Chapter 12: Planning and Evaluating Operations

Chapter 12: Planning and Evaluating Operations
Competencies for Planning and Evaluating Operations
1. Describe the management process in terms of the functions
front office managers perform to achieve organizational
objectives.
2. Identify room rate categories and explain how managers
establish room rates.
3. Discuss issues involved with forecasting room availability and
apply the ratios and formulas managers use.
4. Explain how front office managers forecast rooms revenue and
estimate expenses when budgeting for operations.
5. Describe how managers use various reports and ratios to
evaluate front office operations.
6. Explain what front office managers can do to plan for disasters.
Managing Front Office Operations PowerPoint
1

Management Functions
• Planning
• Organizing
• Coordinating
• Staffing
• Leading
• Controlling
• Evaluating
2

Planning
• Planning is probably the most important management function
in any business. Without competent planning, front office work
would be chaotic.
• A front office manager’s first step in planning should be to
establish department goals, both near-term and long-term.
• An important component of planning is communicating
preliminary plans with all those involved.
• When staff members have a chance to contribute to the plan,
they gain ownership of the plan, give managers a chance to
address their concerns, and have a more comprehensive
understanding of the plan and how it came about.
3

Organizing
• Using planned goals as a guide, front office managers
can organize the department by dividing the work among
front office staff.
• Managers should distribute work so that everyone
participates and the work can be completed in a timely
manner.
• Organizing includes determining the order in which tasks
should be performed and establishing completion
deadlines for each group and subgroup of tasks.
4

Coordinating
• Coordinating involves bringing together and using
available resources to attain planned goals.
• Front office managers must be able to coordinate the
efforts of many individuals to ensure that work is
performed efficiently.
• Coordinating front office procedures may involve
engaging with other hotel departments; many front office
goals depend on other departments for achievement.
5

Staffing
• Staffing involves recruiting applicants and selecting those best
qualified to fill available positions.
• To properly recruit employees, it is essential that managers
develop good job descriptions.
• If the hotel has a human resources department, front office
managers will work with it to develop job descriptions.
• At most hotels, the human resources department is usually
involved in the first level of qualifying and interviewing job
applicants.
• The staffing process also involves scheduling employees.
• Most front office managers develop staffing guidelines based on
formulas for calculating the number of employees required to
meet guest and operational needs under specific conditions.
6

Leading
• Leading is a complicated management skill that is exercised
in a wide variety of situations.
• Leading is closely related to other management skills such as
organizing, coordinating, and staffing.
• For front office managers, leadership involves overseeing,
motivating, training, disciplining, and setting an example for
the front office staff.
• A front office manager’s leadership impact often extends
beyond the front office, because so much of the hotel’s
business activity flows through the front desk.
• One of the best ways to lead a department is by example.
• When a manager leads effectively, this behavior demonstrates
what is expected of all department employees.
7

Controlling
• Every front office department has a system of internal
controls to protect the hotel’s assets.
• Internal control systems only work when managers
believe in the systems’ importance and follow
established procedures.
• The control process ensures that the actual results of
business operations closely match planned results.
• Front office managers also exercise a control function
when keeping front office operations on course in
attaining planned goals.
8

Evaluating
• Proper methods of evaluation determine the extent to
which planned goals are attained.
• The evaluating task is frequently overlooked in many
front office operations.
• Evaluating also involves reviewing and, when necessary,
revising front office goals.
9

Establishing Room Rates
• A front office revenue management system will almost
always have more than one room rate category for each
guestroom.
• Room rate categories generally correspond to types of
rooms (suites, two beds, one bed, etc.).
• Differences in a hotel’s room rates are based on criteria
such as room size, location within the hotel, view,
furnishings, and amenities.
• The “rack rate” is the standard price for an overnight
accommodation, as determined by management, for a
particular room or room type.
Continued
10a

Establishing Room Rates
• Unless a guest qualifies for an authorized room rate
Continued from previous slide…
discount, the rack rate will apply.
• Often, rack rates must be reported to local and state
authorities and posted in a hotel’s public areas or
guestrooms.
• Room rates are normally assigned by type of room.
• Front office employees are expected to sell rooms at the
rack rate unless a guest qualifies for a discounted room
rate.
10b

Room Rate Categories
• Rack
• Corporate/commercial
• Group
• Promotional
• Incentive
• Family
• Package plan
• Internet rate
• Distressed-inventory rate
• Complimentary
11

