Chapter 12 - Planning and Evaluating Operations

Outline

Management Functions

Planning

Organizing

Coordinating

Staffing

Leading

Controlling

Evaluating

Establishing Room Rates

Market Condition Approach

Rule-of-Thumb Approach

Hubbart Formula Approach

Planned Rate Changes

Forecasting Room Availability

Forecasting Data

Forecast Formula

Sample Forecast Forms

Budgeting for Operations

Forecasting Rooms Revenue

Estimating Expenses

Refining Budget Plans

Evaluating Front Office Operations

The Daily Operations Report

Occupancy Ratios

Rooms Revenue Analysis

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 The Hotel Income Statement

The Rooms Schedule

Rooms Division Budget Reports

Operating Ratios

Ratio Standards

Planning for Disasters

Summary

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Competency 1

Objective: Describe the management process in terms of the functions front office managers perform to
achieve organizational objectives.

Most front office managers will readily admit that they rarely have all the resources they feel are
necessary. Resources available to managers include people, money, time, materials, energy, and
equipment. All are in limited supply. An important part of a front office manager's job involves planning
how to apply these limited resources to attain the department's objectives. An equally important part of the
job is evaluating the success of front office activities in meeting the department's objectives.

Management Functions

The process of front office management can be divided into specific management functions. Exhibit 1
illustrates how management functions fit into the overall management process. Although specific front
office management tasks vary from one hotel to another, fundamental management functions are similar in
scope.

Planning

Planning is probably the most important management function in any business, yet managers often give it
less attention than it requires, or even overlook it entirely. Without competent planning, the front office
would be chaotic. Without the direction and focus planning provides, the front office manager may
become overly involved with tasks that are unrelated to or inconsistent with accomplishing the
department's goals. A front office manager's first step in planning what the front office will accomplish is
to define the department's goals.

Managers should identify both near-term goals and long-term goals, and develop a plan to meet them. An
example of a near-term goal might be to raise occupancy to 85 percent for the month. A long-term goal
might be to improve guest satisfaction scores. The front office manager should use these general goals as a
guide to planning more specific, measurable objectives. Planning also includes determining the strategies
the department will use to attain the objectives.

An important component of planning is communication, which is sometimes overlooked. An effective

manager will communicate the plans under development with managers to whom he or she reports to be
sure that departmental activities are consistent with overall hotel planning. At the same time, it is a good
idea to share tentative or preliminary plans with department members likely to be affected and to seek
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their input and feedback. Communication is most effective when put in writing so that ideas are
documented and clearly illustrated, and reviewers can react to them.

There are several benefits to communication and the sharing of ideas. First, department staff members
contribute to the planning process and take some ownership of the plan. Staff members who do so are
more willing to accept and support the final plans. Second, staff members have the opportunity to provide
constructive comments before the department manager finalizes the plans. If staff members have concerns
about or issues with the plans, the department manager is able to address them during the planning phase.
Third, once the plans are finalized, everyone will have a more comprehensive understanding of the goal or
objective. If several different competing perspectives emerge during the planning process, it becomes
clear that planning often requires compromise. Although it is not always obvious, staff members tend to
develop a better understanding of the compromises that are made when they are part of the planning
process.

Organizing

Using the planned goals as a guide, a front office manager organizes the department by dividing the work
among front office staff. The manager should distribute work so that everyone gets a fair assignment and
all work can be completed in a timely manner. Organizing includes determining the order in which tasks
are to be performed and establishing completion deadlines for each group of tasks.

Coordinating

Coordinating involves bringing together and using the available resources to attain planned goals. A front
office manager must be able to coordinate the efforts of many individuals to ensure that they perform the
work efficiently, effectively, and on time. Coordinating may involve working with other departments,
such as sales, housekeeping, and accounting. Many front office goals may depend upon other departments
for help in achieving them. For example, the goal of improving guest satisfaction scores may partially
depend on the housekeeping staff's promptly notifying the front desk about clean and vacant rooms for
awaiting guests. A manager's ability to coordinate is closely related to his or her other management skills,
such as planning and organizing.

Staffing

Staffing involves recruiting applicants and selecting those best qualified to fill available positions. To
properly recruit employees, it is essential to develop job descriptions that thoroughly describe the position
and that clearly identify the skills and qualities applicants must possess to satisfactorily fill it. The front
office manager will work with the human resources department to develop job descriptions for front office
positions. At most hotels, the human resources department is usually involved in the first level of
qualifying and interviewing job applicants. Human resources staff members are also relied upon to resolve
issues that may arise regarding whether a job description properly represents the position. The staffing
process involves scheduling employees and applicants. 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.

Leading

Leading is a complicated management skill that is exercised in a wide variety of situations, and is closely
related to other management skills such as organizing, coordinating, and staffing. For a front office
manager, leadership involves overseeing, motivating, training, disciplining, and setting an example for the
front office staff. For example, to direct the work of others, a front office manager must first analyze the
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work to be done, organize the tasks in a logical order, and consider the environment in which staff will
perform the tasks. In addition, if the department is behind in getting the work done, the front office
manager steps in and assists until the workload is under control again.

Leading often extends beyond the front office. With so much of the hotel's business activity flowing
through the front desk, other department heads count on the front office manager to provide leadership.
Senior managers at a hotel often depend on the front office manager's strong leadership skills to ensure
that assignments are completed successfully.

One of the best ways to lead a department is by example. It is often necessary for department managers to
participate in the department's day-to-day operations to demonstrate job knowledge and skills mastery. For
example, working at the front desk may involve greeting guests, checking guests in and out, pre-blocking
rooms, working with housekeeping staff, charting room status, and more. When a manager leads by
example, he or she demonstrates what is expected of all department employees. A manager must be
available to department employees and will earn their respect as the unit leader if he or she leads by
example. This often means working varying shifts to be available to shift staff, not just to the employees
on one particular shift.

