Front Office

10/15/2015 PLANNING AND EVALUATING OPERATIO
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PLANNING AND EVALUATING OPERATIONS

I Management Functions:
1. Planning: At the planning stage, the front office manager shall determine the department’s goals. Later, the
front office manager shall use these goals as a guide for planning more specific and measurable objectives.
Lastly, the front office manager shall determine the strategies and tactics to reach these objectives.

2. Organizing: The front office manager shall organize the work to be done through dividing it among staff
members. While doing so, the work shall be distributed fairly and shall be completed in a timely manner.

3. Coordinating: Involves bringing together and using the available resources to attain planned goals.

4. Staffing: Involves recruiting applicants, selecting those best qualifies for positions, and scheduling employees.

5. Leading: Involves overseeing, motivating, training, disciplining, and setting an example for the front office.

6. Controlling: Ensures that the actual results of operations closely match planned results.

7. Evaluating: Determines the extent to which planned goals are, in fact, attained. Moreover, it involves
reviewing and, when necessary, revising or helping to revise front office goals.

PLANNING IN FRONT OFFICE :
It involves 3 main functions:
1. Establishing room rates
2. Forecasting room availability
3. Budgeting for operation

1.Establishing Room rate
Each hotel has different room rate categories based on roomsize, location, view, furnishing and amenities. Each
cateory is assigned a rack rate based on the number of pax occupying the room.
RACK RATE: is the standard price determined by the management. hotel design a standard rate for each
category of rooms offered to the guest. These are the highest possible rate for each category of rooms.
Special Rates:There are certain circumstances when special reduced rates or discounts may be offered on rack
rates during the low occupancy period. The special rates are:

Corporate rates: these are the promotional rates to attract the corporate market segments. These are
generally 10 to 20 % below the rack rate.
Package Rates: It covers all expenses of accommodation, food, transportation, sightseeing, entertainment,
etc. These are normally for a fixed period of time, e.g. 4 days and 3 nights. These can be meeting,
marriage or holiday’s package.
Seasonal rate: depending on the desirability of a location at a particular time of the year, destination may
have a high or a low season and rate also change accordingly.
Advance purchase rate: it is a new concept; heavy discounts are given on room booking done in advance.
Discounts depend upon advance period and number of rooms booked.
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Week day and week end rates: hotel occupancy change with regard to the days of the week and rate
goes low with decrease in occupancy and goes up with increase in occupancy, e.g. down town hotels are
busy on week day whereas resorts are busy on weekends.
Day and half day rate: rates offered to guest using room for few hours.
Group Rate: Groups are given special rates due to the number of rooms taken by them at a time.
A group under standard stipulation comprises of 15 guests or more. Based on the discretion of the
Management, the group leader may be given a complimentary room for a minimum of 15 paying
customers.
Guests who do not come into any of the above groups are called as ‘F.I.Ts’ or Free Individual Travellers.
i.e., they are not part of any group or company enjoying special rates. When these are Indians or
Domestic clientele, they are referred to as ‘D.F.I.T’. or ‘Domestic Free Individual Traveller’. Similarly,
if the guest is not a domestic traveller i.e., if he is a foreigner, then he is called as ‘F.F.I.T’. or ‘Foreign
Free Individual Traveller’.
Tour rates: these are special discounts that are given to wholesalers who operate series of tours for
groups arriving and departing together.
Company Guaranteed Rates (CGR): Companies which give regular guaranteed business to the hotel are
given discounts.
Company volume guaranteed rate (CVGR)Based on the room night potential of different
companies, certain hotels give a special rate to those companies which contribute a large volume of
room nights. This special rate offered came to be called as the ‘Company Volume Guaranteed
Rate’ (C.V.G.R) or ‘Company Guaranteed Rate’ (C.G.R.). The higher the volume of business, the
higher was the percentage of discount given. For this purpose, all those companies which offer a
large quantum of business could be ‘A’ rated. As the contribution figure dipped, the company
rating would also drop to ‘B’ or even ‘C’ for those with a relatively poor volume of business.

Many hotels today, in order to accommodate all categories of employees from one particular organisation,
have gone ahead and offered very low rates to the lower down officers, and higher rates to the top brass
of the company, based on their entitlements and expenditure capabilities. A record of the room night
contribution (R.N.C.) of individual companies is maintained either on a computerized system or manually
by an alphabetically indented register. Periodically, the companies are informed of their volume
contribution. If the expected room night contribution was not maintained by any one company, they would
fall to a lower rating or even be left out of the C.G.R. list after the total period of assessment
Employee rate Employees of major hotel chains have a special employee rate for all employees
at their member hotels within the chain. This is however based on the availability of space and
policy of the individual hotel.
Travel agent rate: travel agents provide substantial volume of business to hotels; hence hotels
offer them special discounts and commissions.
Government rates: these are the discounts given to the government official travel for official purpose.
Educational rate: these are the special rates offered by hotels to students and educationists who have a
limited travel budget. They provide a large chunk of repeat business to hotels.
Membership rate: rates offered to the guests who are the member of influential organization or
memberships offered by hotel that provide volumes of business to hotels.
Introductory rate: rates offered by new hotels or hotels providing new services to the market.
Complimentary rates: these are rates where hotel does not charge the room rent from a guest, these are
provided to tour or group leaders, tour operators, travel agencies, local dignitaries, and media personnel’s.
Promotional Rates: For publicity and promotion special discounted rates are offered to CIP’s. These
discounts are authorized by senior staff members.
Off Season Rates: Resorts usually have separate tariff for peak season and off season, the off season rate
being much lower.
Staff Discount: In chain hotels, employees may be given discounts on room rates for hotels belonging to
that chain. This is given on space available basis.
Airline/Crew Discount: For their crew members, airlines are given a fixed discounted rate. Most airlines
enter into a contract with hotels in different cities where its flights commute, wherein staff of the airline
(crew) is given a very special rate for a fixed period. Their duration of stay may be a few hours up to a
maximum of 24 hours. There is also another special rate negotiated for the layover passengers. The food
plan applied would be based on the requirement, but the food element computed is also on a discounted
basis.
 Internet rate: rates offered on internet booking.
 Crib Rate: Reduced rates are applicable for children below five years.
Extra Bed: A fixed charge generally one fourth of the room rate. As most five star hotels today do not
have single rooms, but have only double rooms which could accommodate a minimum of two guests, a
third person if present, is given an extra bed and charged. This charge is in most hotels levied even if an
extra bed is not given. The rate charged could be approximately 20 to 25% of the room rate.
F.H.R.A.I DISCOUNT: The Federation of Hotel and Restaurants Association of India (F.H.R.A.I)
is a major association of hotels and restaurants in India. As a gesture of goodwill for members of
the same fraternity, the association issues membership cards to the Proprietor / Partners / Chairman
/ M.Ds of these establishments, which entitles them to a special discount( presently 30% on room
rent, food and beverage (excluding liquor), if paid by cash and 25% if settled through a credit card.
The percentage of discount and other conditions are subject to change).
Other rates: Besides the above, special rates may also be given to a hoard of other category of
people based on the discounting policies of the management. Some of these might be commercially
important persons (C.I.Ps) for publicity and promotion purposes, influential persons like company
directors, decision makers, top executives, travel writers, etc. Such discounts have to be authorised
by a senior member of the Management.

ROOM TARIFF FIXATION:
A hotel fixes the room tariff on the following two bases:

1. COST BASED: cost based pricing is a room rent determination technique that covers the basic
cost of operations at a given level of service, plus the pre determined % of return on investment.
Cost + fixed profit % = selling price

a. Rule of thumb: this is also known as cost rate formula or 1:1000 ratios. This is the oldest
method of determining the room rent of any hotel. According to this approach, the room rent
should be fixed at the rate of Rs. 1 for each Rs. 1000 spent on the construction and
furnishing of the room (cost per room or room cost), assuming that the average occupancy is
70% for the year.

Cost per room or room cost = cost of (land+construction+fixture+fitting)
Total number of rooms

Drawbacks associated with rule of thumb approach:
 Consider only cost incurred in constructing rooms but does not consider other factors
like inflation, competition, fixed expenses
 Does not consider return on investment (ROI).
 Consider average occupancy at 70% which is not always achievable.
 Does not consider depreciation of fixed asset and elevation of land cost.
 Approach fails to consider unexpected expenses, and contribution of other
department.
 If the property is new, construction cost will be high in comparison to ther hotels, that
will effect profitability.
 Approach does not take care value of property into consideration, if the property is
new, amenities are new.
 Local market and competition rules your rates

b. Hubbart formula: Also known as bottom up approach. This is a scientific way and most
recent approach, of determining the room rent, was developed by Roy Hubbart in America in
the 1940s.it resolve all the problems of the rule of thumb approach. To determine the
average selling price per room, the approach consider operating cost, desired profit and
expected number of the rooms sold.

