UNIT – IV

BUDGETING AND EVALUATING FRONT OFFICE OPERATION

BUDGETING FOR FO OPERATIONS

Making a front office budget

A.Factors affecting budget planning
B.Capital operation budget for front office
C.Refining budgets
D.Forecasting room revenue

Budgeting for Operations

The most important long-term planning function performed by front office managers 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 which, 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, banquets, or any other source of
revenue. In addition, rooms division profits are usually greater than those of any other
department. Therefore, an accurate rooms budget is vital to creating the overall budget of the
hotel.

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 hotel
accounting division will be counted on to supply department managers with statistical
information essential to the budget preparation process. The hotel accounting division 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 hotel general
manager and controller typically review departmental budget plans and prepare a 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 primary responsibilities of the front office manager in budget planning are forecasting room
revenue and estimating related expenses. Room revenue is forecasted with input from the
reservations manager while expenses are estimated with input from all department managers in
the rooms division.
 At least once per year, hotels shall prepare annual budgets, which are profit plans that
address all revenue sources and expense items for the following calendar year. Moreover,
the hotel annual operating budget represents standards against which management can
evaluate actual results of operations. In the annual budget preparation process, close
coordination efforts of all management personnel is vital.
 The hotel’s annual operation budget is commonly divided into monthly plans, which in
turn are divided into weekly and even daily plans, for better control over actual results.
  While preparing the front office department annual budget, the front office manager shall
coordinate with the accounting department as to estimate only rooms revenue and related
direct expenses. The hotel controller and the general manager, then, shall revise this very
budget.
Advantages of Budget:
1. Maximization of profit
2. Co-ordination
3. Specific aims
4. Tool for measuring performance
5. Economy
6. Determining Weaknesses
7. Corrective action
8. Consciousness
9. Reduces Cost
10. Introduction of incentive schemes
Limitations of Budget:
1. Uncertain future
2. Budgeting revision requirement
3. Budgets too easy to achieve
4. Non achievable budgets discourage the concerned employee
5. Discourages efficient people
6. Difficulty of co-ordination
7. Differences among different department of achievements o failures
8. Depends upon the support of top management.

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
room revenue from past periods.

For the purpose of making a revenue forecasts (budget), the Front Office Manager needs past
periods (any specified) financial information. This means that the Reservation Manager shall
supply to the Front Office Manager figures of room revenue for, say, three previous years and
the pattern in the increase of revenue and also the increase in terms of percentage. Let us suppose
that each year the increase in revenue is 15% (although this is a hypothetical situation, because
every year the increase cannot be constant).

Year Room Revenue Increase of 15% every year

2015 Rs 5,00,00,000 Rs 75,00,000

2016 Rs 5,75,00,000 Rs 86,25,000
2017 Rs 6,61,25,000 Rs 99,18,750
2018 Rs 7,60,43,750 Rs11,40,64,625
The figures in the table for the years 2015, 2016 and 2017 are for the past years, while figure for
2018 is the projected figure for 2018 as the forecasting is done in 2017 for 2018.
Please note that tile figure for the year 2018 in the 'Room Revenue' column of Rs. 7 ,60,43,750 is
Revenue at the end of the year 2017 and the beginning of the year 2018, while the figure of Rs
11,40,64,625 in the column 'Increase of 15% every year' projected increase over the figure of
year 2017.
The budgeted figure of Rs.11,40,64,625 will be calculated at the beginning of the year 2018 or
at the end of year 2017.
Another way of projecting room revenue is on the basis of past room sales and ADR. Let us
study by an example.
Suppose a hotel has 100 rooms and average occupancy of the hotel for the year 2015 = 80%.
Therefore, the number of rooms sold over a period of the year 2008
= 80/100 x 100 x 365 = 29,200 rooms
and suppose the total room revenue for the year 2008 is Rs 11,68,00,000.
Then the ADR =11,68,00,000 / 29200 = Rs 4,000.
Further, we see that the occupancy percentage increased by 3% in the year 2015 to 2016 and
from 80% it became 83% in 2016.

Year Total No. Occupancy No. of rooms Total Revenue for ADR
rooms in % sold during the year (say)
the hotel the year
2015 100 80 29,200 Rs 11,68,00,000 Rs 4,000/- approx.
2016 100 83 30,295 Rs 15,40,00,000 Rs 5,008/- approx.
2017 100 86 31,390 Rs 17,80,00,000 Rs 5,676/- approx.
2018 100 89 32,585 Rs 22,00,00,000 Rs 6,751/- approx.