Controlling

Every front office has a system of internal controls in place to protect the hotel's assets. For example, one
form of internal control is requiring a witness's signature when a cashier makes a deposit at the end of the
shift. Internal control systems work only when managers believe in the systems' importance and follow the
established procedures for their use. The control process ensures that the actual results of operations
closely match planned results. The front office manager also exercises a control function when keeping
front office operations on course in attaining planned goals.

Evaluating

Evaluating determines the extent to which planned goals are, in fact, attained. This task is frequently
overlooked in many front office operations, or is performed haphazardly. Evaluating also involves
reviewing and, when necessary, revising or helping to revise front office goals.

This chapter focuses on elements of two front office management functions: planning and evaluating front
office operations. It begins by examining three important front office planning functions:

Establishing room rates

Forecasting room availability

Budgeting for operations

It concludes by examining various methods a front office manager may use to evaluate the effectiveness
of front office operations.

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Competency 2

Objective: Explain how managers establish room rates, and identify special room rate categories.

Establishing Room Rates

A front office will almost always have more than one room rate category for each of its guestrooms. Room
rate categories generally correspond to types of rooms (suites, two beds, one bed, etc.) that are comparable
in square footage and furnishings. Differences are based on criteria such as room size, location, view,
furnishings, and amenities.

The rack rate is the price for an overnight accommodation, as determined by front office management,
for a particular room or room type. The rack rate is listed on the room rate schedule to inform front desk
agents of the standard selling price of each guestroom in the hotel. Unless the guest qualifies for an
authorized room rate discount, the rack rate will apply. The term rack rate predates front office
automation and references the process by which an employee would identify the retail room rate from a
manual filing system at the front desk called a room rack, hence the name rack rate. With front office
automation, an electronic file replaces the rack. Electronically stored room rate data is accessed by front
office staff members, as well as reservation agents, at the time of reservation or registration. Often,
operational policies mandate that rack rates be reported to local and state authorities, and posted in public
areas or inside the guestroom. Rack rates must be kept current and must accurately reflect the appropriate
accommodation charge for each room and room rate category.

Room rates are normally assigned by room type category. For example, a standard room with two double
beds and no special amenities may be assigned the hotel's lowest rack rate. Larger rooms, with different
sleeping accommodations and amenities, will be assigned a higher rack rate. Concierge floor rooms with
more amenities and perhaps better outside views will likely be assigned an even higher rack rate. Suites
usually command the highest rack rate because of size, number of beds, quality of furnishings, and other
amenities.

When a resort property includes a meal plan in its room pricing (for example, Bed and Breakfast,
Modified American, or Full American Plan), the rack rate is usually based upon the room characteristics
as well as the number of people expected to occupy the room. In this case, the resort pricing for a single
room rate may be greater than the value of the property's double occupancy rate divided by two, since the
hotel incurs certain fixed costs no matter how many guests occupy the room.

Front office employees are expected to sell rooms at the rack rate unless a guest qualifies for a discounted
room rate. Although rack rates are important, more often than not, guests may ask for and qualify for
discount rates. For example, special rates are often quoted to groups and certain guests for promotional
purposes during low occupancy periods. Special room rate categories include:

Corporate or commercial rate: the rate offered to companies that provide frequent business for the
hotel or its chain.

Group rate: the rate offered to groups, meetings, and conventions using the hotel for their
functions.

Promotional rate: the rate offered to individuals who may belong to an affinity group such as the
American Automobile Association or American Association of Retired Persons to promote their
patronage. The rate may also be extended during special low occupancy periods to any guest to
promote occupancy.
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 Incentive rate: the rate offered to guests in affiliated organizations such as travel agencies and
airlines because of potential referral business. The rate may also be offered to promote future
business; it is often extended to group leaders, meeting planners, tour operators, and others capable
of providing the hotel with additional room sales.

Family rate: a rate reserved for families with children.

Package plan rate: a rate that includes a guestroom in combination with other events, activities, or
services, such as breakfast, golf, tennis, or parking.

Internet rate: a special discounted rate that many hotel companies offer through their own Internet
websites. A web rate is usually classified as the "best available rate" and is available to guests
making their online reservations themselves. Many hotel companies guarantee that the best
available rate is at their own website and often offer a bonus plan for guests who find lower rates
elsewhere. During projected lower occupancy business cycles, web rates tend to be discounted
rates. Since a hotel company incurs less expense selling a guestroom through its own website, its
rates will naturally be lower. Comparatively, global distribution systems, travel agency sites,
corporate call centers, and other distribution channels list higher room rates.

Distressed-inventory rate: a rate offered when a hotel projects or experiences low occupancy. This
rate usually represents a significant discount off the rack rate and is implemented to help build
occupancy. The idea behind distressed-inventory rates is that the discount will be sufficient to
attract guests who seek lower rates. Distressed-inventory rates are usually offered at opaque
Internet websites, which offer hotel rooms based on targeted price and not on a specific hotel
property; in fact, the guest commits to the rate even before learning the identity of the hotel
property or brand. Most hotels restrict the use of distressed-inventory rates to only those times they
expect extremely low occupancy.

Complimentary rate: a room rate provided to special guests and/or important industry leaders. The
term complimentary rate usually means that the guest will not be charged for the room during the
stay. However, the guest may receive charges for dining, telephone calls, etc.

The front office manager must be sure that the sale of rooms at special rates is rigidly controlled. Special
rates represent discounts from the rack rate and therefore may adversely affect the average room rate and
room revenue. The front office manager should examine the circumstances under which special rates are
granted to ensure that front office staff members are adhering to prescribed policies. All policies should be
clearly explained to front office staff, who should obtain proper approval when applying a special room
rate. For example, a complimentary room (provided at no charge) does not increase room revenue, but it
may or may not decrease the average room rate, depending upon the front office accounting system. Most
hotels require the general manager or another senior member of the management team to approve
complimentary rates before guests arrive.