8 steps of Hubbart formula approach
i. Calculate the hotels desired profit by multiplying the desired rate of return by
owners’ investment.
ii. Calculate pretax profit by dividing desired profit (step1) by 1 minus the hotel tax
rate.
iii. Calculate fixed charges and management fee. The calculation includes estimating
depreciation, interest expenses, property tax, insurance, amortization, building
mortgage, land, and rent and management fee.
iv. Calculate undistributed operating expenses. The calculation include estimated
administrative and general, data processing, HR, transportation, marketing,
property operation and maintenance and energy cost.
v. Estimate non room operated department income and loss, that F&B, and other
departments income or loss.
vi. Calculate the required rooms’ department income. The sum of pretax profit
(step2), fixed charges and management fee (step3), undistributed operating
expenses (step 4), and other operated department income less other operated
department income (step 5) equals the required room department income.
vii. Determine the room department revenue. The required rooms department income
(step6) plus room department expenses of payroll and related expenses, plus other
direct operating expenses, equals the required room department revenue.
viii. Calculate the average room rate by dividing room department revenue (step7) by
the expected number of rooms to be sold.

 Doubles sold daily = double occupancy rate * total number of rooms * occupancy %
 Singles sold daily = rooms sold daily – number of double rooms sold daily
 Singles sold daily * x + doubles sold daily * (x + y) = (average room rate) * (total number of rooms sold daily)
 Where: x = price of singles; y = price differential between singles and doubles; x + y = price of doubles.

2. MARKET BASED: market based pricing is setting a price based on the value of the product in the
perception of the customer. In this case, the hotel works backwards as it first makes an
accommodation product available at a price that a guest is willing to pay, and then it tries to cut
down on the cost to achieve a reasonable rate of return on that basis.
Some common methods of market based pricing are:
 As per Competition: in this approach market looks at comparable hotels in the geographical
market and sees what they are charging for the same product.
 Market tolerance: checking competing hotels’ best available rates for a room, by calling up the
competitive hotel without disclosing your identity.
 Rate cutting: lowering of rates to increase occupancy levels, especially during off season.
 Inclusive and noninclusive rate: charging rates on the basis of meals provided.
 Guest requirement: varying room tariff as per guest requirement, e.g. early check in on CO
basis or late check out on MAP basis.
 Prestige pricing : product and prices are fixed much higher then other hotels , it works on the
mentality that if it is expensive it must be good.

FACTORS EFFECTING ROOM TARIFF:

 COST the total expenditure that is incurred in providing service and product to the ultimate consumer of
the hotel service is the cost. The higher the investment that has been made in a hotel property, the higher
would be the room rent.
 LEVEL OF SERVICE a hotel offering the best services or more services like spa, gymnasium,
banquet, specialty restaurant, etc. will charge a higher room rent in comparison to other hotel offering
limited services.
 AMENITIES hotel providing more amenities in room will charge higher price for their rooms.
 FOOD what all meals are provided in room package (food plan) will also affect room prices.
 COMPETITIONthe higher the competition in the market lower the prices.
 TARGET MARKET the target market governs the rack rate of a hotel. Hotels are priced on the basis
of the spending power of the target guest
 LOCATION location of the hotel effect the room tariff e.g. downtown hotels or hotels near tourist
destinations or sea facing are more expensive than other hotels.
 SURROUNDING – resources available in the area

2. FORECASTING ROOM AVAILABILITY

Forecasting means to say what will probably happen in the future. Thus forecasting is the predication of future
happenings based on the precise analysis of the data available for the past rather that guess work. Forecasting
plays a very important role in the SHORT TERM PLANNING

Benefits of Forecasting

In the hotel industry, reservation forecasting in very useful in the following ways:
The volume of the hotel reservation will help the FOM and the management to plan the following things
 Staff required in each department for the smooth functioning of the hotel
 Reservation process
 Effective room management
 Occupancy forecast occ % on a given date
 Determining operating cost
 Helps in budgeting
 Minimum inventory of items required by each department to carry out their tasks effectively
 Allocation of resources to serve the guests in the hotel in the best possible way
 Maintenance and replacement requirements of the furniture, fixtures and ultimately the property, as the
wear and tear of these depend on the number of people using it.
 Special arrangements to be made for the arrivals of groups, commercially important people (C.I.P’s) and
VIP’s.
 The reservation forecast will provide the necessary information to the FOM so as to practice YIELD
MANAGEMENT.
 The forecast provides information about the lean days when occupancy is low. The sales department may
take necessary action to attract business for those durations.
 The forecast data will also reveal the sold out dates, which will ensure that the reservation agent does not
accept any reservation for those dates.

Forecasting Room Availability

The most important short term planning performed by a FOM is forecasting the number of rooms available for
sale to WALK IN guests on any given date. Room availability forecast or room position can be defined as
number of rooms available for sale to the walk in guests.

There are 3 types of room positions.

1. Plus Position
When number of rooms available for sale (vacant rooms and expected departure rooms) are more than the
expected arrivals, the hotel is running on plus position.
Room position= Vacant rooms + Expected Room DeparturesExpected Rooms Arrival
E.g.: Vacant rooms are 30. Expected departures are 20 and Arrivals are 40.Room Position will be VR 30 + EDR
20 EA 40 = 10. In the above case, vacant rooms and expected departure rooms are greater than the expected
arrival which means that 10 rooms are available for sale to walk in guests.

2. Neutral Position
When the number of rooms available for sale (Expected departure rooms and vacant rooms) is equal to expected
room arrivals, this shows that the hotel is running on neutral position
E.g.: VR 30, EDR 20 and EA 50Room position will be 30 + 20 50 = 0. In the above case the hotel cannot accept
a walk in guest because expected departures guest and vacant rooms are equal to expected arrival rooms.

3. Minus Position
When the numbers of rooms available for sale are less than expected room arrivals, the hotel is said to be in
minus position which in other words means that the hotel is Overbooked
E.g.: VR 30, ERD 20 and EA 70

Room position will be 30 + 20 70 = 20

In the above mentioned case the hotel cannot receive any walk in guests as the hotel is highly overbooked.

Room availability forecast or room positions are used to manage the reservation process and guide the front
office staff in room management. Forecasting may be especially important on nights when a full house (100%
occupancy) is possible. A room availability forecast can also be used as occupancy forecast since there is a
fixed number of rooms in the hotel. Forecasting the numbers of rooms available for sale can automatically
determine the number of rooms expected to be occupied.

A forecasted availability and occupancy numbers are very important for the daily operations of the hotel. Room
occupancy forecast can be useful to the FOM attempting to schedule the required number of employees for a
expected busy day of business. These forecasts may also be helpful to other departments as well. For E.g.: The
HK department needs to know how many rooms are expected to be occupied so that proper staffing and manning
can be done in various public and guest areas of the hotel. The restaurant manager needs to know the same
information to better schedule the F&B staff in various F&B outlets. The hotels Chef too needs the forecasted
figures so as to order raw material and staff his kitchen team accordingly.

A forecast is only as reliable as the information on which it is based. A forecast can serveas a guide in
determining OPERATIONAL COST and thus every effort should be made to ensure accurate forecasting.
Forecasting is a difficult skill to develop. This skill is acquired withexperience, effective record keeping and
accurate calculations. Experienced FOM’s have foundout that several types of information can be available or
can prove to be helpful to make. The information is as follows

Information required for accurate room availability forecast

1. Thorough knowledge of the hotel and surroundings areas
2. Market profile of the people to whom the hotel provides services
3. Occupancy data for the past several months and for the same period of the previous year 4.Reservation trends
and history of reservation lead time between expected date of arrival and date of reservation also called
reservation horizon
5. A list of special events scheduled in the geographical area
6. Business profile of specific groups booked for the forecasted data
7. Number of Nonguaranteed and guaranteed reservations and estimate of no snows
8. The percentage of rooms’ already reserved, cut off dates for rooms blocks held in the forecasted dates
9. Impact of hotel groups and their potential influence on the forecasted dates
10. Plan of renovating the hotel that would change the number of rooms available for sale
11. Construction or renovating plans for competitive hotels in the area

Useful Forecasting Data

The process of forecasting room availability generally relies on historical occupancy data.
To facilitate forecasting the following daily occupancy figures should be collected
1. Number of expected arrivals
2. Number of expected stay over
3. Number of expected no shows
4. Number of expected under stays
5. Number of expected overstays
6. Number of expected room walkins
7. number of expected room check outs.