Guestroom Pricing Strategies
• Market condition approach
• Rule-of-thumb approach
• Hubbart Formula
12

Market Condition Approach
• With the market condition approach, managers identify
comparable hotels in their geographic market--their
“competitive set”--and base their pricing on what their
competitors are charging.
• TIMS, Phaser, RateVIEW, and STAR reports provide
information on competitors.
• In the United States, it is illegal for hotel managers to
base their rates on the rates of other hotels via direct
discussions with the managers of competing hotels.
13

Rule-of-Thumb Approach
• The rule-of-thumb approach establishes the minimum
average room rate at $1 for each $1,000 of construction
and furnishings cost per room (and assumes the hotel
maintains a 70 percent average occupancy).
• This approach fails to consider the effects of inflation
over time. For that reason, sometimes managers
consider the current replacement cost of a hotel, rather
than its original construction and furnishings cost, as a
basis for the rule-of-thumb approach.
Continued
14a

Rule-of-Thumb Approach
• The rule-of-thumb approach also fails to consider the
contribution of other facilities and services toward the
hotel’s desired profitability.
• The rule-of-thumb approach should carefully take into
account the hotel’s occupancy level. If the hotel’s
occupancy percentage is expected to be lower than 70
percent, the hotel will have to capture a higher average
rate to generate the same amount of room revenue.
14b

Hubbart Formula
• The Hubbart Formula considers operating costs, desired
profits, and expected number of rooms to be sold. It
starts with desired profitability, adds income taxes, then
adds fixed charges and management fees, followed by
overhead expenses and direct operating expenses.
• The Hubbart Formula is considered a bottom-up
approach to pricing rooms because its initial item—
profit—comes from the bottom line of a standard income
statement; the second item—income taxes—is the
second item from the bottom of the income statement,
and so on.
15

The Eight Steps of the Hubbart Formula
1. Calculate the hotel’s desired profit by multiplying the
desired rate of return (ROI) by the owners’ investment.
2. Calculate pretax profits by dividing desired profit (Step
1) minus the hotel’s tax rate.
3. Calculate fixed charges and management fees.
4. Calculate undistributed operating expenses.
Continued
16a

The Eight Steps of the Hubbart
Formula
5. Estimate non-room operated department income or loss.
6. Calculate the required rooms department income. The sum of
pretax profits (Step 2), fixed charges and management fees
(Step 3), undistributed operating expenses (Step 4), and other
operated department losses less other operated department
income (Step 5) equals the required rooms department income.
7. Determine the rooms department revenue. The required rooms
department income (Step 6), plus rooms department direct
expenses of payroll and related expenses, plus other direct
operating expenses, equals the required rooms department
revenue.
8. Calculate the average room rate by dividing rooms department
revenues (Step 7) by the expected number of rooms to be sold.
16b

Planned Rate Changes
• Room rack rates are likely to change during the year,
due to market factors such as location, seasonality, or
major events in the area.
• Because of this, hotels may publish a rack rate range
instead of a specific rack rate.
• Resorts, for example, may have several different rack
rates for the same room types during the year, reflecting
how demand for the rooms vary during the year.
• Major events, such as the NFL Super Bowl, will cause
hotels to plan special (higher) rates, given the expected
high demand for hotel rooms due to the event.
17

Forecasting Room Availability
• The most important short-term planning that front office
managers engage in is forecasting the number of rooms
available for future reservations.
• Room availability forecasts are used to help manage the
reservations process.
• A room availability forecast can be used as an occupancy
forecast. Since there is a fixed number of rooms available on
any given night, forecasting the number of rooms available for
sale and the number of rooms expected to be occupied can be
useful in computing an expected occupancy percentage.
• Occupancy forecasts may be an important consideration for
making room rate pricing decisions.
Continued
18a

Forecasting Room Availability
• Without an accurate forecast, rooms may go unsold or
be sold at less-than-optimal rates.
• Room occupancy forecasts can be useful when
scheduling employees.
• Every effort should be made to ensure forecasting
accuracy.
• Forecasting is a difficult skill to develop. Skill is acquired
through experience, effective recordkeeping, and
accurate counting methods.
18b

Forecasting Data
• Expected arrivals
• Expected walk-ins
• Expected stayovers
• Expected no-shows
• Expected understays
• Expected check-outs
• Expected overstays
19

