EVALUATING FRONT OFFICE OPERATIONS
Evaluating the result of front office operations is an important management function. Without thoroughly evaluating the results of operations, managers will not know whether the front office is attaining planned goals. Successful front office managers evaluate the results of department activities on a daily, monthly, quarterly, and yearly basis. The following sections examine important tools that front office managers can use to evaluate the success of front office operations. These tools include.
The daily operations report
Rooms revenue analysis
The hotel income statement
The rooms schedule
Rooms division budget reports
THE DAILY OPERATIONS REPORT
The daily operations report, also known as the manager’s report, the daily report, and the daily revenue report, summarizes the hotel’s financial activities during a 24 hour period. The daily operations report provides a means of reconciling cash, bank accounts, revenue and accounts receivable. The report also serves as a posting reference for various accounting journals and provides important data that must be input to link front and back office automated functions. Daily operations reports are uniquely structured to meet the needs of individual hotel properties.
Room statistics and occupancy ratios from an entire section of a typically daily operations report. Enriched by commends and observations from the accounting staff, statistics shown on the daily operations report may take on the more meaning. For example, statistics about the number of guests using the hotel’s valet parking services take on added significance when remarks indicate that valet sales are down while occupancy is up. The front office manager may assume that the front office is not properly promoting available guest valet parking services.
The information provided by the daily operations report is not restricted to the front office manager or hotel general manager. Copies of the daily operations report are generally distributed to all department and division managers in the hotel.
Occupancy ratios measures the success of the front office in selling the hotel’s primary product: guestrooms. The following rooms statistics must be gathered to calculated basic occupancy ratios:
Number of rooms available for sale
Number of rooms sold
Number of guests
Number of guests per room
Net rooms revenue
Generally, these data are presented on the daily operations report. Occupancy ratios that can be computed from these data include occupancy percentage, multiple (or double) occupancy ratio, average daily rate, revenue per available room (Rev PAR), revenue per available customer (Rev PAC), and average rate per guest. Computed occupancy percentage and average daily rate may also appear on a property’s daily operations report. These ratios typically are calculated on a daily, weekly, monthly, and yearly basis.
The front office system typically generates occupied rooms data and calculates occupancy ratios for the front office manager, who analyzes the information to identify trends, patterns, or problems. When analyzing the information, the front office manager must consider how a particular condition may produce different effects on occupancy. For example, as multiple occupancy increases, the average daily room rate may also increase. This is because, when a room is sold to more than one person, the room rate for two people in a room is usually not twice the rate for one person, the average room rate per guest decreases.
The following sections examine how daily occupancy ratios are calculated for the Gregory Hotel. Rooms division data needed for the calculations are as follows.
The Gregory Hotel has 120 rooms and a rack rate of $98. (for simplicity, we will assume in this example that this rack rate is applicable to both singles and doubles)
Eighty-three rooms were sold at varying rates.
Eighty-five rooms were occupied by guests. (Rooms sold does not equal rooms occupied by guests because, on this particular day, single guests occupied two rooms at a complimentary room rate, thereby generating no rooms revenue. Note that the handling of complimentary rooms may differ among hotel properties)
Ten rooms were occupied by two guests, therefore, a total of 95 guests were in occupancy.
$6,960 in room’s revenue was generated.
$7,363.75 in total revenue was generated, including rooms, food, beverage, telecommunications, and other.
The most commonly used operating ratio in the front office is occupancy percentage. Occupancy percentage relates the number of rooms either sold or occupied to the number of rooms available during a specific period of time. It is important to note that some hotels use the number of rooms sold to calculate this percentage, while other hotels use the number of rooms occupied to calculate the statistic. Including complimentary rooms in the calculation can change certain operating statistics, such as average room rate. Using rooms sold, rooms occupied both is valid, depending upon the needs and history property. This discussion will use rooms occupied to illustrate the occupancy percentage calculation.
Sometimes out-of-order rooms may be included in the number of rooms available. At properties that evaluate management performance partly on the basis of occupancy percentage, including out-of-order rooms in the number of rooms available provides the manager with incentive to get those rooms fixed and recycled more quickly. Including all rooms also provides a consistent base on which to measure occupancy. Conversely, not including out-of-order rooms may allow managers to artificially increase the calculated occupancy percentage simply by improperly classifying unsold rooms as out-of-order. Some properties do not include out-of-order rooms because the rooms are not available for sale. Also, to the extent that the occupancy percentage is used to evaluate the performance of front office staff having no control over out-of-order rooms, including those rooms may unfairly penalize the front office staff. Regardless of the approach chosen, it should be used consistently.