Some hotels with very high double occupancy % may be as concerned with guest count as rooms count. For E.g.:
A hotel with large amount of group business where there are 2 guests per room may want to forecast guest as
well as room count activity. Overall these data are important to room availability forecasting. Since they are used
in calculating various daily operating ratios that help determine the room position. The ratios are mathematical
expression of a relationship between two numbers that result from dividing one by the other. Most statistical
ratios that apply to Front Office operations are expressed as percentages. Managers should look for consistency
in ratios. Without consistency in forecasting ratios the evaluation of the hotels performance will be difficult.

The following ratios and percentages and useful for the FOM for forecasting

1. Percentage of No Shows
The percentage of no shows indicates the proportion of reserved rooms that the expected guests did not arrive to
occupy the reserved rooms on the expected date of arrival. This ratio helps the front office manager to decide
when and if the rooms can be sold to walk in guests. The percentage of no shows is calculated by dividing the
number of rooms no show for a specific period of time by the total number of expected rooms arrivals for that
same period.
Some hotels track no shows in relation to guaranteed and nonguaranteed reservations. Nonguaranteed
reservations typically have a higher no show percentage than guaranteed reservations since the potential guest do
not have any obligation to pay if they do not register at the hotel. Proper forecasting no shows rooms also depends
on the hotels mix of business. For E.g.: corporate groups have a generally much lower no show percentage that
other type of groups or FIT’s or individual businesses. A hotel with a large corporate meeting market segment
will most likely have a very low no show percentage. Conversely, a hotel that does little corporate business tends
to have higher overall no show percentage.

No Show% = Number of rooms no show/ No. of Expected arrivals ×100

2. Percentage of Overstay
Overstay represents rooms occupied by guests to stay beyond their originally scheduled departure dates. Overstay
guests may have arrived with guaranteed reservations or nonguaranteed reservations or as walk in’s. Overstay
guest should not be confused with stay over. Stays over rooms are occupied by guests who arrive to occupy a
room before the day in question and whose scheduled departure date is until after the day in question. The
percentage of overstay is calculated by dividing the number of overstay rooms by expected room departures for
the same period. To help regulate room overstays the Front desk agents are trained to verify the arriving guest’s
departure date at the time of check in. Such verification can be critical especially when the hotel is at or near a
full occupancy and there are no provisions for overstaying the guest. Overstay do not cause any loss to revenue
but in full occupancy can cause problem for checking in guest

Overstay % = Number of rooms overstay/ No. of expected departures ×100
Number of expected check out = number of actual check out – understay+ overstay
Or number of expected check out = number og rooms showing occupied which are due for departure

3. Percentage of Under stay
Under stay percentage represents rooms occupied by guests who check out before their scheduled departure date.
Under say guests may arrive at the hotel with guaranteed reservation or as walk in guest. The percentage of
under say is calculated by dividing the number of under stay rooms for a period by total number of departure
rooms for the same period.

Guests leaving before their stated departures dates create vacant rooms that are difficult to sell thus under stay
rooms tend to represent permanently lost room revenue. Over stay on the other hand are guests staying beyond
their stated departure dates and many not harm room revenue. When the hotel is not operating at full capacity,
overstays result in additional unexpected room revenue.

Under stay % = Number of under stay/ Number of stay over rooms × 100

HOW To regulate understay and overstay rooms:
 Confirm and reconform each guest ‘s departure date at registration time. If any changes required
, do it at arrival stage only.
 At the time of registration explain the guest that this room is already booked for an arrival on his
date of departure. A reminder card may be placed in his room in the morning of scheduled
departure.
 Review group history . groups at times hold large closing events on the last day of the meeting
and reservation are made accordingly, change in plan may require to leave early. So based on
group history , plan for early departures.
 Contact potential overstay guest about their schduled departure date to confirm their check out .
check room occupancy data on dail basis. Mark the expected guest. Contact the guest who have
not left by check oujt time. This help in revised countof overstay andplanning can be done
accordingly.

4. Percentage of Walk in
The percentage of walk in is calculated by dividing the number of rooms occupied by walk in guest for a period of
time by the total number of net room arrivals for the same period of time. 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 alternative properties.they help us to achieve higher occupancy
and higher ARR. Front desk agent are often asked to show a guest room to walk in guest which is much more
effective than trying to sell rooms over telephone. Walk in sale improve both occupancy and ADR which in turn
helps to increase the room revenue and yield. However, for planning prospective room revenue it is always
considered to have reservations in advance than to count on walk in guests. It should be noted that walk in % can
be dramatically effective by other ratios. For E.g.: if a hotel has 10 no. of no shows beyond forecast, it may
accept more walk in guest to make up for the lost business. When this information is recorded for historical
purposes, it is essential that the other ratios are also tracked to show how they affect each other.

Walk in % = Number of walk in rooms/ Total number of arrivals × 100

5. Occupancy Percentage
One of the oldest and traditional ways of evaluating the performance of a hotel is by calculating occupancy ratios.
Occupancy % = Number of rooms sold/Total no. of rooms available for sale × 100

6. Average daily rate or Average room rate
(ADR or ARR)ADR or ARR is calculated by dividing the net room revenue by the number of rooms sold.

ADR or ARR = Room Revenue/Total no. of rooms sold

7. Average room rate per guest

ARRPG is calculated by dividing the net room revenue by total number of guests in the hotel.
ARRPG = Total room revenue/ Total no. of guests in the hotel

8. Rev Par (Revenue Per Available Room)

Rev Par is calculated by dividing the net room revenue by the total rooms’ available to sale (sold and unsold). The
second method is by multiplying the ADR or ARR with the occupancy percentage
Rev Par = Room revenue /Total no of room in the hotel (OOO, sold and unsold)

OR
Rev Par = ADR or ARR × Occupancy percentage

Forecast Formulas

OPTION 1:

Room Position = Total number of rooms in the hotel
Minus No. of OOO rooms
Minus No. of occupied room (previous day)
= No. of vacant rooms
Plus No. of expected room departures
Minus No. of expected room arrivals
Plus No. of expected rooms No show
Plus No. of expected rooms under stay
Minus No. of expected rooms overstay

OPTION 2:
Room Position = Total number of rooms in the hotel
Minus No. of OOO rooms
Minus No. of expected over stays
Minus No. of expected rooms arrivals
Plus No. of expected rooms No shows
Plus No. of expected rooms under stay
Minus No. of expected rooms over stay

E.g.: A hotel has 410 rooms out of which 10 rooms are OOO. The day closed with 300occupied rooms on 15th
July 2010. The expected departures for 15th July 2010 are 50 and expected arrivals for the same day are 100.
Forecast the room position for 16th July 2010 on the night of 15th July 2010. From past stats the no snow % is
10%, under stay % is 10% and over stay % is 5%.

Answer:
Total no of rooms in the hotel 410
Minus No of OOO rooms 10
Minus No of occupied rooms 300
Plus No. of expected room departures 50
Minus No. of expected room arrivals 100
Plus no. of expected No shows 10
Plus No. of expected under stay 25
Minus No. of expected over stay 3

Room Position 82

Sample Forecast Form

The front office may prepare several different forecasts depending on its needs. Occupancy forecast are typically
developed on a monthly basis and reviewed by the Front Office department and F&B Departments to forecast
revenues of respective departments, project expenses and develop staff schedules. A 10 day forecast, for e.g.
May be needed to update labor schedules and past projections which may later be supplemented by more current
3 day forecasts. Together these forecasts help many hotel departments to maintain appropriate staff levels for
expected business volumes and thereby help to control expenses and cost of running the hotel.

• 10 Day Forecast At most hotels the 10 day forecast is developed jointly by the FOM and the reservation
manager in conjunction with the forecast committee. A special 10 day forecast may be prepared for the F&B &
Catering operations. This forecast usually includes the expected number of guests which is often referred to as
House count. Sometimes the house count is also divided into groups and nongroup categories; so that the
restaurant manager, HK department, kitchen and FO can better understand the nature of their business and their
staffing needs.