Percentage of No-Shows
Number of Room No-Shows
Number of Room Reservations
Purpose: Helps front office managers decide when (and if)
to sell already-committed rooms to walk-in guests.
20

Percentage of Walk-Ins
Number of Room Walk-Ins
Total Number of Room Arrivals
Purpose: Helps front office managers know how many
walk-ins to expect, especially when the hotel is near full
occupancy.
21

Percentage of Overstays
Number of Overstay Rooms
Number of Expected Check-outs
Purpose: Alerts front office managers to potential problems
when the hotel is near full occupancy and rooms have been
reserved for arriving guests.
22

Percentage of Understays
Number of Understay Rooms
Number of Expected Check-outs
Purpose: Alerts front office manager to probable additional
room availability when the hotel is near full occupancy.
23

Rooms Available Formula
Total number of guestrooms
– Out-of-order rooms
– Stayovers
– Reservations
+ Reservations no-show percentage
+ Understays
– Overstays
_______________________________________________
Number of rooms available for sale
24

Ten-Day Forecasts
• At most lodging properties, the ten-day room availability
forecast is developed jointly by the front office manager
and the reservations manager, perhaps in conjunction with
a room availability forecast committee.
• A ten-day forecast usually consists of: daily forecasted
occupancy figures, the number of group commitments (with
details about the groups), and a comparison of the
previous period’s forecasted and actual room counts and
occupancy percentages.
Continued
25a

Ten-Day Forecasts
• A special ten-day forecast may also be prepared for food
and beverage, banquet, and catering operations.
• To help departmental managers plan their staffing and
payroll levels for the upcoming period, the ten-day forecast
should be completed and distributed in advance of the
coming period.
• Most automated systems have programs to help managers
accurately forecast business.
25b

Three-Day Forecasts
• A three-day forecast is an updated report that reflects a
more current estimate of room availability.
• A three-day forecast details significant changes or
events not highlighted on the ten-day forecast.
• Three-day forecasts are intended to guide management
in fine-tuning labor schedules and adjusting room
availability information.
• In some hotels, a daily revenue meeting is held to focus
on occupancy and rate changes for the next several
days; the results of this meeting are often reflected in the
three-day forecast.
26

Room Count Considerations
• Control books, charts, software applications, projections, ratios,
and formulas can be essential in short- and long-range room
availability planning.
• Each day in some hotels, front office management performs
several physical counts of rooms occupied, vacant, reserved,
and expected to check out, to complete the occupancy statistics
for that day.
• An automated system may reduce the need for most physical
counts, since the system can be programmed to continually
update room availability information.
• It is important for front desk agents to know exactly how many
rooms are available, especially if the hotel is expected to operate
at nearly 100 percent occupancy.
27

Budgeting for Operations
• The most important long-term planning function that front
office managers perform is budgeting for front office
operations.
• The hotel’s annual operations budget is a profit plan that
addresses all revenue sources and expense items.
• Annual budgets are commonly divided into monthly plans
that, in turn, are divided into weekly (and sometimes
daily) plans.
• These budget plans are standards against which
management can evaluate the actual results of
operations.
Continued
28a

Budgeting for Operations
• In most hotels, room revenues and profits are usually
greater than for other hotel revenue areas, so an
accurate rooms division budget is vital to creating a
hotel’s overall budget.
• The budget planning process requires close cooperation
of all managers.
• The front office manager’s primary responsibilities in
budget planning are forecasting rooms revenue and
estimating related expenses.
28b

Forecasting Rooms 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. For
example, if for the past four years rooms revenue
increased an average of ten percent, for the next year
rooms revenue might be budgeted at a ten percent
increase over the previous year’s revenue.
Continued
29a

Forecasting Rooms Revenue
• Another approach to forecasting rooms revenue bases
the revenue projection on the trends of past room sales
and average daily room rates.
• Detailed approaches to forecasting rooms revenue
consider the variety of different rates corresponding to
room types, guest profiles, days of the week, seasonality
of business, and other factors.
29b

Estimating Expenses
• Most expenses for front office operations are variable
expenses (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 expense category for the budget year.
• Typical rooms division expenses are payroll and related
expenses, guestroom laundry, guest supplies, hotel
merchandising, travel agent commissions and direct
reservation expenses, and other expenses.
Continued
30a

