PLANNING AND EVALUATING FRONT OFFICE OPERATIONS
- Management Functions:
1. Planning: At the planning stage, the
front office manager shall determine the department’s goals. Later, the front
office manager shall use these goals as a guide for planning more specific and
measurable objectives. Lastly, the front office manager shall determine the
strategies and tactics to reach these objectives.
2. Organizing: The front office manager
shall organize the work to be done through dividing it among staff members.
While doing so, the work shall be distributed fairly and shall be completed in
a timely manner.
3. Coordinating: Involves bringing
together and using the available resources to attain planned goals.
4. Staffing: Involves recruiting
applicants, selecting those best qualifies for positions, and scheduling
employees.
5. Leading: Involves overseeing, motivating, training, disciplining, and
setting an example for the front office.
6. Controlling: Ensures that the actual
results of operations closely match planned results.
7. Evaluating: Determines the extent to
which planned goals are, in fact, attained. Moreover, it involves reviewing
and, when necessary, revising or helping to revise front office goals.
II- Establishing Room Rates:
Basis of Charging Room
Tariff
Price
is one of the major elements involved in the marketing and positioning of a
product or service. The price of goods and services of a hotel should cover the
cost of production and overheads, and include a fair amount of profit, so that
the hotel business remains sustainable and profitable. The room of a hotel
generates the maximum revenue, so an accurate and competitive room rent is one
of the prerequisites for running a successful hospitality business. The rate of
a hotel room is based on the competition, cost, standard of services and
amenities offered by the hotel, the guest profile, location of the hotel,
location of the room etc.
Three
common approaches to deciding room tariff are given as below:
Market based Pricing: Market based
pricing is setting a price based on the value of the product in the perception
of the customer. The concept is based on an idea of what the ultimate consumer
of goods and services, i.e the guest is willing to pay and then use this as a
starting point. In this case, the hotel works backwards as it first makes an
accommodation product available at a price that a guest is willing to pay
rather than first readying the product and then deciding its tariff on the
basis of costs involved.
This
approach is common sense approach. Management looks at comparable hotels in the
geographical market and sees what they are charging for the same product. The
thought behind this is that the hotel can charge only what the market will
accept, and this is usually dictated by the competition.
There
are many problems with this approach, although it is used very often. First, if
the property is new, construction costs will most likely be higher than those
of the competition. Therefore the hotel cannot be as profitable as the
competition initially. Second, with the property being new and having newer
amenities, the value of property to guests can be greater. The market condition
approach is really a marketing approach that allows the local market to determine
the rate. It may not tale fully into account what a strong sales effort may
accomplish.
Close
observation of market trend approach further divides it into four types:
·
Competitive
Pricing : Charge what the competition charges
·
Follow
the leader Pricing : Charge what the dominant hotel in the area charges
·
Prestige
Pricing : Charge the highest rate in the area and justify it with better
product, better service levels, etc
·
Discount
pricing : Reduce rates below that of the likely competitors without considering operating
costs
·
The front office manager shall assign to each room category a rack rate. In
accordance, front office employees are expected to sell rooms at rack unless a
guest qualifies for an alternative room rate (ex: corporate or commercial rate,
group rate, promotional rate, incentive rate, family rate, day rate, package
plan rate, complementary rate…).
·
While establishing room rates, management shall be careful about its operating
costs, inflationary factors, and competition. Generally, there are three
popular approaches to pricing rooms:
1. Market
condition approach
2. Rule-of-thumb
approach
3.
Hubbart formula approach
1.
Market condition approach:
·
Under this very approach, management shall look at comparable hotels in the
geographical market, see what they are charging for the same product, and “charge only what the market will accept”.
Some drawbacks of this approach are that it does not take into consideration
the value of the property, and what a strong sales effort may accomplish.
2. Rule of thumb approach:
The rule of thumb approach sets the rate of a
room at Rs. 1 for each Rs. 1000 spent on the project cost per room, assuming 70
% occupancy. In case the occupancy percentage is expected to be more than 70%
then the rate of a room can be less than Rs. 1 and on the contrary if the
occupancy is expected to be less than 70 % then the rate can be more than Rs.