• To help various hotel departments to plan their staffing and payroll needs for upcoming period, the 10 day
forecast should be completed and distributed to all department managers by midweek for the upcoming period.
This forecast can especially be of help to the HK department. At first the current number of occupied rooms is
found out. The estimated number of no shows, under stay and departures is noted. The relevant reservation
information is evaluated for each room and guest by the date of arrival, length of stay and date of departure.
These counts are then reconciled with the reservation data. Then the actual counts are adjusted to reject the
projected percentage of No Show, anticipated under stay and over stay and expected walk in guests. These
projections are based on the hotels recent history, the season of business and the known history of specific groups
and schedule of arrivals.

3 Day Forecast
A 3 day forecast is an updated report that reflects a more current estimate of room availability and room forecast.
A 3 day forecast is intended to guide the management in fine tuning staff schedules and adjusting room
availability information.

Room Count Consideration Control books, density charts, computer projections, ratios and formulas cab be
essential in short term and long term planning for room count. Each day the FOM performs several physical
accounts of room occupancy, reservation, vacant and check out rooms to complete and compute the occupancy
statistics for the day. A computerized system may reduce the need for most manual counts since the computer
can be programmed to continuously update the room availability position and room forecast. It is important for the
front deck agents to know exactly how many rooms are available especially if the hotel expects to operate near
100% occupancy and once the procedure for gathering room count information is established, planning procedure
can be extended to longer period of time to form a more reliable basis for revenue, expense and labor forecasting.

GOPPAR is the abbreviation for gross operating profit per available room , a key performance indicator for
the hotel industry. It gives greater insight in the actual performance of a hotel than the most commonly used Rev
PAR as it not only considers revenues generated, but also factors in operational costs related with such revenues.

The definition of GOPPAR is the following:
'GOPPAR, or gross operating profit per available room, is defined as total gross operating profit(GOP) per
available room per day, where GOP is equal to total revenue less the total departmental and operating expenses.
The following table illustrates the computation of GOPPAR.

GOPPAR = G.O.P. (gross operating profit) / (per) Available Room

GOPPAR does not take into consideration the revenue mix of the hotel. So it does not allow an accurate
evaluation of the room revenue generated. It is however a good key performance indicator for the efficiency and
effectiveness of your hotel operations. It demonstrates the profitability and value of the property as a whole.

GOPPAR = Departmental revenueDepartmental Expenses/Number of Available rooms

EVALUATION IN FRONT OFFICE:
Evaluation is done on regular basis to check if we have attained planned goals. It is done on daily, weekly,
monthly, quarterly and yearly basis.

TOOLS OF EVALUATION:
1. DAILY OPERATION REPORT/ MANAGER’S REPORT/ REVENUE REPORT: it is a summary
of the hotel’s financial activities during a 24 hrs. Period. The daily operations report provides a means of
reconciling cash, bank account, revenue and accounts receivable. Daily operations reports are uniquely
structured to meet the needs of individual hotel properties. The information is not restricted to the front
office manager or general manager, copies of the daily operation reports are generally distributed to all
departments and division managers in the hotel.

2. OCCUPANCY RATIO: occupancy ratios measure the success of the front office in selling the hotel’s
primary product: guestrooms. These data are contained on the daily operations report.
Occupancy ratios measure the success of the front office in selling the hotel’s primary product (i.e.
guestrooms). Below are some common ratios used in the front office department:
Occupancy Ratios shall be computed on a daily basis by the Night Auditor, and communicated to related
department managers the next day!
For any ratio to be significant, it should be compared to a certain benchmark, which might include:

 Occupancy Percentage = (Number of Rooms Occupied) / (Total Number of Rooms Available For
Sale) * 100
 Multiple Occupancy Percentage = (Number of Rooms Occupied by More Than One Guest) / (Total
Number of Rooms Occupied) * 100
 Single Occupancy Percentage = (Number of Single Rooms Occupied) / (Total Number of Single
Rooms Available For Sale) * 100
 Double Occupancy Percentage = (Number of Double Rooms Occupied) / (Total Number of Double
Rooms Available for Sale) * 100
 Triple Occupancy Percentage = (Number of Triple Rooms Occupied) / (Total Number of Triple
Rooms Available For Sale) * 100
 Bed occupancy %= number of bed sold/ total no of guest beds*100
 Local guest occ %= total no. of domestic guest staying/ total no. of guest staying in hotel * 100
 Foreigner guest occ % = total no of foreigner guest staying/ total no of guest staying * 100

Let’s consider the following problem:

Yasin Hotel has 204 rooms: 45 are triple, 60 are double and the remaining is single. On the night of May
9th, 13 the night auditor counted 195 rooms occupied, 43 are triple, 58 are double, and the remaining are
single. Moreover, the housekeeping department communicated only 4 rooms (all single) out of order for
the night of May 09th, 13

a) What is Yasin Hotel's Occupancy Rate for the night of May 09th, 13?
 Hotel’s Occupancy Rate = 195 / (204 4) * 100 = 97.50 %

b) What is Yasin Hotel's Single, Double, and Triple Occupancy rates for the night of May 09th, 13?
 Single Occupancy Rate = 94 / (994) * 100 = 98.95 %
 Double Occupancy Rate = 58 / 60 *100 = 96.67 %
 Triple Occupancy Rate = 43 / 45 *100 = 95.56 %

2. Other Operational Statistics:

 Average Guests Per Rooms Sold = (Total Number of Guests) / (Total Number of Rooms Sold)
 Average Daily Rate = (Actual Room Revenue) / (Total Number of Rooms Sold)
 Average Daily Rate = (Actual Room Revenue) / (Total Number of Rooms Sold)
 Average Rate per Guest = Revenue Per Available Customer (RevPAC) = (Actual Room Revenue) /
(Number of Guests)
 Revenue Per Available Room (RevPAR) = (Actual Room Revenue) / (Number of Available Rooms)

Let’s consider the following example:

Cordoba Hotel has 120 rooms: 53 of them are single and 67 are double. On the night of 09/12/03, Cordoba
Hotel’s Night Auditor counted a total of 85 rooms occupied, 42 of which were occupied by more than one
guest. Moreover, on the same night 127 guests were registered. In addition, 2 rooms were on a
complimentary basis. From the Housekeeping Room Status Report (for the night of 28/11/07), there were
a total of 4 rooms Out of Order, 3 of which were Single. Lastly, the Actual Room Revenue for the same
night was at the order of $ 6,960.

a) Calculate the Average Guest Per Room Sold
b) Calculate the Average Daily Rate
c) Calculate the Average Rate Per Guest (RevPAC)
d) Calculate the RevPAR

Answer:
 Average Guest Per Room Sold = 127 / (85 – 2) = 1.53 Guest Per Room Sold
 Average Daily Rate = $ 6,960 / (852) = $ 83.86
 Average Rate Per Guest (RevPAC) = $ 6,960 / 127 = $ 54.80 Per Guest
 RevPAR = $ 6,960 / (120 – 4) = $ 60.00

3. ROOM REVENUE ANALYSIS: Front office staff is expected to sell rooms on the rack rate unless a
guest qualifies for an alternate room rates. A room rate variance report lists those rooms that have been
sold at other than the rack rates. One way for front office manager s to evaluate the effectiveness of the
front office staff in selling rooms is to look at the yield statistics.
YIELD STATISTICS: potential room revenue is the4 amount of room’s revenue that can be generated if
all the rooms in the hotel are sold at the rack rate on a given day, week, month or year. The ratio of
actual to the potential room revenue is known as yield statistics.
Yield statistics = actual room revenue/ potential room revenue
OR
Yield statistics = ARR* no. Of room sold/ rack rate* total no. Of rooms

4. HOTEL INCOME STATEMENT: The hotel income statement provides important financial
information about the result of hotel operations for a given period of time. The period may be one month
or longer, but it should not exceed one business year. Since a statement of income reveals the amount of
net income for a given period, it is one of the most important financial statements used by the
management to evaluate the overall success of the operations. The hotel’s statement of income is often
called the consolidated income statement because it presents a composite picture of all hotels’ financial
operations.

5. ROOM DIVISION INCOME STATEMENT: the hotel’s statement of income shows only summary
information. The separate department income statements prepared by each revenue center provide more
details. Departmental income statements are called scheduled and are referenced on the hotel’s statement
of income. It is generally prepared by the hotel accounts department and not by front office staff.

