Managing Expenses – in Housekeeping
Since Housekeeping is not a Revenue-generating department, the executive housekeeper’s primary responsibility for achieving the property’s financial goals is managing expenses. In addition to salaries and wages, inventoried items are the key area for the executive housekeeper’s exercise of cost control measures.
The Budget Process
The operating budget outlines the financial goals of a hotel. The purpose for the operating budget is to relate operational costs to the Year’s expected revenues. Each department prepares its own monthly budget.
Essentially, a budget is a plan. It protects both the revenues the hotel anticipates during the period covered by the budget and the expenses required to generate the anticipated revenues. The executive housekeeper’s responsibility in the budgetary process is twofold. First, the executive housekeeper is involved in the planning process that leads to the formulation of the budget. This entails informing the rooms division manager and general manager what expenses the housekeeping department will incur in light of forecast room sales. Second, since the budget represents an operational plan for the Year, the executive housekeeper ensures that the department’s actual expenses are in line with budgeted costs and with the actual occupancy levels.
As a plan, a budget is not “set in stone” It may need to be adjusted in light of unforeseen or changing circumstances. If anticipated room sales do not materialize, then expenses allocated to different departments will need to be adjusted accordingly. If occupancy levels exceed expectations, then increased expenses need to be planned for and incorporated into a revised budget. If unexpected expenditures are required, their effect on the overall plan needs to be assessed. New ways may need to be determined for the property to meet its financial goals and objectives.
As a plan, a budget is also a guide. I provides managers with the standards by which they can measure the success of operations.
Types of Budgets
Two types of budgets are used in managing a hotel’s financial resources: capital and operating budgets. The difference between the two essentially lies in the types of expenditures involved.
Usually, a capital budget plans for the expenditure of company assets. Typically, these items are not used up in the normal course of operations; instead, they have a life span that exceeds a single year. Furniture, fixtures, and equipment are typical examples of capital expenditures. Capital expenditures in the housekeeping department may include room attendant carts, vacuum cleaners, carpet shampooers, pile lifters, rotary floor scrubbers, laundry equipment, sewing machines, and trash-handling equipment. In addition, major initial purchases of recycled inventory items – such as linen, towels, blankets, and uniforms – are capital budget items since they have relatively long useful life and not used up in the course of normal operations.
An operating budget forecasts revenues and expenses associated with the routine operations of the hotel during a certain period. Operating expenditures are those costs the hotel incurs in order to generate revenue in the normal course of doing business. In the housekeeping department, the most expensive operational cost is salaries and wages. The cost of non-recycled inventory items, such as cleaning and guest supplies, are also considered operational costs.
Planning the Operating Budget
The budgeting process begins far in advance of the start of the period for which the budget is planned. The process of planning an annual operating budget generally takes several months. It involves gathering information, formulating initial plans, reconsidering goals and objectives, and making final adjustments. The budget-planning process requires a closely coordinated effort for all management personnel.
In budget planning, the first step is always to forecast room sales. The reason for this is twofold. First, room sales generate the revenue for operating various departments. Second, and more important, most of the expenses that each department can expect – and the ones that departments are most able to control – are most directly related to room occupancy levels. This is especially true of the housekeeping department where salaries and wages and the usage rates for both recycled and non-recycled inventory items are direct functions of the number of occupied rooms. The concept of “cost per occupied room” is the major tool the executive housekeeper uses to determine the levels of expense in the various categories. Once the executive housekeeper knows predicted occupancy levels, expected expenses for salaries and wages, cleaning supplies, guest supplies, laundry, and other areas can be determined on the basis of formulas that express cost in terms of cost per occupied room.
Occupancy forecast are generally developed by the front office manager, who works closely with the property’s general manager. The forecast is based not only on past levels of occupancy (and their distribution among the budget periods), but also on information supplied by the marketing department concerning the anticipated effect on room sales of special events, advertising, and promotions. Some hotels generate forecasts from room sales that predict the level of occupancy for each day of the coming year.
