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
Occupancy ratios
Rooms revenue analysis
The hotel income statement
The rooms schedule
Rooms division budget
reports
Operating ratios
Ratio standards
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
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.
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. 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
= 70.8%
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
= 11.8%
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
=
$73.26
YIELD MANAGEMENT:
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.
Measuring yield:
It is divided into two types:
Actual Revenue.
Potential Revenue.
Actual Revenue.
The revenue generated by
sale on discounted rate.
Potential Revenue.
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:
Room Type
|
No. of Rooms
|
Single rack rate
|
Revenue at 100% Occupancy
singles
|
1 bed
|
100
|
$90
|
$9000
|
2 beds
|
200
|
$100
|
$20,000
|
-
|
300
|
-
|
$29,000
|
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:
Room Type
|
No. of Rooms
|
Double rack rate
|
Revenue at 100% occupancy
doubles
|
1 Bed
|
100
|
$110
|
$11,000
|
2 Beds
|
200
|
$120
|
$24,000
|
-
|
300
|
-
|
$35,000
|
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:
105
Multiple occupancy
percentage = _____
210
= 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
Single rate
= (.5 X $20) + $96.67
= $106.67
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
Cost
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 %
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