6. ROOM DIVISION BUDGET REPORT: the hotel’s accounting department also prepares monthly
budget reports that compare actual revenue and expense figures with budgeted amounts. These reports
can provide timely information for evaluating front office operations. Front office performance is often
judged according to how favorably the rooms division’s monthly income and expenses figures compared
with budgeted amount. A typical budget report format should include both monthly variance and year to
date variance for all budget items.

Favorable variance Unfavorable variance
revenue Actual exceeds budget Budget exceeds actual
expenses Budget exceeds actual Actual exceeds budget

7. MARKET SHARE INDEX: rev – par is a useful tool to measure the performance of a hotel. It uses
occupancy % and ADR for comparing the performance of hotels. However in a competitive environment,
hotels may not provide information about ADR. In such situation, the evaluation of hotel’s performance is
done by using market share. Market share is defined as a hotel’s occupancy performance in relation to
other hotels within the predetermined competitive set.
Let’s suppose there are 4 hotels in a competitive set:
HOTEL No of rooms Total market potential Rightful share
A 100 1000 10%
B 200 1000 20%
C 300 1000 30%
D 400 1000 40%
If we feed the actual occupancy data of all the participating hotels of the competitive set, we will be able
to know the actual market and share taken by each hotels, and can compare the performance of each
hotel.

hotel No of No of Market Actual rightful difference
rooms rooms sold/ share percentage share
day
A 100 60 60/860 7% 10% 3%
B 200 150 150/860 17% 20% 3%
C 300 270 270/860 32% 30% +2%
D 400 380 380/860 44% 40% +4%
TOTAL 1000 860

On comparing the actual market share one can find out that hotel D’S performance is better than Hotel C,
Hotel C is better than Hotel A & B.

8. EVALUATION BY GUEST: Guests also evaluate hotels on various criteria like location, hotel staff,
service levels, cleanliness etc. It can be done online, through mail or by filling up the feedback form at
the time of departure.

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BUDGET
Budgets are “financial and for quantitative statements, prepared and approved to a defined period
of time, for the policy to be pursued during that period for the purpose of attaining a given
objective”.
OR
It is a comprehensive and coordination statement expressed in monetary or quantitative terms, reflecting
the policies of a company and determining its operation in respect of a particular time period.
Budget is an estimate of revenue and expenditure for e forthcoming fiscal year. Budget is a plan to be followed of
how much money will be spent over a period of time in relation to the money available and for the purpose of
attaining determined goals. A budget is a long term plan. Budgeting is the formulation of plans for a given future
period.
THE BASIC ELEMENTS OF BUDGET ARE:
1. It is a comprehensive and inter related plan.
2. It can be expressed in financial as well as quantitative terms
3. It is a future plan for future resources and operations.
4. It is a future plan for a specific time period and objectives of the organisation.
5. It is prepared in advance and is derived from the long term strategy of the organisation
6. It is expressed in quantitative from, physical or monetary units, or both.

CHARACTERISTICS OF A BUDGET:

A good budget is characterised by the following:
1. Participation: involve as many people as possible in drawing up a budget.
2. Comprehensiveness: embrace the whole organisation.
3. Standards: base it on established standards of performance.
4. Flexibility: allow for changing circumstances.
5. Feedback: constantly monitor performance.
6. Analysis of costs and revenues: this can be done on the basis of product lines, departments or cost
centres.

TYPES OF BUDGET:

1. FIXED BUDGET: a budget which is independent on the level of turnover is known as fixed budget. It is
based on one set of condition, one volume of output and simple collection of cost e.g. advertising budget,
office administrative budget or maintenance budget.
2. FLEXIBLE BUDGET: a budget which may be change with the change circumstances and condition is
called a flexible budget. It contains different estimates in different assumed situations e.g. labour budget.
3. LONG TERM BUDGET: a budget which is prepared for a long period of time which could be 1 to 5
years is known as long term budget. E.g. capital budget
4. SHORT TERM BUDGET: a budget which is prepared for a short period which is less than 1 year like
monthly, weekly or daily is known as short term budget e.g. seasonal budget.
5. CAPITAL BUDGET: which is prepared for the acquisition of assets of the organization is known as
capital budget. E.g. acquisition of land, building or expansion plan. Investments in property, buildings and
major equipment are called capital expenditures. These are typically substantial expenditures both in
terms of magnitude and duration. The magnitude and duration of these investments can justify the
development of separate budgets for these expenditures. Such capital expenditure budgets allow
management to forecast future capital requirements, to keep on top of important capital projects, and to
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ensure that adequate cash is available to meet these expenditures as they become due.
6. REVENUE BUDGET: a budget which is prepared for regular income as well as expenses in known as
revenue budget. The revenue budget is a forecast because it is based on projecting future sales. Managers
must take into consideration their competitors, advertising budget, sales force effectiveness and other
relevant factors, and they must make an estimate of sales volume. Then, based on estimates of demand at
various prices, managers must select an appropriate sales price. The result is the revenue budget.
7. EXPENSE BUDGET: Found in all units within a firm and in notforprofit and profitmaking
organisations alike. Expense budgets list the primary activities undertaken by a unit to achieve its goals
and allocate a dollar amount to each. Managers give particular attention to socalled fixed expenses &
that is, those that remain relatively unchanged regardless of volume. As production drops, the variable
expenses tend to control themselves because they fall with volume.
8. CASH BUDGET: An estimate of a company's cash position for a particular period of time. Cash budgets
are forecasts of how much cash the organisation will have on hand and how much it will need to meet
expenses. This budget can reveal potential shortages or the availability of surplus cash for shortterm
investments.
9. OPERATING BUDGET: A business's forecasted revenues along with forecasted expenses, usually for
a period of one year or less. Line items in your operating budget may include:
a. Labour budget: The total labour cost to be expended for a set period of time calculated by taking
every person in an organization, department, or project and multiplying the number of hours they
are expected to work by their wage rates.
b. Sales budget: An estimate of the quantity of goods and services that will be sold during a specific
period of time.
c. Production budget: A forecast that starts with the sales budget's estimates of the total number of
units projected to be sold, then translates this information into estimates of the cost of labour,
material, and other expenses required to produce them.
d. Expense budget: An estimate prepared for travel, utilities, office supplies, telephone, and many
other common business expenses for a given period.
e. Capital budget: The total costs and maintenance fees planned for your company's fixed assets.

10. ZERO BASED BUDGET (ZBB): If the approach adopted in the formulation and preparation of budgets
is based on current level of operations or activities, including current level of expenditure and revenue,
such budgeting is known as traditional budgeting .This type of budgeting process generally assumes that
the allocation of financial resources in the past were correct and will continue to hold good for the future
as well. In most cases, an addition is made to the current figures of cost to allow for expected (or even
unexpected) increases. Consequently, the budget generally takes an upward direction year after year, in
spite of generally declining efficiency. Such a system of budgeting cannot be expected to promote
operational efficiency. It may, on the other hand, create several problems for top management. Some of
these problems are:
Programmes and activities involving wasteful expenditure are not identified, resulting in avoidable financial and
other costs.
 Inefficiencies of a prior year are carried forward in determining subsequent years' levels of performance.
 Managers are not encouraged to identify and evaluate alternative means of accomplishing the same
objective.
 Decisionmaking is irrational in the absence of rigorous analysis of all proposed costs and benefits.
 Managers tend to inflate their budget requests resulting in more demand for funds than their availability.
This results in recycling the entire budgeting process.

Thus, the traditional budgeting technique may be quite meaningless in the present context when management must
review or reevaluate every task with a view to utilize the scarce resources in a better manner or to improve
performance. The technique of zero base budgeting provides a solution for overcoming the limitations of
traditional budgeting by enabling top management to focus on priorities, key areas and alternatives of action
throughout the organisation.
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The technique of zero base budgeting suggests that an organisation should not only make decisions about
the proposed new programmes, but should also review the appropriateness of the existing programmes
from time to time. Such a review should particularly be done of such responsibility centres where there is
relatively high proportion of discretionary costs. Costs of this type depend on the discretion or policies of the
responsibility centre or top managers. These costs have no direct relation to volume of activity. Hence,
management discretion typically determines the amount budgeted. Some examples are: expenditure on research
and development, personnel administration, legal advisory services.
Zero base budgeting, as the term suggests, examines or reviews a programme or function or responsibility
from ‘scratch’. The reviewer proceeds on the assumption that nothing is to be allowed. The manager proposing
the activity has, therefore, to justify that the activity is essential and the various amounts asked for are reasonable
taking into account the outputs or results or volume of activity envisaged. No activity or expense is allowed
simply because it was being allowed or done in the past. Thus according to this technique each programme,
whether new or existing, must be justified in its entirety each time a new budget is formulated. It involves:
dealing with particularly all elements of mangers' budget requests
critical examination of ongoing activities along with the newly proposed activities
Providing each manger a range of choice in setting priorities in respect of different activities and in
allocating resources.