Establishing rack rates for room types, and determining discount categories and special rates, are some of
the revenue manager's major duties. The revenue manager recommends rack rates to senior hotel
management after analyzing forecasted occupancy and business conditions in the marketplace. Rack rates
are usually determined on a yearly basis (subject to frequent revision review) and are a major decision
factor in the annual hotel budgeting process. Determining discounted rates is more tactical and is a
decision the revenue manager, or possibly a revenue committee, must make. When determining rack rates
or discounted rates, management should consider such factors as operating expenses, guest demand,
market conditions, inflationary factors, and related business issues.

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Room rates often serve as a market positioning statement, since they directly reflect service expectations
to the hotel's target market. Room rate positioning can be critical to a hotel's success. For example, a
property offering economy facilities and limited guest services will most likely not succeed if its rates are
positioned in the mid-price or upscale levels.

The following sections examine three popular approaches to pricing rooms: the market condition
approach, the rule-of-thumb approach, and the Hubbart Formula.

Market Condition Approach

This approach is the commonsense approach. Management looks at comparable hotels in the geographical
market and sees what they are charging for the same product. These properties are often called the
competitive set, which is usually made up of 6 to 10 properties in a market that are a property's most
important competition. The competition can be based on location, property ratings, property type, brand
identification, or other factors. Not every lodging property in a particular location is a direct competitor.
Guests who look for moderately priced lodging will generally limit their research to properties in that
price range.

The thought behind this approach is that the hotel can charge only what the market will accept, and this is
usually dictated by the competition. This information is available through various public domain sources,
including a periodic blind call to competing hotels. A blind call does not identify the hotel making the
call, and simply asks for availability and rates on specific dates. (Note that, with caller ID, "blind" calls
may not truly be blind unless the hotel takes steps to hide its phone number.) A competitive analysis
usually focuses on these questions:

How do our rates compare to those of our competition?

Are our rates much lower or higher than those of the competition? How are our rates affecting our
revenue and our share of the business?

What is our occupancy percentage? What is the occupancy percentage of the competitive set? Will
our total revenue improve if we increase (or decrease) our rates?

Have any trends emerged during the past six months?

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Most of the answers to these questions cannot be determined through simple phone calls to the hotel or
reviews of the competitors' websites. Three well-known commercially available reports providing this
information from neutral sources are the TIMS, Phaser, and RateVIEW reports. Future occupancy and rate
trends can be determined by studying the quoted rates and availability for the competitive set. The TIMS
Report lists one month's rate information for a property and five local competitors. The rates are broken
down daily and include information on sold-out nights, low rate, low rate variance from the subscribing
property, low corporate rate, low corporate rate variance, special rates date available, high-low
comparisons, and an index of room types and rates for the period. Exhibit 2 shows a sample TIMS report.
A Phaser Report is a comparative analysis of room rates, including information from internal distribution
channels (such as central reservations offices) and external distribution channels (such as global
distribution systems) for a property and its competitive set. RateVIEW is a series of reports providing
details on how a property compares with its competitive set for future dates, looking at many distribution
channels.

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Another, more reliable way to determine historical market conditions is to subscribe to industry reports
that provide this information from neutral sources. The best-known historical report is the Smith Travel
Accommodations Research (STAR) Report. The STAR Report provides historical information on
occupancy, average room rate, RevPAR, and market share. Exhibit 3 shows a sample STAR trend report,
and Exhibit 4 shows a sample STAR summary report. By tracking this information over a period of
months and years, the rates and occupancy of the competitive set can be well established.

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There are many problems with this approach, although it remains popular. First, if the property is new,
construction costs will most likely be higher than those of the competition. Therefore, the hotel is not
likely to have an identical cost structure or be as profitable as the competition initially. Second, this
approach does not take the value of the property into consideration. Since the property is new, and perhaps
offers newer amenities, the value of the 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 take into
account what a strong sales effort may accomplish. It can, in effect, allow the competition to determine the
rates, and this could significantly affect the profitability of a hotel's operation. Third, the downturn of
business between 2000 and the end of 2004 has rendered many historical views of rates inaccurate.

In the United States, hotel managers must not base their rates on the rates of other hotels through direct
discussions with competitors. Such discussions would be considered violations of U.S. antitrust laws. This
is one reason some hotels use a blind-call approach to rate assessment among their competitive set. In a
blind-call survey, staff at the researching property phone competitors pretending to be potential guests.
During the calls, staff members inquire about room rates for select future dates. Rates may also be
available from many public sources, such as the Internet, global distribution systems, published rate
brochures, directories from the American Automobile Association, and many others.

Rule-of-Thumb Approach

The rule-of-thumb approach sets the rate of a room at $1 for each $1,000 of construction and furnishings
cost per room, assuming a 70 percent occupancy. For example, assume that the average construction cost
of a hotel room is $80,000. Using the $1 per $1,000 approach results in an average selling price of $80 per
room. Singles, doubles, suites, and other room types would be priced differently, but the minimum
average room rate would be $80.

The emphasis placed on the hotel's construction cost fails to consider the effects of inflation. For example,
a well-maintained hotel worth $100,000 per room today may have been constructed at $20,000 per room
40 years ago. The $1 per $1,000 approach would suggest an average selling price of $20 per room;
however, a much higher rate would appear to be appropriate. The suggested rate of $20 per room does not
take into account inflation and increased costs of labor, furnishings, and supplies. In these cases,
management might consider the current replacement cost of the hotel, rather than its original construction
and furnishings cost, as a basis for the rule-of-thumb application. Another way of accounting for inflation
would be to index current costs against original costs. For example, if a hotel was built five years ago and
inflation has increased at an annual rate of 3 percent, the $1 per $1,000 five years ago would require $1.16
per $1,000 today.