Also that every year it is increasing by 3%, (i..e.) the occupancy percentage for 2017 becomes
86%, and for the year 2017-2018 the occupancy percentage becomes 89%.
Further, from these figures, we find that it means that a total number of 30,295 rooms and the
room revenue is Rs 15,40,00,000/- and hence the ADR is Rs 5,008 approximately for the year
2015 -2016 and
for the year 2016-2017 these figures are, total number of rooms being 31,390, and the total room
revenue being Rs 17,80,00,000/- which means an ADR of Rs 5,676/-, and
for the year 2017-2018 these figures are, total number of rooms 32,585, total room revenue Rs
22,00,00,000 and ADR of Rs 6,751.
Now, based on the above assumption of 3% increase in room occupancy percentage, which
means 92% for the year 2017-2018 and the total room revenue, say, Rs 24,75,80,000, the number
of rooms sold will be 33,780 and ADR shall be approximately Rs 7,329.
From the above figures, we note that while the occupancy percentage is increasing at a constant
rate of 3% every year, the ADR is increasing from Rs 4000/- to Rs 5,008/-, i.e., 125.2% and
further to Rs 5,676 from Rs 5,008, which means 101.1%, and further from Rs 5,676 to Rs 6,751,
which means 119.6% increase and further shall increase to Rs 7,329, which means an increase of
108.5% in ADR.

 Estimating Expanses
In hotel industry one of the major departments is Front Office and most of the expenses are of
direct expenses nature, which means that they are in direct proportion to the total room revenue,
which means more the revenue, more the expenses, and less the revenue, lesser the expenses. By
using the data, we can calculate approximately the percentage of room revenue in relation to
each one of the expense items, such as labor cost, bath room items cost, bed room decoration
cost, bed room linen cost, taxes on labor cost, cost involved in reservation procedure and many
other such items. Let us consider the example of the years 2015, 2016, 2017 and 2018 for some
such expense items, say, reservation system expenses, labor and labor related taxes, bath room
linen, bed room linen and miscellaneous items. Let us presume that there is an increase of 1%,
1%, 0.5%, 1% and 2% respectively in the above mentioned items each year and further let us
suppose that these figures of expenses or various items for the year 2008 are 3% for reservation
system, 20 % for labor and labor related taxes, 3% for bath room linen and 3% for bed room
linen and 5% for miscellaneous expenses of the total room revenue, say, Rs 80,00,000/- every
year. Now the figure of expenses on the above mentioned heads for the years 2016, 2017 and
2018 are as follows:

Year Reservation Labor and labor Bathroom Bedroom linen Miscellaneous

system related taxes expenses linen expenses expenses expenses

2015 4.0% 21.0% 3.5% 4.0% 7.0%

Similarly for the year 2016, these figures are as follows:

Year Reservation Labor and labor Bathroom Bedroom linen Miscellaneous
system related taxes expenses linen expenses expenses expenses

2016 5.0% 22.0% 4.0% 5.0% 9.0%

Also for the year 2017, these figures are as follows:

Year Reservation Labor and labor Bathroom Bedroom linen Miscellaneous
system related taxes expenses linen expenses expenses expenses

2017 6.0% 23.0% 4.5% 6.0% 11.0%

Please note that-the total room revenue here is considered constant, that is, Rs. 80,00,000 for
each year. This situation is a hypothetical situation and has been assumed only for the purpose of
calculation.

Now let us consider the forecasted figures for the year 2018, which shall be as follows:

Reservation system expenses shall be Rs 5,60,000/- (7% of the Total Room Revenue, i.e., Rs
80,00,000/-).
Labour and labour related expenses shall be Rs 19,20,000/- (24% of the Total Room Revenue,
i.e., Rs 80,00,000/-).

Bathroom linen expenses shall be Rs 4,00,000/- (5% of the Total Room Revenue, i.e., Rs
80,00,000/-).

Bedroom linen expenses shall be Rs 4,80,000/- (6% of the Total Room Revenue, i.e., Rs
80,00,000/-), and

Miscellaneous expenses shall be Rs 9,60,000/- (12% of the Total Room Revenue, i.e., Rs
80,00,000/-).

We can also estimate or forecast the expenses for a future period over various heads, such as
Reservation System, Bedroom linen expenses, Bathroom linen expenses, etc., i.e. the various
expenses of Front Office by estimating the variable costs per room sold and then multiplying
these costs by the expected number of rooms that will be sold. This holds true because most front
office expenses vary proportionately with the occupancy, that is to say, the Room Revenue.