ADVANTAGES OF ZERO BASE BUDGETING:
1. It provides the organisation with systematic way to evaluate different operations and programmes
undertaken. It enables management to allocate resources according to priority of the programmes.
2. It ensures that each and every programme undertaken by managers is really essential for the organisation,
and is being performed in the best possible way.
3. It enables the management to approve departmental budgets on the basis of costbenefit analysis. No
arbitrary cuts or increase in budget estimates are made.
4. It links budgets with the corporate objectives. Nothing will be allowed simply because it was being done
in the past. An activity may be shelved if it does not help in achieving the goals of the enterprises.
5. It helps in identifying areas of wasteful expenditure and, if desired, it can also be used for suggesting
alternative courses of action.
6. It facilitates the introduction and implementation of the system of `management by objectives'. Thus it can
be used not only for fulfilment of the objectives of traditional budgeting, but also for a variety of other
purposes.

It is contended that zero base budgeting is time consuming. Of course, it is true, but it happens only in the initial
stages when decision units have to be identified and decision packages have to be developed or completed. Once
this is done, and the methodology is clear, zero base budgeting is likely to take less time than the traditional
budgeting. In any case, till such time the organisation is properly acclimatized to the technique of zero base
budgeting, it may be done in a way that all responsibility centres are covered at least once in three or four years.
Zero base budgeting as a concept has become quite popular these days. The technique was first used by the U.S.
Department of Agriculture in 1962. Texas Instruments, a multinational company, pioneered its use in the private
sector. Today, a number of major companies such as Zerox, BASF, International Harvester and Easter Airlines in
the United State are using the system.
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THE BUDGET CYCLE

Budget Cycle describes a process of budget planning and control which includes the actions of developing a
financial plan, comparing the financial plan to actual performance, and taking corrective action to bring
substandard performance into line with the plan or adjusting the plan to reflect changing financial conditions.
The budgeting process is a cycle comprised of two main phases: the planning phase and the control
phase. The planning phase identifies the goals to be attained during the fiscal year, and the financial
plan (budget) necessary to achieve them. The control phase focuses on actual performance towards
achieving the plan. It involves implementation, monitoring and control functions. The control phase
emphasizes a comparison between the budget and the actual revenue and expense activity as
recorded in the Finance System and displayed on the monthly statements. When actual revenue and
expense varies from the plan articulated by the budget, the control phase will then include corrective
action. Corrective action might involve adjusting the budget to reflect the actual financial activity,
adjusting revenue projections and collections, or adjusting expenditures.

The following diagram illustrates cycle.

B. Working With the Budget throughout the Budget Cycle
In your departmental finance role, you are likely to be involved in each and every step of the budget
cycle.

Planning and Development
The budget must be well conceived and based upon a combination of historical data and future
financial projections. During this step of the budget cycle, employees who handle the daytoday
finances for a department are often asked to provide information to management about past and
anticipated revenues, expenses and transfers.

Implementation
Verify that the budgets recorded in the Finance System at the beginning of each fiscal year are
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correct. Contact your area accountant if you find errors or if you have questions.

Monitoring
Revenue and Expense Statement Detail
Revenue and Expense Statement Summary
Balance Sheet Summary and Balance Sheet Detail

Control
Departmental management must be informed when the “budget to actual” comparison indicates a
significant deviation, or when the balance sheet indicates an unfavorable balance, so that
appropriate corrective actions can be initiated.

Although reports are made available to all who possess a fiscal role on a FOPPS, if you notice a
problem or a potential problem developing in budget, it’s best to err on the side of caution and
inform management rather than assume they noticed it during their review. This makes for good
interactive teamwork within the department.

ORGANISATION FOR BUDGETING
The setting up of a definite plan of organisation is the first step towards installing budgetary control system in an
organisation.
• Budget Manual should be prepared giving details of the powers, duties, responsibilities and areas of
operation of each executive in the organisation. This document:
• charts the organisation
• Details the budget procedures
• contains account codes for items of expenditure and revenue
• timetables the process
• Clearly defines the responsibility of persons involved in the budgeting system.
Budget Controller: Although the Chief Executive is finally responsible for the budget programme, it is
better if a large part of the supervisory responsibility is delegated to an official designated as Budget
Controller or Budget Director. Such a person should have knowledge of the technical details of the
business and should report directly to the President of the Chief Executive of the organisation.
Budget Committee: The Budget Controller is assisted in his work by the Budget Committee. The
Committee may consist of Heads of various departments, viz., Production, Sales Finance, Personnel,
Purchase, etc. with the Budget Controller as its Chairman. It is generally the responsibility of the Budget
Committee to submit, discuss and finally approve the budget figures. Each head of the department should
have his own Subcommittee with executives working under him as its members.
Fixation of the Budget Period: Budget period' means the period for which a budget is prepared and
employed. The budget period depends upon the nature of the business and the control techniques. For
example, a seasonal industry will budget for each season, while an industry requiring long periods to
complete work will budget for four, five or even larger number of years. However, it is necessary for
control purposes to prepare budgets both for long as well as short periods.
Budget Procedures: Having established the budget organisation and fixed the budget period, the actual
work or budgetary control can be taken upon the following pattern:
o Key Factor: It is also termed as limiting factor. The extent of influence of this factor must first be
assessed in order to ensure that the budget targets are met. It would be desirable to prepare first
the budget relating to this particular factor, and then prepare the other budgets.
o Making a Forecast: A forecast is an estimate of the future financial conditions or operating
results. Any estimation is based on consideration of probabilities. An estimate differs from a
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budget in that the latter embodies an operating plan of an organisation.
A budget envisages a commitment to certain objectives or targets, which the management seeks to attain on the
basis of the forecasts prepared. A forecast on the other hand is an estimate based on probabilities of an event. A
forecast may be prepared in financial or physical terms for sales, production cost, or other resources required for
business. Instead of just one forecast a number of alternative forecasts may be considered with a view to
obtaining the most realistic, overall plan.
Preparing Budgets: After the forecasts have been finalised the preparation of budgets follows. The
budget activity starts with the preparation of the sales budget. Then production budget is prepared on the
basis of sales budget and the production capacity available. Financial budget (i.e. cash or working capital
budget) will be prepared on the basis of sales forecast and production budget. All these budgets are
combined and coordinated into a master budget. The budgets may be revised in the course of the financial
period if it becomes necessary to do so, in view of the unexpected developments, which have already taken
place or are likely to take place.
Choice between Fixed and Flexible Budgets: A budget may be fixed or flexible. A fixed budget is based
on a fixed volume of activity. It may lose its effectiveness in planning and controlling if the actual capacity
utilisation is different from what was planned for any particular unit or time e.g. a month or a quarter, The
flexible budget is more useful for changing levels of activity as it considers fixed and variable costs
separately. Fixed costs, as you are aware, remain unchanged over a certain range of output. Such costs
change when there is a change in capacity level. The variable costs change in direct proportion to output.
If flexible budgeting approach is adopted, the budget controller can analyse the variance between actual
costs and budgeted costs depending upon the actual level of activity attained during a period of time. This
will be explained in detail a little later.
Placement and approval of budget: budget is forwarded by the management and final approval is given
by the chief controller.
ADVANTAGES OF BUDGET:
1. Compels management to think about the future, which is probably the most important feature of a
budgetary planning and control system. Forces management to look ahead, to set out detailed plans
for achieving the targets for each department, operation and (ideally) each manager, to anticipate and
give the organisation purpose and direction.
2. Promotes coordination and communication.
3. Clearly defines areas of responsibility. Requires managers of budget centres to be made responsible
for the achievement of budget targets for the operations under their personal control.
4. Provides a basis for performance appraisal (variance analysis). A budget is basically a yardstick
against which actual performance is measured and assessed. Control is provided by comparisons of
actual results against budget plan. Departures from budget can then be investigated and the reasons
for the differences can be divided into controllable and noncontrollable factors.
5. Enables remedial action to be taken as variances emerge.
6. Motivates employees by participating in the setting of budgets.
7. Improves the allocation of scarce resources.
8. Economises management time by using the management by exception principle.
9. It brings about efficiency and improvement in the working of the organisation.
10. It is a way of communicating the plans to various units of the organisation. By establishing
the divisional, departmental, sectional budgets, exact responsibilities are assigned. It thus
minimizes the possibilities of buckpassing if the budget figures are not met.
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11. It is a way of motivating managers to achieve the goals set for the units.
12. It serves as a benchmark for controlling ongoing operations.
13. It helps in developing a team spirit where participation in budgeting is encouraged.
14. It helps in reducing wastage's and losses by revealing them in time for corrective action.
15. It serves as a basis for evaluating the performance of managers.
16. It serves as a means of educating the managers.
17. Eliminates uncertainty.
18. Result of various brain so better planning.
19. Optimum use of capital resources.
20. Easy availability of working capital.
21. Effective coordination
22. Responsibility can be pin pointed
23. Coordination among various department
24. Used as a control tool by management.
LIMITATIONS OF BUDGET:
Budget are estimated and can never be hundred per cent accurate.