The rule-of-thumb approach to pricing rooms also fails to consider the contribution of other facilities and
services toward the hotel's desired profitability. In most hotels, guests pay extra for services such as food,
beverages, telephone, and laundry. If these services contribute to profitability, the hotel may have less
pressure to charge higher room rates.

The rule-of-thumb approach should also consider the hotel's occupancy level. As pointed out, the rule-of-
thumb approach assumes 70 percent occupancy when determining the appropriate average room rate.
However, if a lower occupancy percentage is expected, the hotel will have to capture a higher average rate
to generate the same amount of room revenue. Hotels tend to have a very high level of fixed expenses
(especially depreciation and mortgage expenses). For instance, a mortgage payment is the same every
month, regardless of the hotel's occupancy level. The front office manager must understand the effects of
room rate and room occupancy on room revenue to ensure that the hotel meets its revenue goals and
financial obligations.

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Hubbart Formula Approach

Another approach to average room rate determination is the Hubbart Formula. To determine the average
selling price per room, this approach considers operating costs, desired profits, and expected number of
rooms sold. In other words, this approach starts with desired profit, adds income taxes, then adds fixed
charges and management fees, followed by operating overhead expenses and direct operating expenses.
The Hubbart Formula is considered a bottom-up approach to pricing rooms because its initial item net
income (profit) appears at the bottom of the income statement. The second item income taxes is the
second item from the bottom of the income statement, and so on. The Hubbart Formula approach involves
the following eight steps:

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) by 1 minus the hotel's tax rate.

3. Calculate fixed charges and management fees. This calculation includes estimating depreciation,
interest expense, property taxes, insurance, amortization, building mortgage, land, rent, and
management fees.

4. Calculate undistributed operating expenses. This calculation includes estimating expenses for the
following categories: administrative and general, information technology, human resources,
transportation, marketing, property operation and maintenance, and energy costs.

5. Estimate non-room operated department income or loss that is, food and beverage department
income or loss, telecommunications department income or loss, and so forth.

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. The Hubbart Formula, in essence, places the overall financial burden of the
hotel on the rooms department.

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.

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 8. Calculate the average room rate by dividing rooms department revenue (Step 7) by the expected
number of rooms to be sold.

Illustration of the Hubbart Formula. The Casa Vana Inn, a 200-room property, is projected to cost
$9,900,000 inclusive of land, building, equipment, and furniture. An additional $100,000 is needed for
working capital, bringing the total cost of construction and opening to $10,000,000. The hotel is financed
with a loan of $7,500,000 at 12 percent annual interest and cash of $2,500,000 provided by the owners.
The owners desire a 15 percent annual return on their investment. A 75 percent occupancy is estimated;
thus, 54,750 rooms will be sold during the year (200 x .75 x 365). The hotel's income tax rate is 40
percent, and additional expenses are estimated as follows:

The other operated departments' income (losses) are estimated as follows:

The rooms department estimates direct operating expenses to be $10 per occupied room.

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Exhibit 5 contains the calculations used in the Hubbart Formula and reveals an average room rate of
$67.81.

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Exhibit 6 contains the formula for calculating room rates for single rooms (x) and double rooms (x + y),
where the price differential between single and double rates is represented by the variable y. Assume that
the Casa Vana Inn has a double occupancy rate of 40 percent (that is, two out of every five rooms sold are
sold at the double rate) and a room rate differential of $10. Applying the formula from Exhibit 6, single
and double rates would be calculated as follows:

Using the required average rate of $67.81 calculated in Exhibit 5, the required single and double rates can
be determined as follows:

Alternatively, the double rate could be set as a percentage of the single rate. When this is the case, the
formula is slightly altered:

The percentage differential is simply the percentage difference of the double rate over the single rate. To
understand this approach, consider the Casa Vana Inn again. Assume a 40 percent double occupancy and a
price differential of 15 percent:

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The Hubbart Formula is most useful in setting target average prices as opposed to actual average prices. It
is important to note that the Hubbart Formula generates an average room rate as a target price at the hotel's
point of profitability. It relies on management's best estimates of total rooms occupied and the
single/double occupancy mix to determine target rates. If these estimates are incorrect, the targets will be
incorrect.

Suppose a hotel company is planning to build a new property. Using the Hubbart Formula, management
computes an average target room rate of $75. Knowing the current average rate for competing hotels in
the area is only $50, management ponders whether the proposed hotel, opening in two years, has too high
a targeted room rate.

To evaluate its potential, management assumes the competitor's average price will increase at 5 percent
per year to $55.13 (that is, $50 x 1.05 x 1.05). Since the proposed hotel would be new, management
reasons that a price premium may be acceptable. A difference of nearly $20, however, appears to be too
large. A more reasonable average room rate might be $65; after three years of successive five percent
price increases, the hotel's daily average room rate would be increased to just over $75, as follows:

Considering this situation, hotel developers will have to finance the additional deficit in the first year ($75
for the targeted average rate versus $65 expected average rate when the hotel opens). In order to operate,
the hotel will need to devise some method of financing the shortfall. As stated before, most hotels do not
generate profits during the first few years of operation. In this respect, operating deficits should always be
included in the hotel's financing plan.

Planned Rate Changes

Rack room rates may change during a year, depending on market factors such as seasonality or a major
event in the area. Knowing this, hotels may publish a rack rate range instead of a specific rack rate. For
example, resorts may have several different rack rates during a year, reflecting peak, shoulder, and off-
peak (or value) seasons. Rack rates may vary 50 percent or more between these seasons for the same room
and amenities. Another example of a planned rate change occurred when the Summer Olympics were held
in Atlanta, Georgia. Hotels planned their rates for the two weeks of the Summer Olympics several years in
advance. These rates were submitted to governmental and Olympic authorities for their planning and

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approval. Developing opening and closing rates takes careful planning. Discounts should not be left open
when strong demand will fill rooms at rack rates. At the same time, quoting only rack rates may not be
desirable when demand is low.