The occupancy percentage for the Gregory Hotel is calculated as follows:
Number of rooms occupied
Occupancy Percentage =_________________________ X 100
Number of rooms available
= 85 / 120 X 100
MULTIPLE OCCUPANCY RATIO
The multiple occupancy ratio (frequently called the double occupancy ratio, although this phrasing may not always be accurate) is used to forecast food and beverage revenue, indicate clean linen requirements, and analyze average daily room rates. Multiple occupancy can be calculated by determining a multiple occupancy percentage or by determining the average number of guests per room or occupied (also called the occupancy multiplier or the multiple occupancy factor).
The multiple occupancy percentage for the Gregory Hotel is calculated as follows.
Number of rooms occupied by more than one guest
Multiple occupancy percentage =______________________________________ X 100
Number of rooms occupied
= 10 / 85 X 100
AVERAGE DAILY RATE (ADR)
A measure of the average rate paid for rooms sold, calculated by dividing room revenue by rooms sold.
ADR = Room Revenue / Rooms Sold
AVERAGE RATE PER GUEST:
Resort hotels, in particular, are often interested in knowing the average rate per guest (ARG). This rate is computed inclusive of every guest in the hotel, including children.
The average rate per guest for the Gregory Hotel is calculated as follows:
Total Room Revenue
Average Rate per Guest = _____________________
Number of Guests
= $6,960 / 95
Hotel yield management systems have developed as a separate add-on to normal reservation systems. They work by calculating how full the hotel is likely to be on a given date in the future. This is done by constantly measuring previous occupancy and booking patterns and projecting them forward into the future.
The reservation is then advised whether or not top take a booking, and at what rate. This has the effect of smoothing peaks and troughs of demand and ensuring that rooms are sold at the best possible price. In a period of low demand. Sunday evening for example, the system would recommend accepting a rate lower than rack to ensure the booking and gain revenue for the hotel. It should be recognized that the hotel room can never be sold twice like an airline or coach seat, it is perishable. If a room is not sold on a particular night then it is never sold. This is because there are two elements, space (the room) and time (the date).
Concept of yield management:
The word yield means to produce or give forth an output or return, and the term yield management means output. When applied to accommodation, the term means the management of revenue generation from rooms.
It is divided into two types:
The revenue generated by sale on discounted rate.
Revenue which could be generated if all rooms were sold at rack rate.
Uses of yield management
Yield management has now caught on in the hotel industry. It id imperative that hoteliers understand the importance of the basic factors of yield management, room rate category, room inventory, and group buying power. The goal of revenue management is twofold: to maximize profit for guest room sales and to maximize profit for the hotel services.
FORMULA 1: POTENTIAL AVERAGE SINGLE RATE
If Casa Vana Inn had not varied its single rate by room type (for example, if all single were $90), the potential average single rate would equal its rack rate. When the single rate differs by the room type, as in this case, the potential average single rate is computed as a weighted average. It is computed by multiplying the number of rooms in each room type category by its single room rate and dividing the sum total by the number of potential single rooms in the hotel. For the Casa Vana Inn, the potential average single rate is computed as follows:
No. of Rooms
Single rack rate
Revenue at 100% Occupancy singles
Single room revenues at rack rate
Potential Average single rate =____________________________
Number of rooms sold at singles
= $ 29,000 / 300
= $ 96.67
FORMULA 2 : POTENTIAL AVERAGE DOUBLE RATE
If the hotel had not varied its double rate by room type, the potential average double rate would equal its rack rate. When the double rate differs by room type, as in this case, the potential average double rate is computed as weighted average. It is found by multiplying the number of rooms in each room type category by its respective double room rack rate and dividing the sum total by the number of potential double rooms in the hotel. For the Casa Vana Inn, this computation is as follows:
No. of Rooms
Double rack rate
Revenue at 100% occupancy doubles
Double room revenues at rack rate
Potential average double rate =________________________________
No. of rooms sold as doubles
= $35,000 / 300
= $ 116.67
NOTE: For lodging properties basing potential revenue on 100% double occupancy, this
step is all that is necessary to determine potential average rate ( see formula 5).
FORMULA 3: MULTIPLE OCCUPANCY PERCENTAGE
An important element in determining a hotels yield statistics is the proportion of the hotel’s rooms that are occupied by more than one person that is, the multiple occupancy percentage. This information is important because it indicates sales mix and helps balance room rates with future occupancy demand. In the case of the Casa Vana Inn, if 105 of the 210 rooms sold (at 70% occupancy) are normally occupied by more than one person, the multiple occupancy percentage is computed as follows:
Multiple occupancy percentage = _____
= 0.5 or 50%
FORMULA 4 : RATE SPREAD
In addition to multiple occupancy percentage, another intermediate computation is important to yield statistics. The determination of a room rate spread among various room types can be essential to use of yield decisions in targeting a hotel’s specific market. The mathematical difference between the hotel’s potential average single room rate ( formula 1 ) and potential average double rate ( formula 2 ) is known as the rate spread. For the Casa Vana Inn, the rate spread is computed as follows:
Rate spread =Potential average double rate – Potential average single rate
= $ 116.67 - $ 96.67
= $ 20
FORMULA 5: POTENTIAL AVERAGE RATE
A very important element revenue management formulation is the potential average rate. A hotel’s potential average rate is the collective statistic that effectively combines the potential average rate, multiple occupancy percentage, and rate spread. The potential average rate is determined in two steps. The first steps involves multiplying the rate spread by the hotel’s potential average single rate to produce a potential average rate based on demand (sales mix ) and room rate information. For the Casa Vana Inn, the potential average rate is computed as follows.
