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.