Section Keywords

rack rate The standard rate the property establishes for a particular category of rooms.

market condition approach An approach to pricing that bases prices on what comparable hotels in
the hotel's competitive set are charging for a similar product.

rule-of-thumb approach A cost approach to pricing rooms in which the room rate is set at $1 for
each $1,000 of construction and furnishings cost per room, assuming an occupancy of 70 percent.

Hubbart Formula A bottom-up approach to pricing rooms; in determining the average price per
room, this approach considers costs, desired profits, and expected rooms sold.

competitive set The group of hotels in a market that provide the most important competition for a
hotel.

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Competency 3

Objective: Apply the ratios and formulas managers use to forecast room availability.

Forecasting Room Availability

The most important short-term planning that front office managers do is forecasting the number of rooms
available for future reservations. Room availability forecasts are used to help manage the reservations
process and guide front office staff in effective rooms management. Forecasting may be especially
important on nights when a full house (100 percent occupancy) is possible.

A room availability forecast can also be used as an occupancy forecast. Since there is a fixed number of
rooms in the hotel, forecasting the number of rooms available for sale and the number of rooms expected
to be occupied forecasts the occupancy percentage expected on a given date. The forecasted availability
and occupancy numbers are very important to the daily operations of the hotel. Occupancy forecasts are
the foundation for making room pricing decisions. They also influence when rooms are to be placed on
out-of-order status for maintenance or deep cleaning. Without an accurate forecast, rooms may go unsold
or be sold at inappropriate rates. Room occupancy forecasts can be useful to the front office manager
attempting to schedule the necessary number of employees for an expected volume of business. These
forecasts may be helpful to other hotel department managers as well. For example, the housekeeping
department manager needs to know how many rooms the front office expects to be occupied to properly
schedule room attendants. Restaurant managers must know the same information to better schedule
service staff. The chef requires this figure to determine how much food to purchase for the restaurants.

Obviously, a forecast is only as reliable as the information on which it is based. Since forecasts can serve
as a guide in determining operating costs, every effort should be made to ensure forecasting accuracy.

Forecasting is a difficult skill to develop. The skill is acquired through experience, effective
recordkeeping, and accurate counting methods. Experienced front office managers have found that several
types of information can be helpful in room availability forecasting:

A thorough knowledge of the hotel and its surrounding area

Market profiles of the constituencies the hotel serves

Occupancy data for the past several months and for the same period of the previous year

Reservation trends and a history of reservation lead times (how far in advance reservations are
made)

A listing of special events scheduled in the surrounding geographic area

Business and historical profiles of specific groups booked for the forecast dates

The number of non-guaranteed and guaranteed reservations and an estimate of the number of
expected no-shows

The percentage of rooms already reserved and the cut-off date for group room blocks held for the
forecast dates

The room availability of the most important competing hotels for the forecast dates (as discovered
through blind calls)

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 The impact of citywide or multi-hotel groups and their potential influence on the forecast dates

Plans for remodeling or renovating the hotel that would change the number of available rooms

Construction or renovating plans for competitive hotels in the area

Forecasting Data

The process of forecasting room availability generally relies on historical occupancy data as well as
business already committed. Historical data is used to take some of the guesswork out of forecasting. To
facilitate forecasting, the following daily occupancy data should be collected:

Number of expected room arrivals: based on existing reservations and historical trends for new
reservations and on cancellations prior to the arrival date.

Number of expected room walk-ins: based on historical records.

Number of expected room stayovers (rooms occupied on previous nights that will continue to be
occupied for the night in question): based on existing reservations.

Number of expected room no-shows: based on historical records.

Number of expected room understays (check-outs occurring before expected departure date): based
on historical data.

Number of expected room check-outs: based on existing reservations.

Number of expected room overstays (check-outs occurring after the originally reserved departure
date): based on historical records.

Some hotels with a very high double occupancy percentage may be as concerned with guest counts as
room counts. For example, an all-inclusive resort with a large amount of business from vacationing
couples may want to forecast guest as well as room count activity. Convention hotels may often have the
same concerns.

Chances are good that much of this information is available in reports, documents, and other data sources
at the property. The hotel's daily reports will likely be invaluable in this research. These reports should be
summarized and stored in a way that is easily accessible.

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Overall, these data are important to room availability forecasting, since they are used in calculating
various daily operating ratios that help determine the number of available rooms for sale. Ratios are a
mathematical expression of a relationship between two numbers that is determined by dividing one by the
other. Most statistical ratios that apply to front office operations are expressed as percentages. The ratios
examined in the following sections are percentages of no-shows, walk-ins, overstays, and understays.
Occupancy history data from the fictitious property shown in Exhibit 7 (the Holly Hotel) are used to
illustrate the calculation of each front office ratio. Managers should look for consistency in ratios.
Consistency may be roughly the same ratio every day or identifiable patterns. Without consistency,
forecasting ratios and projecting operating performance may be very difficult.

Percentage of No-Shows. The percentage of no-shows indicates the proportion of reserved rooms that the
expected guests did not arrive to occupy (and did not cancel) on the expected arrival date. This ratio helps
the front office manager decide when (and if) to sell already-committed rooms to walk-in guests.