Budget cannot guide as to what action should be taken.

The initiative and creativity in an employ may be hampered if the bosses stick to budget strictly.

It can be misused by bosses to find fault in the employees.

Useless for the firm where policies, processes, techniques are changing frequently.

It is time consuming and involves expenses. Very costly for the small firms.

It fails at times as there are so many factors which are not under management control.

Budgets can be seen as pressure devices imposed by management, thus resulting in:

a. a) bad labour relations
b. b) Inaccurate recordkeeping.
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Departmental conflict arises due to:

a. a) disputes over resource allocation
b. b) Departments blaming each other if targets are not attained.
10. It is difficult to reconcile personal/individual and corporate goals.
11. Waste may arise as managers adopt the view, "we had better spend it or we will lose it". This is often
coupled with "empire building" in order to enhance the prestige of a department.
12. Responsibility versus controlling, i.e. some costs are under the influence of more than one person, e.g.
power costs.
13. Managers may overestimate costs so that they will not be blamed in the future should they overspend.
PREPARATION OF FRONT OFFICE BUDGET
The starting point in the process of budgeting is the preparation of the sales budget. The sales budget is the most
critical budget because the volume of sales has an important bearing on all variable and semivariable costs, as
indeed on cash inflows and outflows of the business. It is clear, therefore, that there is no point in attempting to
prepare any budget unless and until the sales budget has been prepared.
Before the preparation of the sales budget, it is essential to examine all the key factors (also known as limiting
factors). These are factors, which operate to limit the volume of output/sales. It will be found, of course, that in
marketoriented business the most important key factors operate on the revenue, rather than cost, side of the
business. Thus, whilst in costoriented business, key factors such as shortages of materials, nonavailability of
skilled labor and general labor shortages are often are the most critical key factors, in marketoriented business
such key factors are secondary Importance.

PRINCIPAL KEY FACTORS (ELEMENTS IN PREPARATION OF BUDGET)
Accommodation Available: This is one of the most critical key factors operating in hotels. When all the
rooms are sold, it is impossible to increase the volume of room sales except through an increase in room rates.
When the sales budget is being prepared it is essential to examine patterns of occupancy to establish what level
of room sales may realistically be expected during the forthcoming budget year. Where there is a high degree of
room sales instability, evidenced by pronounced swings in occupancy rates, it is desirable to examine the
possibility of shifting demand from peak to offpeak periods.
Economic Forecast: This will illustrate the general business conditions both locally and nationally
including the general economic climate, political/governmental climate, proposed/likely pending legislative
changes or alterations to present laws which may together or in part have an effect on the hotel’s business, either
directly or indirectly via its guests.
Shortage of Labor: This particular key factor is potentially powerful, but there is no evidence that it exerts
much influence on the volume of hotel sales. In some locations labor shortages may, in fact, be a severe limiting
factor. It seems that such locations are rather exceptional.
Irregular Operational Changes: Although more significant items such as maintenance and repair will
be incurred under a particular plan which may stretch for three, four or five years. The scheduling of such
expenditure is still reviewed when budgeting to include unusual items; for example, complete change in linen,
china, or other major capital items. Each department of the hotel is required to justify abnormal items, and
management to access their effect on operations and to decide on which items to sanction and which to defer.
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Major expenditure may necessitate the borrowing of funds.
Tariffs: Once the current year’s operation has been reviewed together with the factors which may affect future
business, management will examine the rate structure within the hotel – including rooms, food and beverage, and
other services provided. The governing factors when such reviews take place is the determination of the right
price in order to obtain a maximum return from its facility – that is the maximum rate available without a major
reduction in volume. Each rate is examined individually to ensure that this maximum is possible.
Quality of Management: This is an important key factor. Its operation is not, however, evident over
shorter periods. Over long periods, of course, the quality of management will have a direct and powerful
influence on the volume of sales.
Consumer Demand: Consumer demand is often found to be a potent key factor. Its operation may be due to
several reasons. The price level of the establishment may be too high, and this may result in a low ASP (Average
Spending Power). Where the price level is thought to be the reason for insufficient consumer demand, it is
essential to subject all the tariffs and menus to thorough scrutiny, and examine room sales, menu items offered to
customers, as well as profit margins. Insufficient consumer demand may also be due to competition. In order to
remedy this it is imperative to examine the external environment of the business. Where insufficient consumer
demand obtains over long periods, it is essential to undertake a through reappraisal of the whole marketing policy
in relation to the existing location.
Other Key Factors: In addition to the key factors dealt above, several others may operate to restrict the
volume of sales. Insufficient capital may make it impossible for a company to acquire further units and thus
increase its turnover. For the same reason an establishment may find it difficult to maintain its facilities at an
appropriate level of comfort, etc., through insufficient expenditure on repairs, replacements and other items which
add to the décor and atmosphere of the establishment. Management may, as a result of its own policy, exclude
certain types of customers. From what has been said it will be clear that there are a variety of key factors. It is
for each establishment to identify the key factors limiting its sales and take steps to remove their negative effect
on the volume of sales.

HOW A BUDGET IS PREPARED

 Since, for the scope of this course, only a Rooms Division Department budget shall be prepared, the Rooms
Division manager shall only estimate next period’s room revenue, and direct expenses. Putting it in other words,
the Rooms Division Manager shall not care about estimating capital expenses (i.e. Indirect Expenses) since in
responsibility accounting; a manager is responsible and liable only for his department!
 The Rooms Division Manager shall first forecast demand for rooms for the next period in question, and then
might use historical averages, industry average… to estimate Room Revenue and Room Direct Expenses

ESTIMATING ROOM REVENUE:

 By using an appropriate forecasting method, the Rooms Division Manager can forecast demand measured in
room nights. Later, the Rooms Division Manager shall multiply the total room nights by the Average Room Rate
(ARR), either using hotel historical or industry averages, to come up with the estimated Room Revenue.
 Later, according to hotel historical figures, the Rooms Division Manager shall estimate the room allowances
figure and subtract it from the estimated total room revenue to come up with the net room revenue.

Financial information of previous years often serves as the foundation on which rooms’ revenue is forecasted.
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One method of rooms revenue forecasting involves an analysis of rooms revenue from past studies.
Rooms Revenue Summary for Hotel A

Year Rooms Revenue Increase in Rooms Revenue % Increase
1999 Rs. 10,00,000
2000 Rs. 11,00,000 Rs. 1,00,000 10 %
2001 Rs. 12,10,000 Rs. 1,10,000 10 %
2002 Rs. 13,31,000 Rs. 1,21,000 10 %
The above data shows yearly increase in net rooms revenue for the hotel. From 1999 to 2002, the amount of
rooms revenue increased from Rs. 10,00,000 to Rs. 13,31,000, reflecting a 10% yearly increase. In future,
conditions appear to be similar to those of the past, the rooms revenue for 2003 would be budgeted at Rs.
14,64,000 – a 10% increase over 2002 amount.

