295424-d1151777-t1. (n.d.). Retrieved from
http://www.tripadvisor.ca/FAQ Sarbomania presentations. (n.d.). Retrieved from http://www.slideshare.net/sarbomania
2. Planning and evaluating operations. (n.d.).Retrieved from http://www.tourism.bilkent.edu.tr/%7Ejamel/Foo/52148-Chapter%2010.doc
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