The percentage of no-shows is calculated by dividing the number of room no-shows for a specific period
of time (day, week, month, or year) by the total number of room reservations for the same period. Using
figures from Exhibit 7, the percentage of no-shows for the Holly Hotel during the first week of March can
be calculated as follows:

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Some properties track no-show statistics in relation to guaranteed and non-guaranteed reservations. Non-
guaranteed reservations typically have a higher no-show percentage than guaranteed reservations, since
the potential guest has no obligation to pay for the accommodations if he or she does not register at the
property. Properly incorporating no-show allowances into room availability forecasts also depends on the
hotel's mix of business; for example, corporate groups generally have a much lower no-show percentage
than do other types of groups or individual guests. A hotel that works with a large corporate meetings
market will most likely have a low no-show percentage. Conversely, a hotel with very little corporate
group business, such as a hotel located in a suburban area alongside an interstate highway, is likely to
have a much higher percentage of no-show reservations since guests desire flexibility in their travel plans.
Hotels and resorts strive to control no-shows through a number of policies and procedures, such as
requiring a cash or credit card deposit in advance of the stay and/or contacting the guest before arrival to
confirm travel and room arrangements.

Percentage of Walk-Ins. The percentage of walk-ins is calculated by dividing the number of rooms
occupied by walk-ins for a period by the total number of room arrivals for the same period. Using figures
from Exhibit 7, the percentage of walk-ins for the Holly Hotel during the first week of March can be
calculated as follows:

Walk-in guests occupy available rooms that are not held for guests with reservations. Often, hotels can sell
rooms to walk-in guests at a higher rate, since these guests may have less opportunity to consider alternate
properties. Front desk agents are sometimes asked to show a guestroom to a walk-in guest which tends
to be much more effective than trying to sell rooms over the telephone or through a website. Walk-in guest
sales help improve both occupancy and room revenues. However, from a planning perspective, it is
generally better to have reservations in advance than to count on walk-in traffic.

Note that other ratios can dramatically affect the walk-in ratio. For example, if a hotel has ten no-shows
beyond forecast, it may accept more walk-ins than usual to make up for the lost business. When this
information is tracked for historical purposes, it is essential that the other ratios also be tracked to show
how they affect one another. One effective way to predict walk-ins is to know what is going on in the
marketplace. There will be a better opportunity for walk-ins (and a higher rate) if nearby hotels are
experiencing high demand.

Percentage of Overstays. Overstays represent rooms occupied by guests who stay beyond their
originally scheduled departure dates. Overstay guests may have arrived with guaranteed or non-guaranteed
reservations or as walk-ins. Overstays should not be confused with stayovers. Stayover rooms are rooms

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occupied by guests who arrived to occupy a room before the day in question and whose scheduled
departure date isn't until after the day in question.

Using historical data, the percentage of overstays is calculated by dividing the actual number of overstay
rooms for a day or a period by the total number of expected room check-outs for the same day or period.
The number of expected room check-outs is the number of rooms shown by the front office system or the
manual count of occupied rooms as due for departure. Stated another way, the number of expected room
check-outs can be calculated from historical data as the number of actual departures on the books minus
understays plus overstays. Note that in this case, the term understays refers to people checking out early
on the day in question, not to those guests who were originallyscheduled to leave on the day in question
but who chose to check out one or more days early. For purposes of this equation, those latter guests
would be considered understays on the day they checked out.

Overstays and understays can be determined for periods beyond one day by summing the actual overstay
and understay counts calculated separately for each day within the longer period. Using figures from
Exhibit 7, the percentage of overstays for the Holly Hotel during the first week of March can be calculated
as follows:

To help regulate room overstays, front office agents are trained to verify an arriving guest's departure date
at check-in. Such verification can be critical, especially when the hotel is at or near full occupancy and
there are no provisions for overstay guests. Overstays may also prove problematic when specific rooms
have been blocked for arriving guests. This is especially important for suites or other rooms that may have
special importance to an incoming guest.

Percentage of Understays. Understays represent rooms occupied by guests who check out before their
originally scheduled departure dates. Understay guests may have arrived at the hotel with guaranteed or
non-guaranteed reservations or as walk-ins.

The percentage of understays is calculated by dividing the number of understay rooms for a day or period
by the total number of expected room check-outs for the same day or period. Using the same approach as
that just described for determining the percentage of overstays, the understays are counted as understays
only on the day of their early check-out, and understay counts should be determined separately and
summed for each day in a multi-day period. Using figures from Exhibit 7, the percentage of understays for
the Holly Hotel during the first week of March can be calculated as follows:

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Guests leaving before their stated departure date create empty rooms that typically are difficult to fill.
Thus, understay rooms may represent permanently lost room revenue. Overstays, on the other hand, are
guests staying beyond their stated departure date and may boost room revenues. When the hotel is not
operating at full capacity, overstays result in additional, unexpected room revenues. In an attempt to
regulate understay and overstay rooms, front office staff should:

Confirm or reconfirm each guest's departure date at registration. Some guests may already know of
a change in plans, or a mistake may have been made in the original processing of the reservation.
The sooner erroneous data are corrected, the greater the chance for improved planning.

Present an alternate guestroom reservation form to a registered guest, explaining that an arriving
guest holds a reservation for his or her assigned room. A note card may be placed in the guest's
room the day before or the morning of the scheduled day of the registered guest's departure.

Review group history. Many groups, especially associations, hold large closing events for the
entire group on the last day of the meeting. Guests may make reservations to include attending the
final event. However, changes in plans or other priorities may require guests to leave early. While
it is difficult for the hotel to hold guests to the number of nights they reserved, managers may be
better able to plan for early departures, based on the group's departure history. Some hotels that
have a lot of association business or a history of transient guests departing before their scheduled
date may apply the reservation deposit to the last night of the stay, not the first night.

Contact potential overstay guests about their scheduled departure date to confirm their intention to
check out. Room occupancy data should be examined each day; rooms with guests expected to
check out should be flagged. Guests who have not left by check-out time should be contacted and
asked about their departure intentions. This procedure permits an early revised count of overstays
and allows sufficient time to modify previous front office planning, if necessary.