Once occupancy levels are predicted, the departments whose costs fluctuate with occupancy levels can forecast expected costs and submit prepared budgets to the general manager and controller for review. Upper management analyses and adjust the departmental budget plans so reflect the property’s goals and objectives. Often, budgets are returned to department heads with comments and recommended adjustments. Such feedback primarily reflects the concern of upper management to maximize profits and control expenses while maintaining appropriate levels of service.
By specifying expense levels in relation to room sales, the budget actually expresses the level of service the hotel will be able to provide.
Using the Operating Budget as a Control Tool
An operating budget is a valuable control tool with which to monitor the course of operations during a specified period. Each month, the hotel’s accounting department produces statements reporting actual costs in each of the expense categories. The form of these statements is nearly identical to that of the operating budget: actual costs are listed alongside budgeted costs. Such reports enable the executive housekeeper to monitor how well the housekeeping department is doing in relation to the budgeted goals and constraints.
When comparing actual and budgeted expenses, the executive housekeeper should first determine whether the forecast occupancy levels were actually achieved. Similarly, if levels are higher than forecast, the executive housekeeper can expect a corresponding increase in housekeeping expenses.
Small deviations between actual and budgeted plan require investigation and explanation. If the actual costs far exceed the budgeted amounts while the predicted occupancy level remains the same, the executive housekeeper needs to find the source of the deviation. In addition to discovering why the department is “behind budget” the executive housekeeper needs to formulate a plan to correct the deviation and get the department back “on budget”.
For example, a re-examination of staff scheduling procedures or closer supervision of standard practices and procedures may be necessary. Even if the executive housekeeper finds that the department is far “ahead of budget”, it is not necessarily a cause for celebration. It may indicate a deterioration of the service levels that were built into the original budget plan. Any serious deviation from the plan is a cause for concern and requires explanation. Identifying and investigating such deviations on t timely basis is one of the most valuable functions an executive housekeeper can perform in terms of the operating budget.
Operating Budgets and Incoming Statements
The one is a report of what actually occurred, while the other is a forecast or plan for what is to come. The operating budget is a plan for the period in the sense that it predicts or anticipates what the income statement will actually show at the end of that period. The success of the hotel’s plan as expressed in the budget is determined by how closely its forecast numbers match the numbers on the end-of-the-period income statement.
The Hotel Income Statement
The statement of income provides important financial information about the results of hotel operations for a given period. The period may be one month or longer, but cannot exceed one business year. Since a statement of income reveals the bottom line-the net income for a given period-it is one of the most important financial statements used by top management to evaluate the success of operations. Although the executive housekeeper may never directly use the hotel’s statement of income, this statement relies in part on detailed information supplied by the housekeeping department.
Since the rooms division is generally the hotel’s major source of income, and since housekeeping is a major source of expense incurred by the rooms division. The executive housekeeper plays an important role in the hotel’s overall financial performance.
The Rooms Division Income Statement
The hotel’s statement of income shows only summary information. More detailed information is presented by the separate departmental income statements prepared by each revenue center. These departmental income statements are called schedules and are referenced on the hotel’s statement of income.
The executive housekeeper is directly concerned with many of the line items listed in the expense sections of the rooms division’s income statement. The largest single expense category listed is Salaries and Wages. The personnel cost associated with the housekeeping department are incorporated into this total, which also includes payroll costs for all rooms division employees. Regular pay, overtime pay, vacation pay, severance pay, incentive pay, holiday pay, and employee bonuses are included in the expense category.
The budgeting process begins with a forecast of room sales. Since expense levels in all the expense categories on the departmental income statement vary with occupancy, everything in the operating budget depends upon how accurately occupancy levels are forecast. Early in the budget-planning process, the rooms manager will give the executive housekeeper the yearly forecast of occupancy levels, broken down into monthly budget periods.
For the executive housekeeper, the most important information in the rooms manager’s forecast is not so much the total expected sales dollars, but the projected number of occupied rooms for each budget period. This is because nearly all the expense levels for which the executive housekeeper is responsible are directly depending upon the number of occupied rooms the housekeeping department will have to service.