1. For example, assume that the average construction and furnishing cost of a
hotel room is Rs. 30,00,000/- the average rack rate of hotel room in this hotel
using thumb rule will be Rs. 3000, as illustrated below.
1000:
1
30,
00,000: 3000
The
inflation cost is kept in mind while fixing the rack rate. For example if a
hotel was built 50 years ago at the cost of Rs. 50,000/- per room than as per
the rule of thumb the rack rate per room will be Rs. 50/- only which is not a
financially viable rate option. To find out the current rack rate either the
present asset value is evaluated or the net present value of Rs. Invested 50
years ago is calculated, keeping in view the inflation and the resultant
devaluation of currency.
The
rule of thumb approach to pricing rooms also fails to consider the contribution
of other facilities and services provided by the hotel in generating revenue.
As hotel generates revenue from sources like food and beverage, conference,
laundry, telephone etc so it must be a part of calculation while deciding room
tariff for the hotel.
3. Hubbart formula approach:
· This very approach considers operating costs, desired
profits, and expected number of rooms sold (i.e. demand). The procedure of
calculating a room rate is as follows:
a)
Calculate the hotel’s
desired profit by multiplying the desired rate of return (ROI) by the
owner’s investment.
b)
Calculate pre-tax
profits by dividing the desired profit
by 1 minus hotel’s tax rate.
c)
Calculate fixed
charges and management fees. This calculation includes estimating depreciation,
interest expense, preperty taxes, insurance, amortization, building mortgage,
land, rent, and management fees.
d)
Calculate undistributed
operating expenses. This includes estimating administrative and general
expenses, data processing expenses, human resourecs expenses, transportation
expenses, marketing expenses, property operation and maintenance expenses, and
energy costs.
e)
Estimate non-room
operating department income or loss, that is, F&B department income or
loss, telephone department income or loss …
f)
Calculate the required
room department income which is the sum of pre-tax profits, fıxed charges
and management fees, undistributed operating expenses, and other operating
department losses less other department incomes.
g)
Determine the rooms
department revenue which is the required room department income, plus other
room department direct expenses of payroll and related expenses, plus other
direct operating expenses.
h)
Calculate the average
room rate by dividing rooms department revenue by the expected number of
rooms to be sold.
· Doubles sold daily = double occupancy rate * total number
of rooms * occupancy %
· Singles sold
daily = rooms sold daily – number of double rooms sold daily
·
Singles sold daily * x + doubles sold daily * (x + y) = (average room rate) *
(total number of rooms sold daily)
· Where: x =
price of singles; y = price differential between singles and doubles; x + y =
price of doubles.
Types of Room
Rates
Room
rates are of two types:
(1) Rack Rate
Hotel
generally designates a standard rate for each of the category of rooms offered
to guests. This rate which is the published tariff of the hotel and is without
any discount is known as the Rack rate. In common parlance, rack rate may be
referred as the MRP of a hotel room. Traditionally, a wooden rack or rate board
was placed in the lobby or at the reception, hence the name rack rate.
(2) Discounted Rate
To
attract business and to compete in the market hotels offer different types of
discounted room tariff. Discounted tariff is lower than the rack rate.
Sometimes hotels offer discounts to please a guest for a courtesy as it is
expected that the guest may send a lot of business to the hotel in future. Some
of these discounted rates are given as below:
(a) Corporate rate: Corporate discount is offered to
companies and corporate houses. Business hotels particularly rely on this rate
but it may also be a part of resorts as now-a-days various companies organize
conferences and training programs at resort destinations. Corporate rate is of
two types
Regular
corporate rate: It is a unilateral offer. When hotels offer a fixed percentage
of discount without any commitment from the corporate house it is known as
regular corporate rate.
CGVR: It stands for company guaranteed volume rate. It’s a bilateral contract between the hotel and the corporate house. In this case hotels offer a higher discount compared to regular corporate rate but on a condition that company will give a guaranteed volume of business during the year.
b) Airline rate: It is usually
offered by airport hotels or the transit hotels. It is a discounted rate given
to airline companies when they give business in the form of stay of their crew
members or layovers.
c) Travel Agent rate: Travel agents
work on a commission basis. They are like a retail shop of tourism services.