Estimating Expenses
• When rooms division expenses 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.
• Another method of estimating expenses is to estimate
variable costs per room sold and then multiply these
costs by the number of rooms expected to be sold.
30b

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 support documents should be saved to provide an
explanation of the reasoning behind the budget. They may
help resolve issues that arise during the budget review and
may assist in the preparation of future budgets.
• Many hotels refine their budgets as they progress through the
year. Reforecasting is normally suggested when actual
operating results start to vary significantly from the budget.
• Significant variations may indicate that conditions have
changed since the budget was first prepared.
31

Evaluating Front Office Operations
• Evaluating the results of front office operations is an important
management function; without evaluation, managers will not
know whether the front office is attaining planned goals.
• Front office managers should evaluate the results of department
activities on a daily, monthly, quarterly, and yearly basis.
• Important tools that front office managers can use to evaluate
the success of their operations include the following: daily report
of operations, occupancy ratios, rooms revenue analysis,
income statement, rooms schedule, rooms division budget
reports, operating ratios, and ratio standards.
32

Daily Report of Operations
• The daily report of operations is also known as the manager’s
report, the daily report, and the daily revenue report.
• The daily report of operations summarizes the hotel’s financial
activities during a twenty-four-hour period.
• The daily report of operations provides a means of reconciling
cash, bank accounts, revenue, and accounts receivable.
• This 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 reports of operations are often uniquely structured to
meet the specific needs of individual properties.
• Copies of the daily report are usually distributed to the hotel’s
general manager and all department and division managers.
33

Occupancy Ratios
• Occupancy ratios measure the effectiveness of the front office
and reservations sales staffs in selling guestrooms.
• The following rooms statistics must be gathered to calculate
basic occupancy ratios: number of rooms available for sale,
number of rooms sold, number of guests, number of guests
per room, and net rooms revenue. (This information is usually
available in the daily report of operations.)
• Common occupancy ratios include occupancy percentage,
multiple occupancy, average daily rate, revenue per available
room, revenue per available customer, and average rate per
guest.
• The front office system typically generates occupied rooms
data and calculates occupancy ratios for the front office
manager to review.
34

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.
• Some hotels use the number of rooms sold to calculate
occupancy percentage, while others use the number of
rooms occupied.
Continued
35a

Occupancy Percentage
• Out-of-order rooms may or may not be included in the
number of rooms available, depending on the hotel.
Occupancy Percentage =
Number of Rooms Occupied
Number of Rooms Available
35b

Multiple Occupancy Ratio
• The multiple occupancy ratio is used to forecast food and
beverage revenue, indicate clean linen requirements, and
analyze average daily room rates.
• This ratio is also referred to as the double occupancy ratio.
• Multiple occupancy can be calculated by determining a
multiple occupancy percentage or by determining the
average number of guests per room sold or occupied.
Continued
36a

Multiple Occupancy Ratio
Multiple Occupancy Percentage =
by More Than One Guest
Average Guests per Room Sold =
Number of Guests
Number of Rooms Sold
36b

Average Daily Rate
• Most front office managers calculate an average daily rate
even though room rates within a property can vary
significantly depending on the type of room, type of guest,
day of the week, and season.
• Some hotels include complimentary rooms when calculating
average daily rate, to show their effect on the rate.
Average Daily Rate =
Total Room Revenue
Number of Rooms Sold
37

Revenue per Available Room
• Revenue per Available Room (RevPAR) is one of the
most important hotel statistics, because it provides a
statistical benchmark for comparison with similar hotels.
• RevPAR divides the total room revenue of the hotel by
the number of available rooms.
RevPAR =
Total Room Revenue
Number of Available Rooms
38

Revenue per Available Customer
• Revenue per Available Customer (RevPAC) divides the
total revenue generation of the hotel by the number of
guests staying overnight.
• For hotels with high volumes of multiple occupancy,
RevPAC is especially important, since it provides an
average room rate spending figure per guest.
RevPAC =
Total Revenue
Number of Guests
39

Average Rate per Guest
• Average rate per guest is of special interest to resort hotels.
• All guests are included in this calculation; some hotels
include children.
Average Rate per Guest =
Total Room Revenue
Number of Guests
40

Rooms Revenue Analysis
• A room variance report lists rooms that have been sold
at other than their rack rates.
• Managers use the room variance report to review the
use of various special rates to determine whether staff
has followed front office policies and procedures.
• One way for front office managers to evaluate the sales
effectiveness of the front office staff is to generate a yield
statistic, which is actual rooms revenue as a percentage
of potential rooms revenue.
41