Salaries & Wages
Salaries and Wages expense for the housekeeping department is related to such positions as executive housekeeper, assistant housekeepers, inspectors, linen room attendants, room attendants, house persons, lobby attendants, and other employed in the housekeeping operation.
By using a staffing guide, the executive housekeeper can determine how many labor hours in each job classification are needed to ensure smooth operations at varying levels of occupancy. When planning the Salaries and Wages expense for the operating budget, the executive housekeeper can use the staffing guide in conjunction with the occupancy forecasts to determine staffing needs for each budget period. After determining the number of labour hours needed for each job category, the executive housekeeper can multiply the number of hours by the position’s average per-hour wage to calculate the expected cost for that job category. By summing the calculations for all positions, a total wage cost can be determined for each budget period.
Calculations related to employee benefits depend on the number of labour hours expected to be scheduled, the types of job classifications involved, and the property’s policies regarding employee benefits.
If the hotel employs any outside contractors for major cleaning projects or for laundry and dry-cleaning services, then the cost of these services are averaged throughout the budget periods. The executive housekeeper can consult current contracts or past invoices to determine the expense levels to budget.
The executive housekeeper needs to work closely with the laundry manager to budget laundry expenses. The forecast of occupancy levels provided by the rooms division, along with the property’s staffing guide, will be the basis for determining all expenses related to salaries, wages, and benefits for laundry personnel.
The cost of operating the hotel’s on-premises laundry is directly related to the volume of soiled items to be processed. This, in turn, is a direct function of the hotel’s occupancy levels. Therefore, the cost of laundering room linens and uniforms can be budgeted on the basis of historical information that shows the cost per occupied room of laundry operations. Multiplying the cost per occupied room for laundry operations by the number of occupied rooms forecast for each budget period will provide a figure for the expected laundry expense during the budget period
Although linen supplies in the housekeeping department are a recycled inventory item, their life spans are ultimately limited. New linens must be purchased throughout the year as older linens are removed from service due to loss, damage, or wear. Replacement cost for new linens is an expense that need to be worked into the budget-planning process.
The operating supplies expense category for the housekeeping department includes non-recycled inventory items, such as guest supplies and amenities, cleaning supplies, and small equipment. As with the other housekeeping expense categories, the executive housekeeper can budget for the cost of these items on the basis of cost per occupied room.
Guest supplies include pens, stationary, matches, soap, shampoo, toilet and facial tissue, garment bags, and other amenities the hotel provides in each room for the convenience and use of its guests. The cost per occupied room for guest supplies is the same as the cost of one room par for these items. Budget accounts for guest supplies are determined by multiplying their cost per occupied room by the number of occupied rooms in the budget’s forecast.
Cleaning supplies include not only chemical cleaners, polishes, and detergents but also small equipment needed on a daily basis such as applicators, brooms, brushes, mops, buckets, spray bottles, and a variety of cleaning cloths. By following inventory control procedure, the executive housekeeper has an effective system for tracking the usage rates for the various cleaning supply items at different levels of occupancy. By dividing the cost of the number of purchase units used each month by the number of occupied rooms that month, a cost per occupied room can be established for each item in the cleaning supply inventory. Summing the results for all inventoried items yields a cost per occupied room for cleaning supplies. Multiplying this figure by the number of occupied rooms forecasted for the budget period provides the cleaning supply expense for the operating budget.
Provisions must be made in the operating budget for the cost of new and replacement uniforms. In addition, the cost of washing or dry-cleaning uniforms, as well as costs associated with repairing damaged uniforms, may need to be reflected in the operating budget.
Like linens, uniforms are a recycled inventory item. But unlike linens–whose using rates and replacement needs are very predictable-the need for new uniforms during the budged period depends on factors such as personnel turnover and new hiring’s. To help organize information for the operating budget and for future purchasing, the executive housekeeper should maintain an itemized list of all types of uniforms maintained in the department’s inventory.
Managing housekeeping expenses means ensuring that actual expenses are consistent with the expected expenses forecast by the operating budget. There are basically four methods the executive housekeeper can use to control housekeeping expenses: Accurate record keeping, effective scheduling, careful training and supervision, and efficient purchasing.