Usually 10 % commission is offered to the travel agents for the business
provided by them. Travel agents are also offered a discounted rate so
that they market the hotel product ahead of the competition which is also being
marketed by them.
d) Seasonal rate: Usually resorts
have a very pronounced peak season, mid season / shoulder period and off
season. They charge rack rate during peak season and discounted rates during
the rest of the year. Resorts close to the cities may also offer a discounted
rate on week days compared to the weekends.
e) Week end rate: Business hotels get low occupancy on
weekends as most of the commercial establishments and offices are closed on
such days. To attract business on weekend, special discounted tariff is offered
by these hotels.
f)
FHRAI Rate: Federation of hotels and restaurants association of India is
a trade association which is a representative body of hospitality industry in
India. Member hotels and restaurant are offered a membership card which is
usually given to owner and general manager of the hotel. FHRAI card holder gets
a fixed discount in all member hotels which is 30% on Room, F & B, and
Laundry. The discount is reduced to 25% if mode of payment is through credit
card.
g) Group Tariff: 10 or more than 10
persons travelling together are known as group. Group tariff is lower than the
rack rate as it constitutes bulk business. Group rates are usually negotiable
on the basis of the size of group, length of stay, past relationship with the
group operator, season, etc.
h) Package: Package is a
bouquet of product and services which bought collectively will cost less to the
consumer in comparison to the same set of services bought individually. As an
example if rack rate is Rs. 5000/ 1 3 night package may cost Rs. 12,000.
Packages generally include a meal plan, sightseeing, air port pick up etc.
i) Complimentary rate:
When the room is offered without any charge to a guest it is known as
complimentary rate. It may be offered to a relative or friend of the owner, to
compensate for a lapse in service, as a reward to a regular guest or during FAM
Tour/familiarity tours for opinion makers such as travel writes, food critics,
travel agency heads, etc.
j) House Use: When
the room is offered without any charge to a person who is staying in the hotel
for hotel’s own use it is known as house use rate. It may be in the case of a
resident manager or manager on duty or a technician who is staying the hotel
for some kind of repair and maintenance work.
k) Crib rate: A special rate
applicable to children below 12 years of age, and accompanying their parents. A
special crib cot is provided in such cases.
l) Introductory rate:
New hotels offer a special discounted rate for initial 2-3 months to attract business
and to familiarize the market with their product. This kind of discounted
tariff is known a crib rate.
III- Forecasting Room Availability:
· Forecasting
room availability is forecasting the number of rooms available for sale on any
future date. This type of forecasting helps manage the reservation process,
guides the front office staff for an effective rooms management, and can be
used as an occupancy forecast, which is, further, useful in attempting to
schedule the necessary number of employees for an expected volume of business.
· In order to
forecast room availability, the following data are needed:
a)
Number
of expected room arrivals
b)
Number
of expected room walk-ins
c)
Number
of expected room stayovers
d)
Number
of expected room no-shows
e)
Number
of expected room understays
f)
Number
of expected room check-outs
g)
Number
of expected room overstays
·
These above-mentioned data help the front office in conduct various daily
operational ratios such as:
a)
No-shows percentage = (number of no-show
rooms) / (number of rooms reserved)
b)
Walk-ins percentage = (number of walk-in
rooms) / (total number of rooms arrivals)
c)
Overstays percentage = (number of
overstay rooms) / (number of expected check-outs)
d)
Understays percentage = (number of
understay rooms) / (number of expected check-outs)
· The forecasted
number of rooms available for sale for any future date can be tracked using the
following formula:
· Forecasted
number of rooms available for sale = total number of guest rooms – number of
out of order rooms - number of stayovers rooms – number of reserved rooms +
number of no-show rooms + number of understay rooms – number of overstay rooms
·
Under non-automated and semi-automated systems, number of rooms available for
sale forecasts are calculated upon demand and need and vary from three-day to
ten-day forecasts. However, under fully automated systems, forecasts can be
done at any moment for any future period of time. For, computers run forecasts
on a room count considerations, hence eliminating tedious labor work and human
error margins.