Forecast Formula

Once relevant occupancy statistics have been gathered, the number of rooms available for sale on any
given date can be determined by the following formula:

Note that this formula does not include walk-ins. They are not included because the number of walk-ins a
hotel can accept is determined by the number of rooms that remain available for sale. If a hotel is full due
to existing reservations, stayovers, and other factors, it cannot accept walk-ins.

As an example, consider the Holly House, a 120-room property, where on April 1 there are 3 out-of-order
rooms and 55 stayovers. On that day, there are 42 guests with reservations scheduled to arrive. Since the
percentage of no-shows has been recently calculated at 18.06 percent, the front office manager calculates
that as many as 8 guests with reservations may not arrive (42 x .1806 = 7.59, rounded to 8). Based on

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historical data, 6 understays and 15 overstays are also expected. The number of rooms projected to be
available for sale on April 1 can be determined as follows:

Therefore, the Holly House is considered to have 19 rooms available for sale on April 1. Once this figure
is determined, front office management can decide whether to accept more reservations and can determine
its level of staffing. Front office planning decisions must remain flexible; they are subject to change as the
front office learns of reservation cancellations and modifications. Note also that room availability
forecasts are based on assumptions whose validity may vary on any given day.

Sample Forecast Forms

The front office may prepare several different forecasts, depending on its needs. Occupancy forecasts are
typically developed on a monthly basis and reviewed by food and beverage and rooms division
management to forecast revenues, project expenses, and develop labor schedules. A ten-day forecast, for
example, may be used to update labor scheduling and cost projections and may later be supplemented by a
more current three-day forecast. Together, these forecasts help many hotel departments maintain
appropriate staff levels for expected business volumes and thereby help contain costs.

Ten-Day Forecast. At most lodging properties, the ten-day forecast is developed jointly by the front
office manager and the reservations manager, possibly in conjunction with a forecast committee. Many
properties develop their ten-day forecast from their yearly forecast. A ten-day forecast usually consists of:

Daily forecasted occupancy figures, including room arrivals, room departures, rooms sold, and
number of guests

The number of group commitments, with a listing of each group's name, arrival and departure
dates, number of rooms reserved, number of guests, and perhaps quoted room rates

A comparison of the previous period's forecasted and actual room counts and occupancy
percentages

A special ten-day forecast may also be prepared for food and beverage, banquet, and catering operations.
This forecast usually includes the expected number of guests, which is often referred to as the house
count. Sometimes the house count is divided into group and non-group categories so that the hotel's
dining room managers can better understand the nature of their business and their staffing needs.

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To help various hotel departments plan their staffing and payroll levels for the upcoming period, the ten-
day forecast should be completed and distributed to all department offices by mid-week for the coming
period. This forecast can be especially helpful to the housekeeping department. A ten-day forecast form,
as shown in Exhibit 8, is typically developed from data collected through several front office sources.
(The occupancy multiplier mentioned in section 10 of the exhibit is discussed later in the chapter.)
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First, the current number of occupied rooms is reviewed. The estimated numbers of overstays and
expected departures are noted. Next, relevant reservation information is evaluated for each room (and
guest) by date of arrival, length of stay, and date of departure. These counts are then reconciled with
reservation control data. Then, the actual counts are adjusted to reflect the projected percentage of no-
shows, anticipated understays, and expected walk-ins. These projections are based on the hotel's recent
history, the seasonality of its business, and the known history of specific groups scheduled to arrive.
Finally, conventions and other groups are listed on the forecast to alert various department managers to
possible periods of heavy, or light, check-ins and check-outs. The number of rooms assigned each day to
each group may also be noted on the sheet.

Most automated systems provide a summary of recorded data in a report format for the front office
manager to use. However, only revenue management systems are programmed to "forecast" business.
Programming hotel property management systems to successfully analyze historical trends and market
conditions has been attempted in the past with little success. Revenue management systems are much
more sophisticated, with special trend analysis and regression analysis programming built in. Even with
revenue management system forecasting, it is the front office manager's knowledge and skill that
ultimately determines the accuracy of the forecast. Exhibit 9 presents a checklist that some revenue
managers use when revising forecasts.

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Three-Day Forecast. A three-day forecast is an updated report that reflects a more current estimate of
room availability. It details any significant changes from the ten-day forecast. The three-day forecast is
intended to guide management in fine-tuning labor schedules and adjusting room availability information.
Exhibit 10 shows a sample three-day forecast form. In some hotels, a brief daily revenue meeting is held
to focus on occupancy and rate changes for the next few days. The results of this meeting are often
included in the three-day forecast.

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Room Count Considerations. Control books, charts, software applications, projections, ratios, and
formulas can be essential in short- and long-range room count planning. Each day, the front office
performs several physical counts of rooms occupied, vacant, reserved, and due to check out, to complete
the occupancy statistics for that day. An automated system may reduce the need for most final counts,
since the system can be programmed to continually update room availability information.

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It is important for front desk agents to know exactly how many rooms are available, especially if the hotel
expects to operate at nearly 100 percent occupancy. Once procedures for gathering room count
information are established, planning procedures can be extended to longer periods of time to form a more

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reliable basis for revenue, expense, and labor forecasting. The checklist in Exhibit 11 may be applicable to
non-automated and semi-automated operations alike.

Section Keywords

forecasting The process of predicting events and trends in business; typical forecasting for the rooms
division includes room availability and occupancy.

Overstays Guests who stay after their stated departure date.

stayovers A room status term indicating that the guest is not checking out today and will remain at
least one more night; a guest who continues to occupy a room from the time of arrival to the stated date
of departure.

Understays Guests who check out before their stated departure date.

house count The forecasted or expected number of guests for a particular period, sometimes broken
down into group and non-group business.

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Competency 4

Objective: Explain how front office managers forecast rooms revenue and estimate expenses when
budgeting for operations.