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
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 variant may indicate that conditions have
changed since the budget was first prepared and that the budget should be brought into line.

Evaluating Front Office Operations

Evaluating the results 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.
There are different ways of measuring the performance of hotels. Hotels evaluate their
performance by calculating occupancy ratios, average daily rate, average room rate per guest,
rev-par. Guests also have an important say in evaluating the performance of a hotel.

The important tools that front office managers can use evaluate the success of front office
operations include:

 Daily operations report

 Occupancy ratios

Daily operations report

The daily operations report, also known as the manager's report, the daily report, and the daily
revenue report, contains a summary of 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 computer functions.
Daily operations reports are uniquely structured to meet the needs of individual hotel properties.

Rooms statistics and occupancy ratios form an entire section of a typical daily operations report.
Enriched by comments and observations from the accounting staff, statistics shown on the daily
operations report may take on more meaning.
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 measure the success of the front office in selling the hotel's primary product:
guestrooms. The following rooms statistics must be gathered to calculate 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 available in the daily operations report. Occupancy ratios that can be
computed from these data include:

 Occupancy percentage

 Multiple (or double) occupancy ratio

  Average daily rate

 Average rate per guest

These ratios typically are calculated on a daily, weekly, monthly, and yearly basis.

 Occupancy Percentage
The most commonly used operating ratio in the front office is occupancy percentage. Occupancy
percentage indicates the proportion of rooms either sold or occupied to number of rooms
available during a specific period of time.

Occupancy percentage = Number of rooms sold x 100

Total number of rooms available for sale

Let us suppose that a hotel with 350 rooms (all available for sale) manages to sell 245 rooms on
a certain day. The occupancy percentage on that particular day will be:

Occupancy percentage = 245/350 x 100

= 70%

If in the above example, 25 rooms were blocked for spring cleaning and 25 rooms were under
renovation, the total number of saleable rooms will reduce from 350 to 300. Then the occupancy
percentage will be 245/300 x 100 = 82 per cent.

The occupancy percentage can be calculated for a particular day, or on a weekly, fortnightly,
monthly, quarterly, half yearly, or annual basis. This yardstick helps the management to measure
the performance of the hotel.

 Multiple Occupancy Percentage

Multiple occupancy can be calculated by determining a multiple occupancy percentage or by
determining the average number of guests per room sold or occupied (also called the occupancy
multiplier or the multiple occupancy factors).

Multiple Occupancy Percentage = Number of Rooms Occupied by More Than One Guest x100
Number of Rooms Occupied

If in the above example, number of rooms occupied by more than one guest are 250 rooms then
the Multiple Occupancy Percentage will be:

Multiple Occupancy Percentage = 250/350 x100

= 71.42 %

 Average Room Rate or Average Daily Rate

Average daily rate—commonly referred to as ADR—is a statistical unit that is often used in the
hospitality industry. It is the average rental income per occupied room for a given time period. It
is calculated by dividing the total revenue generated in a specific duration of time by the total
number of rooms sold in that duration.

Let us suppose that in the earlier example the total revenue generated was Rs 49,000. The
average daily rate will be:

ADR =Total revenue generated in a specific period

Total number of rooms sold in that period

= Rs 49,000/245 rooms
= Rs 200 per room

 Average Room Rate Per Guest

Average room rate per guest (ARG) is calculated by dividing the total room revenue by the total
number of guests in the hotel, including children above five years. The formula to calculate the
average room rate per guest is as under:

Average room rate per guest (ARG) = Total revenue generated in a specific period
Total number of guests in the hotel

In the above example, if the total number of guests is 280 on that particular day, the average
room rate per guest will be:

ARG = Rs 49,000/280 guests

= Rs 175 per guest

Revenue Per Available Room (Rev-Par)

Rev-par is the revenue per available room. It is used to measure and compare the performance of
two or more hotels. Rev-par is calculated by multiplying the average daily rate with the
occupancy percentage.

Rev-par = ADR x Occupancy percentage

= Rs 200 x 70/100
= Rs 140

Rev-par can analyze the performance of a hotel over any timeframe—daily, weekly, monthly,
quarterly, or yearly. The rev-par analysis can also be used to compare hotels of different sizes.