IV- Budgeting for Operations:
·
At least once per year, hotels shall prepare annual budgets, which are profit
plans that address all revenue sources and expense items for the following
calendar year. Moreover, the hotel annual operating budget represents standards
against which management can evaluate actual results of operations. In the
annual budget preparation process, close coordination efforts of all management
personnel is vital.
· The hotel’s
annual operation budget is commonly divided into monthly plans, which in turn
are divided into weekly and even daily plans, for better control over actual
results.
·
While preparing the front office department annual budget, the front office
manager shall coordinate with the accounting department as to estimate only
rooms revenue and related direct expenses. The hotel controller and the general
manager, then, shall revise this very budget.
1. Forecasting room
revenue:
·
In order to forecast room revenue, the front office manager might consult
historical financial information such as past room revenue, past number of
rooms sold, past average daily rate, and past occupancy rates.
2. Forecasting direct
expenses:
· Due to the fact
front office manager is responsible only for his/her department direct expenses
(i.e. variable costs), the front office manager can, also, consult historical
financial data depicting variable cost to room revenue ratios, in order to
estimate department expenses.
3. Refining budget
plans:
·
Sometimes, if external uncontrollable factors change significantly, in an
unexpected way, then the actual operating budgeted figures shall be revised.
V- Evaluating Front Office Operations:
· A successful
front office manager shall continuously evaluate the results of department
activities on a daily, monthly, quarterly, and yearly basis. While evaluating,
the following items and tools shall be used:
a)
Daily
operations report
b)
Occupancy
ratios
c)
Rooms
revenue analysis
d)
Hotel
income statement
e)
Rooms
division income statement or schedule
f)
Rooms
division budgets report
g)
Operating
ratios and ratio standards
1. Daily operations
report:
·
It is also known as the manager’s report, the daily report, and the daily
revenue report. This very report contains a summary of the hotel’s financial
activities during a 24-Hour period. Moreover, it serves as to reconcile cash,
bank accounts, and revenue and accounts receivable, and as an important data
that must be input to link front and back office computer functions.
2. Occupancy ratios:
· Occupancy
ratios measure the success of the front office in selling the hotel’s primary
product (i.e. guestrooms). Below are some common ratios used in the front
office department:
· Occupancy
percentage = (number of rooms occupied) / (total number of rooms available for
sale)
· Multiple
occupancy percentage = (number of rooms occupied by more than one guest) /
(total number of rooms occupied)
· Average guests
per rooms sold = (total number of guests) / (total number of rooms sold)
· Average daily
rate = (total rooms revenue) / (total
number of rooms sold)
· Average rate
per guest = (total rooms revenue) /
(total number of guests)
3. Rooms revenue
analysis:
· One main report
to enhance control over room revenue is the room rate variance report, which is
the one that lists those rooms that have been sold at rates other than their
rack rates. Another form is the yield statistic, which is the ratio of the
actual revenue to the total possible potential revenue if all rooms are sold at
rack rates.
· Yield statistic
= (actual room revenue) / (potential room revenue)
4. Hotel income statement:
·
This very statement provides important financial information about the results
of hotel operations for a given period of time
5. Rooms division
income statement:
·
The rooms division income statement (sometimes called a schedule) shall be
referenced on the hotel’s income statement. Moreover, the rooms division
schedule shall be prepared by hotel’s accounting division not the hotel’s front
office accounting staff.
6. Rooms division budget reports:
·
These reports are monthly budget forms that compare actual revenue and expense
figures against budgeted amounts depicted both in dollar values and percentage
variances
7. Operating ratios:
· Operating
ratios (ex. occupancy ratios, yield statistic…) assist managers in evaluating
the success of front office operations. Moreover, for ratios to be meaningful
they should be compared against proper standards such as prior period's,
competitor's, and/or budgeted ratios.