Rooms Revenue Statistics for Hotel B

Year Room sold Occ % Avg. daily rate revenue
2008 30,660 Rs 1000 Rs 3,06,60,000 70%

2009 31,974 Rs 1040 Rs 3,32,52,960 73%
2010 32,412 Rs 1080 Rs 3,50,04,960 74%
2011 32,850 Rs 1140 Rs 3,74,49,000 75%
2012

Another approach to forecasting rooms revenue based on the revenue projection on past rooms sales and average
daily rooms sales. Above statistics is of Hotel B which has 120 rooms. The table shows the occupancy
percentage increased by 3% in 2000. 1% in 2001, and 1% in 2002. Average daily room rates increased by Rs. 40,
Rs. 40 and Rs. 60 respectively over same periods. Considering the future conditions to be similar, a rooms
revenue forecast for 2003 may be based on a 1% increase in occupancy percentage (to76%) and Rs. 60 increase
in the average daily room rate (to Rs. 1200). Given these projections, the following formula can be used to
forecast rooms revenue for the following year

Forecasted Rooms Revenue
= Rooms Available X Occupancy % X Average Daily Rate
= (120 X 365) X 76 X Rs. 1200
100
= 4380 X 0.76 X Rs. 1200
= Rs. 3,99,45,600

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 factors that may affect rooms
revenue forecasting.

ESTIMATING DIRECT EXPENSES:

 Direct Expenses (i.e. Variable Costs) in the Rooms Division Department can be divided into 4 categories:
1. Wage Expenses (Hourly Wage * Estimated Total Labor Hours needed)
2. Frills (i.e. Free of Charge Replenished Room Items)
3. Material (i.e. Cleaning Supplies, Utensils…)
4. Laundry & Linen Expenses (Cost of pressing, cleaning, pressing, storing…)
10/15/2015 Untitled 1

 The Rooms Division Manager might consider country averages, and or historical averages, along with current
hotel / labor union collective bargaining contracts for the coming period, suppliers’ price increase intentions, the
relative change of local currency against some major foreign currencies, to estimate department direct expenses.

Most of the expenses of Front office is Direct Expenses. They vary in proportion to rooms’ revenue. Past
statistics is used to calculate the percentage of rooms’ revenue that each expense item may represent. These
percentage figures are applied to the budgeted rooms’ revenue to estimate expenses.

Expense Categories as Percentage of Rooms Revenue for Hotel B

Year Salary & Laundry, Linen Commission & Other
Wages & Guest Supplies Rsv. Expenses Expenses

1999 16.5% 2.6% 2.3% 4.2%
2000 16.9% 2.8% 2.5% 4.5%
2001 17.2% 3.0% 2.6% 4.5%
2002 17.4% 3.1% 2.7% 4.6%

The above data shows the most common Front Office expenses. When these costs are summed up and divided by
the number of occupied rooms (Room Count), the Cost Per Occupied Room is determined.

Based on these past data the percentage of rooms revenue for each expense category is projected for the
budgeted year 2003:
Salary And Wages 17.6 %
Laundry, Linen & Guest Supplies 3.2 %
Commission and Reservation Expenses 2.8 %
Other Expenses 4.7 %
Using these, expenses can be calculated as follows:
Salary And Wages
Rs. 3,99,45,600 X 17.6 = Rs. 70,30,425.60
100
Laundry, Linen & Guest Supplies
Rs. 3,99,45,600 X 3.2 = Rs. 12,78,259.20
100
Commission and Reservation Expenses
Rs. 3,99,45,600 X 2.8 = Rs. 11,18,476.80
100
Other Expenses
Rs. 3,99,45,600 X 4.7 = Rs. 18,77,443.20
100
From the above figures it is evident that there is a rise in coast which will reduce profitability. Therefore, one of
the outcomes of the budget processes will be to identify where costs are rising and why are they rising. So, a plan
can be developed to control them. 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.

Rooms Division Department Item Budgeting (Illustration)

Expense Items 2002 % 2003 % 2004 % 2005 %
Wage / Benefits $525,600 7.80% $638,750 8.44% $821,250 9.69% $1,006,990 10.53%
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Laundry/Linen $257,975 3.83% $264,044 3.49% $277,594 3.27% $284,979 2.98%

Materials $44,224 0.66% $45,265 0.60% $46,599 0.55% $46,859 0.49%
Frills $773,924 11.48% $784,410 10.36% $791,980 9.34% $788,952 8.25%
Total Expense $1,601,723 23.76% $1,732,469 22.89% $1,937,423 22.85% $2,127,781 22.25%
Room Revenue $6,740,020 100.00% $7,569,331 100.00% $8,477,890 100.00% $9,563,060 100.00%

In this example, first we have forecasted the revenue for the budget year (i.e. 2005), which is $ 9,563,060. In
order to estimate the item expenses, we should first establish a standard (i.e. Percentage of Total Revenue). The
average of the historical percentage item expense is the best standard that we can use. The average can be
simple, moving average, or weighted average. The last column in the above table indicates these standards. Now,
in order to budget the item expenses for year 2005, we multiply the last year expenses by the percentage
standards that we established. Here, the percentage standards become the company expenditure objectives.

BUDGETARY CONTROL:

 A control technique whereby actual results are compared with budgets.

 Any differences (variances) are made the responsibility of key individuals who can either exercise
control action or revise the original budgets.

BUDGETARY CONTROL AND RESPONSIBILITY CENTRES:

These enable managers to monitor organisational functions.

A responsibility centre can be defined as any functional unit headed by a manager who is responsible for the
activities of that unit.

There are four types of responsibility centres:

a) Revenue centres : Organisational units in which outputs are measured in monetary terms but are not directly
compared to input costs.
b) Expense centres :Units where inputs are measured in monetary terms but outputs are not.
c) Profit centres : Where performance is measured by the difference between revenues (outputs) and expenditure
(inputs). Interdepartmental sales are often made using "transfer prices".
d) Investment centres : Where outputs are compared with the assets employed in producing them, i.e. ROI.

ADVANTAGES OF BUDGETING AND BUDGETARY CONTROL:

There are a number of advantages to budgeting and budgetary control:

 Compels management to think about the future, which is probably the most important feature of a
budgetary planning and control system. Forces management to look ahead, to set out detailed plans for
achieving the targets for each department, operation and (ideally) each manager, to anticipate and give
the organisation purpose and direction.
 Promotes coordination and communication.
 Clearly defines areas of responsibility. Requires managers of budget centres to be made responsible for
the achievement of budget targets for the operations under their personal control.
 Provides a basis for performance appraisal (variance analysis). A budget is basically a yardstick against
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which actual performance is measured and assessed. Control is provided by comparisons of actual results
against budget plan. Departures from budget can then be investigated and the reasons for the differences
can be divided into controllable and noncontrollable factors.
 Enables remedial action to be taken as variances emerge.
 Motivates employees by participating in the setting of budgets.
 Improves the allocation of scarce resources.
 Economises management time by using the management by exception principle.

REFINING BUDGET PLANS
Departmental budget plans are commonly supported by detailed information gathered in the budget preparation
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, nation accounting and consulting firms usually provide supplemental data for the
budget development process. Many hotels refine expected results of operations and revise operational budgets as
they progress through the budget year. Reforecast is done when there is a significant variance between the
budgeted and actual figures. Such variance may indicate that conditions have changed and hence the budget
should be brought into line.
BUDGET TRICKS OF THE TRADE
When your expenditures exceed your budget, you can do several things to get back on track:
 Review your budget. Before you do anything else, take a close look at your budget and make sure that
the assumptions on which it is based are accurate and make sense in your changing market. If your
market is growing quickly, you may need to adjust up your estimates. Sometimes, it's the budget — not
the spending — that is out of line.
 Freeze spending. One of the quickest and most effective ways to bring spending back in line with a
budget is to freeze expenses such as pay raises, new staff, and bonuses.
 Postpone new projects. New projects, including new product development, acquisition of new facilities,
and research and development, can eat up a lot of money. However, if you are too zealous in curbing
spending when you need to develop new products or services to compete, the result can be disastrous for
the future growth and prosperity of the company.
 Lay off employees and close facilities. This is the last resort when you're trying to cut expenses.
Although these actions will result in an immediate and lasting decrease in expenses, you also face an
immediate and lasting decrease in the talent available to your organization. Productivity and morale of
remaining employees may also suffer.

By:
Shuchi Gothi
Lecturer
IHM, Kolkata

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10/15/2015 PLANNING AND EVALUATING OPERATIO

2008 30,660 Rs 1000 Rs 3,06,60,000 70%

Laundry/Linen $257,975 3.83% $264,044 3.49% $277,594 3.27% $284,979 2.98%

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