Yield Statistic
• Potential rooms revenue is the amount of rooms revenue
that can be generated is all the rooms in the hotel are sold
at their rack rate on a given day, week, month, or year.
Yield Statistic =
Actual Rooms Revenue
Potential Rooms Revenue
42

Income Statement
• A hotel’s income statement provides important financial
information about the results of hotel operations for a given
period of time.
• The income statement reveals the amount of net income for a
given period, so it is one of the most important financial
statements management uses to evaluate the hotel’s
success.
• Rooms division information appears on the first line, under the
category of operated departments.
• The amount of income generated by the rooms division is
determined by subtracting “payroll and related expenses” and
other expenses from the amount of net revenue produced by
the rooms division.
Continued
43a

Income Statement
• Payroll expenses charged to the rooms division may
include those associated with the front office manager,
front desk agents, reservations agents, housekeepers,
and uniformed service staff.
• Since the rooms division is not a merchandising facility,
there is no “cost of sales” to subtract from the net
revenue amount.
• Revenue generated by the rooms division is usually the
largest single amount produced by revenue centers
within the hotel.
43b

Rooms Schedule
• The hotel’s income statement primarily contains
summary information; the separate departmental income
statements prepared by each revenue center, called
“schedules,” provide more detail.
• The hotel accounting division, not the front office
accounting staff, usually prepares the rooms schedule.
• By carefully reviewing the rooms schedule, the front
office manager may be able to develop action plans to
improve the division’s financial condition and services.
44

Rooms Division Budget Reports
• The hotel’s accounting division prepares monthly budget
reports that compare actual revenue and expense figures
with budgeted amounts.
• Budget reports can provide timely information for
evaluating front office operations.
• A budget report should include both monthly variances
and year-to-date variances (both dollar and percentage
variances) for all budget items.
Continued
45a

Rooms Division Budget Reports
• Percentage variances are determined by dividing the
dollar variance by the budgeted amount.
• Both dollar and percentage variances are shown because
either type of variance alone may not indicate the
significance of the variances reported.
• It should be expected that actual results will differ
somewhat from budgeted amounts, since budgeting is not
a perfect science. Therefore, only significant variances
from budget should be investigated by management.
45b

Operating Ratios
• Operating ratios assist managers in evaluating the
success of front office operations.
• Dividing the payroll and related expenses of the rooms
division by the division’s net room revenue yields one of
the most frequently analyzed areas of front office
operations: labor cost.
• Operating ratios should be compared against standards
such as budgeted percentages; any significant
differences should be investigated.
46

Ratio Standards
• Operating ratios are meaningful only when compared against
useful criteria such as planned ratio goals, historical ratios, and
industry averages.
• Ratios are best compared against planned ratio goals.
• Industry averages can be found in publications prepared by the
national accounting firms and trade associations serving the
hospitality industry.
• Operating ratios are only indicators; they do not solve problems
and may not reveal the source of the problem(s).
• At best, when ratios vary significantly from planned goals,
previous results, or industry averages, they are indicating that
problems may exist. More analysis and more investigation are
usually necessary.
47

Planning for Disasters
• Disaster planning is often overlooked by managers; nevertheless,
it is important for managers to have a disaster plan in place and
make sure that staff members are familiar with it.
• There are many types of disasters to consider, from power
failures to acts of terrorism. It is impossible to plan for every
conceivable disaster, but plans should be in place for deal with
those that can be foreseen.
• Given today’s level of hotel automation, it is important for disaster
plans to state what corrective actions front office personnel need
to take if essential technology applications fail.
• Front office managers should prepare for possible criminal
activity.
Continued
48a

Planning for Disasters
• Severe weather, floods, and other natural disasters require
special planning to deal with them. A hotel’s natural disaster
plans should be coordinated with local and regional disaster
planning agencies.
• A fire, terrorism attack, or other disaster may require a complete
hotel evacuation and shutdown of operations. Front office staff
members must know how to conduct themselves in these
situations and what their responsibilities are in assisting guests
and securing hotel assets.
• Managers should periodically review and update disaster plans.
• To be effective, disaster training must be a regularly scheduled,
ongoing activity.
48b

Chapter 12: Planning and Evaluating Operations

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Chapter 12: Planning and Evaluating Operations