Budgeting for Operations

The most important long-term planning function that front office managers perform is budgeting 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 become standards against which
management can evaluate the actual results of operations. In most hotels, room revenues are greater than
food, beverage, banquet, or any other revenues. In addition, rooms division profits are usually greater than
those of any other division. Therefore, an accurate rooms division budget is vital to creating the hotel's
overall budget.

The budget planning process requires the closely coordinated efforts of all management personnel. While
the front office manager is responsible for rooms revenue forecasts, the accounting division staff will be
counted on to supply department managers with statistical information essential to the budget preparation
process. The accounting division staff is also responsible for coordinating the budget plans of individual
department managers into a comprehensive property-wide operations budget for top management's
review. The general manager and controller typically review departmental budget plans and prepare an
overall hotel budget report for approval by the hotel's owners. If the budget is not satisfactory, elements
requiring change may be returned to the appropriate division managers for review and revision.

The front office manager's primary responsibilities in budget planning are forecasting rooms revenue and
estimating related expenses. Rooms revenue is forecasted with input from the reservations manager, while
expenses are estimated with input from all department managers in the rooms division.

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. Dollar and percentage differences are noted and the amount of rooms revenue for the budget
year is predicted.

For example, Exhibit 12 shows yearly increases in net rooms revenue for the Emily Hotel. For the years
20X1 to 20X4, the amount of rooms revenue increased from $1,000,000 to $1,331,000, reflecting a 10
percent yearly increase. If future conditions appear to be similar to those of the past, the rooms revenue for
20X5 would be budgeted at $1,464,100 a 10 percent increase over the 20X4 amount.

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Another approach to forecasting rooms revenue bases the revenue projection on past room sales and
average daily room rates. Exhibit 13 presents rooms revenue statistics for the 120-room Bradley Hotel
from 20X1 to 20X4. An analysis of these statistics shows that occupancy percentage increased three
percentage points from 20X1 to 20X2, one percentage point from 20X2 to 20X3, and one percentage point
from 20X3 to 20X4. Average daily room rates increased by $2, $2, and $3 respectively over the same
periods. If future conditions are assumed to be similar to those of the past, a rooms revenue forecast for
20X5 may be based on a one percent increase in occupancy percentage (to 76 percent) and a $3 increase in
the average daily room rate (to $60). Given these projections, the following formula can be used to
forecast rooms revenue for the year 20X5 for the Bradley Hotel:

The number of rooms available is calculated by multiplying the 120 rooms of the Bradley Hotel by the
365 days of the year. This calculation assumes that all rooms will be available for sale each day of the
year. This will probably not be the case, but it is a reasonable starting point for projection. Note also that
at some point occupancy will not be able to grow any further, and may actually decline. For example, new
competitors may enter the market, taking occupancy away from the hotel. Management needs to anticipate
this shift and adjust its forecasts to take into account the increased competition. The same logic applies to
projecting rate growth. Hotel management may decide to hold or even reduce rates to maintain or improve
occupancy when new competitors enter the market.

This simplified approach to forecasting rooms revenue is intended to illustrate the use of trend data in
forecasting. A more detailed approach would consider the variety of different rates corresponding to room
types, guest profiles, days of the week, and seasonality of business. These are just a few of the factors that
may affect rooms revenue forecasting.

Estimating Expenses

Most expenses for front office operations are direct expenses in that 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.

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Typical rooms division expenses are payroll and related expenses; guestroom laundry (terry and linen);
guest supplies (bath amenities, toilet tissue); hotel merchandising (in-room guest directory and
promotional brochures); travel agent commissions and direct reservation expenses; and other expenses.
When these costs 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. Exhibit 14
presents expense category statistics of the Bradley Hotel from 20X1 to 20X4, expressed as percentages of
each year's rooms revenue. Based on this historical information and management's current objectives for
the budget year 20X5, the percentage of rooms revenue for each expense category may be projected as
follows: payroll and related expenses, 17.6 percent; laundry, linen and terry, and guest supplies, 3.2
percent; commissions and reservation expenses, 2.8 percent; and other expenses, 4.7 percent.

Using these percentage figures and the expected rooms revenue calculated previously, the Bradley Hotel's
rooms division expenses for the budgeted year are estimated as follows:

Payroll and related expenses

$1,997,280 x .176 = $351,521.28

Laundry, linen, terry, and guest supplies

$1,997,280 x .032 = $ 63,912.96

Commissions and reservation expenses

$1,997,280 x .028 = $ 55,923.84

Other expenses

$1,997,280 x .047 = $ 93,872.16

In this example, management should question why costs continue to rise as a percentage of revenue. If
costs continue to rise (as a percentage, not in real dollars), profitability likely will be affected. Therefore,
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one of the outcomes of the budget process will be to identify where costs are increasing as a percentage of
revenue. Then, management can analyze why these costs are increasing disproportionately with revenue
and develop a plan to address the issue.

Since most front office expenses vary proportionately with rooms revenue (and therefore occupancy),
another method of estimating these expenses is to estimate variable costs per room sold and then multiply
these costs by the number of rooms expected to be sold.

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 documents should be saved to
provide an explanation of the reasoning behind the decisions made while preparing departmental budget
plans. Such records may help resolve issues that arise during the budget review. These support documents
may also provide valuable assistance in the preparation of future budget plans.

If no historical data are available for budget planning, other sources of information can be used to develop
a budget. For example, corporate headquarters can often supply comparable budget information to its
chain-affiliated properties. Also, national accounting and consulting firms can usually provide
supplemental data for the budget development process.

Many hotels refine expected results of operations and revise operations budgets as they progress through
the budget year. Reforecasting is normally suggested when actual operating results start to vary
significantly from the operations budget. Such variance may indicate that conditions have changed since
the budget was first prepared. While operating budgets are seldom changed once the hotel's management
and owners approve them, reforecasting provides a more realistic picture of current operating conditions.

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