Potential average rate = ( Multiple occupancy % X Rate Spread) + Potential average
= (.5 X $20) + $96.67
FORMULA 6 : ROOM RATE ACHIVEMENT FACTOR
The percentage of the rack rate that the hotel actually receives is expressed by the hotel’s achievement factor (AF), also called the rate potential percentage. When revenue management software is not being used, the achievement factor is generally calculated by dividing the actual average rate the hotel is currently collecting by the potential average rate. The actual average rate equals total rooms revenue divided by either rooms occupied (depending on hotel policy). For the Casa Vana Inn, the room rate achievement factor is computed as follows:
Actual average rate
Achievement factor = _____________________
Potential average rate
= $ 80 / $ 106.67
= 0.750 or 75%
The achievement factor is also equal to 100% minus the discount percentage. By calculating its achievement factor, management discovers how much its actual room rates from varied from established rack rates. In this case, the discount is 25 percent.
As shown below, the achievement factor can be used in one method of determining the yield statistic. It is not necessary to calculate the achievement factor, because the yield statistic can be determined without it. Nonetheless, the achievement factor is an important statistics in its own right because it allows management to monitor and therefore better control the hotel’s use of discounting. For this reason, many hotels calculate the achievement factor as part of their revenue management efforts.
FORMULA 7: YIELD STATISTIC
An important element in revenue management is the yield statistic. The yield statistic calculation incorporates several of the previous formulas into a critical index. There are various ways to express and calculate the yield statistic, all of which are equivalent.
Actual Rooms Revenue
Yield = ____________________
Potential Rooms Revenue
Room Nights Sold Actual Average Room Rate
2. Yield = ___________________ X _______________________
Room Nights Available Potential Average Rate
3. Yield = Occupancy percentage X Achievement factor
The first equation is used for a hotel that offers all its rooms at a single rack rate, regardless of occupancy. When (as far more common) a hotel uses more than one rack rate for different room types and / or occupancies, potential rooms revenue equals total room nights available times the potential average rate.
The self-explanatory second equation is not demonstrated here. The third equation is illustrated below. For the Casa Vana Inn, the calculation is as follows:
Yield = Occupancy Percentage X Achievement Factor
= 0.7% X 0.75%
= 0.525 or 52.5%
FORMULA 9: EQUIVALENT OCCUPANCY
Management can use the equivalent occupancy formula when it wants to know what other combinations of room rate and occupancy percentage provide equivalent net revenue.
The equivalent occupancy formula is very similar to the identical yield occupancy formula, but takes marginal costs into account by incorporating gross profit or contribution margin. The cost per occupied room ( also called the marginal cost ) of providing a room is the cost the hotel incurs by selling that room (for example, housekeeping expenses such as cleaning supplies); this cost would not be incurred if the room were not sold ( as opposed to fixed costs, which are incurred whether the room is sold or not). The contribution margin is that portion of the room rate that is left over after the marginal cost of providing the room has been subtract out.
To find the equivalent occupancy, use either of the following formula (which are equivalent versions of the same equation).
Rack rate - Marginal cost
Equivalent occupancy = Current occupancy % X __________________________
Rack rate X (1-discount %) – Marginal
Equivalent Current Contribution Margin
Occupancy = Current Occupancy % X ____________________________
New contribution Margin
Recall the example discussed under identical yield statistics. Now assume that the Casa Vana Inn is currently operating at 70 percent occupancy with an average rate of $80, and considering strategies designed to raise its average rate to $100. Further assume that the marginal cost of providing a room is $12. What occupancy percentage must the Casa Vana Inn achieve to match the net room revenue it currently receives?
Current Contribution Margin
Equivalent Occupancy = Current Occupancy % X_________________________
New Contribution Margin
$80 - $12
= 70% X _________
$100 - $12
= 0.541 or 54.1 %
Recall from the discussion of identical yields that the Casa Vana Inn needs a 56 percent occupancy to produce an identical yield statistic – that is, equivalent gross revenue. However, the Casa Vana Inn does not need to match its gross revenue to achieve the same net revenue, since by selling fewer rooms ( at the higher price), it incurs fewer associated operating costs.
Although rack rates are raised relatively infrequently, discounting is a common practice in the lodging industry. What is the equivalent occupancy to 70 percent with an $80 average room rate if the average room rate is discounted by 20 percent (to $64)?
$80 - $12
Equivalent occupancy = 70 % X _________
$64 - $12
=0.915 or 91.5 %