Let us take the following example:

The data collected on a particular day from three hotels is as under:
Hotel X (300 rooms): ADR is Rs 250 with an occupancy percentage of 75.
Hotel Y (200 rooms): ADR is Rs 275 with an occupancy percentage of 70.
Hotel Z (600 rooms): ADR is Rs 200 with an occupancy percentage of 65.
Let us evaluate the performance of the Hotels X, Y. and Z. The total revenue generated by a
hotel is ADR x No. of rooms sold. The number of rooms sold can be calculated as:

Occupancy percentage x Total number of

Number of rooms sold = rooms available for sale
100

The number of rooms sold by Hotel X = 75 x 300/100 = 225 rooms

The number of rooms sold by Hotel Y = 70 x 200/100 = 140 rooms
The number of rooms sold by Hotel Z = 65 x 600/100 = 390 rooms

Thus, the total revenue generated by the hotels is as under:

Total revenue of a hotel: ADR x No. of rooms sold

Total revenue of Hotel X: Rs 250 x 225 = Rs 56,250
Total revenue of Hotel Y: Rs 275 x 140 = Rs 38,500
Total revenue of Hotel Z: Rs 200 x 390 = Rs 78,000

Thus, on the basis of revenue generated, one may reach a conclusion that Hotel Z has
outperformed the other two hotels. However, let us now calculate the rev-par of each hotel,
which is ADR x Occupancy percentage.

Rev-par of Hotel X: 250 x 75/100 = Rs 187.50

Rev-par of Hotel Y: 275 x 70/100 = Rs 192.50
Rev-par of Hotel Z: 200 x 65/100 = Rs 130.00

We see that on the basis of rev-par, Hotel Y has outperformed the other two hotels Thus, rev-par
is useful because of the above-mentioned flexibility of compared hotels of different sizes and
their respective rates

Revenue Per Available Room (Rev-Par)

• Rev-par is the revenue per available room. It is used to measure and compare
the performance of two or more hotels.
• Rev-par is calculated by multiplying the average daily rate with the
occupancy percentage.
• Rev-par can analyze the performance of a hotel over any timeframe—daily,
weekly, monthly, quarterly, or yearly.

Rev-Par =ADR*occupancy percentage

Market Share Index

• Market share is defined as a hotel’s occupancy performance in relation to
other hotels within a predetermined competitive set.
• A major task in calculating the market share is the determination of the
competitive set.
• The answer to the question if a guest is not staying at our hotel, where can he
possibly stay?— constitutes the competitive set.
• The total market potential is the sum total of the number of rooms that are
available in the total number of participating hotels.
• Market share index enables the managers to assess their hotel’s performance
with respect to the competitors.

Room Revenue Analysis

 FO staff members are expected to sell rooms at rack rate unless a guest
qualifies for an authorized discounted room rate
• A room rate variance report lists those rooms that have been sold at other
than their rack rates
• This report helps FO mgmt. to review the performance of the FO staff
• The other way to evaluate the sales effectiveness of the FO staff by FOM is
to generate a YIELD STATISTIC
• Yield Statistic is the ratio of actual rooms revenue to potential rooms revenue
• In other words, it is the amount of room revenue that can be generated if all
the rooms in the hotel are sold at rack rate on a given day, month or year
• Yield Statistic= Actual Room Revenue____
Potential Rooms Revenue

Forecasting Rooms Revenue

Forecasted Annual Rooms Revenue=Rooms available X Occupancy

percentage X Average daily rate
Rooms Available= total rooms*365 days

Forecasting Rooms Revenue Example

100 Rooms Hotel
100 x 365 days = 36,500 Rooms Available

HOTEL INCOME STATEMENT

 It provides important financial information about the results of hotel operations for a
given period of time that is used by the management to evaluate the overall success of
operations
 It is an important financial indicator of operational success and profitability
 The hotel income statement relies in part on detailed FO information that is supplied
through the room schedule
 The amount of income generated by the rooms division is determined by subtracting
payroll and related expenses
 Revenue generated by the rooms division is usually the largest single amount produced
by revenue center with in a hotel

Evaluation of Hotels by Guests

 Guests base their evaluation of hotels on various criteria like:

• Location
• hotel staff
• service level
• Cleanliness
 Consumers are now researching online before booking a hotel
 Most of the traveler says that they have refrained from booking a hotel as a direct result
of a negative review on travel information websites.
 It is very important that the hotel provides consistent excellent services to all the guests
so that no guest leaves the hotel with a negative experience, which might lead to negative
word-of-mouth publicity and to the lowering of hotel sales, and thus affecting the revenue
and performance of the hotel.