Maintaining accurate records is the first step in controlling expenses and identifying problems in relation to managing inventories. Accurate record keeping enables the executive housekeeper to monitor usage rates, inventory costs, and variances in relation to standard procedures.
Training and supervision should not be overlooked as a cost control measure. The recommendations in the property’s staffing guide are based on the assumption that certain performance and productivity standards are consistently achieved. Effective training programs that quickly bring new hires “up to speed” can significantly reduce the time during which productivity is lower than the standards set for more experienced personnel.
Efficient purchasing practices can make a significant contribution to the executive housekeeper’s role in controlling housekeeper expenses. In fact, the most controllable expenses under the executive housekeeper’s responsibility involve the various items whose inventories are maintained by the housekeeping department. Inventory control procedures enable the executive housekeeper to know when to buy and how much to buy of each inventoried item. Deciding what to buy, whom to buy it from, and exactly how to purchase it requires careful consideration on the part of the executive housekeeper. Although the actual purchasing may be done by the hotel’s purchasing department, quantities and specifications are submitted to the purchasing department by department heads.
Next to salaries and wages, linens are the highest expense item in the housekeeping budget. The initial purchase of linens for the hotel will greatly influence the cost of replacing linens that become lost or are taken out of service due to damage or excessive wear. The fabric type, size, and colour will influence both initial purchases and replacement costs. Coloured items are usually more expensive and have a shorter live span than white ones since colours fade through repeated washings.
The physical inventory show the executive housekeeper how long the existing stock of linens will last and how much of each type of linen needs to be reordered to maintain the par levels. Typically, linen purchases are made annually with deliveries scheduled to be drop-shipped on a quarterly basis. This arrangement enables the executive housekeeper to conserve available storage space by using a supplier’s warehouse facilities while periodically receiving replacement stock.
The quantity of linen to purchase is determined by assessing the hotel’s quarterly requirements to maintain linen at the par level. Physical inventories of linens can be used to calculate an annual consumption rate that shows how much linen is “used up” either by normal wear and tear, damage, loss, or theft. With this information, the executive housekeeper can use the following formula to determine the size of the annual linen purchases.
Regarding linen, the expected useful life of the linen is often more important than purchase price in determining whether alternative products are economical or not. The cost of laundering linens over their useful life is usually much greater and more important than their initial price. The life span of linen is measured in terms of how many times it can be laundered before becoming too worn to be suitable for guestroom use.
As with linens, the main criteria for purchasing replacement uniforms is a secondary consideration. Comfort, practicality, and ease of maintenance are also important considerations. New uniforms should be purchased to maintain the par level established for uniforms. Comparing the on-hand quantities with the established par levels will show the executive housekeeper how many replacement uniforms should be ordered.
Purchasing Operating Supplies
Selecting the right vendors can often make the executive housekeeper’s purchasing systems more efficient. The executive housekeeper needs to competitively shop suppliers and vendors for the products to be purchased on a regular basis. When asking for price quotations, the executive housekeeper needs to be as precise as possible regarding such specifications as weight, quality, packaging, size, concentration, quantities and delivery times.
Major purchases of machines and equipment in the housekeeping department are not included on operating budgets. Instead, purchases for items with relatively high costs and long life spans are planned as part of capital budgets because they involve additional capital investments by the hotel.
When purchasing housekeeping equipment, executive housekeepers need to focus on long-range considerations. Major purchases of machines and equipment represent a capital expense for the hotel, and planning is required. The housekeeping department needs equipment that will last through continuous use with a minimum of maintenance. Cost effectiveness is the most important consideration. As always, purchase price needs to be considered along with the quality and durability of the product.
Contract vs. In-House Cleaning
An important decision that arises in an increasing number of contexts is whether to contract outside services for cleaning tasks or undertake them as in-house operations. The issue is often approached in terms of how to best control costs while ensuring that necessary tasks are accomplished and quality standards maintained. In many situations, the issue is one that involves both capital budget and operating budget considerations.
While wages and materials are monthly expenses that can be budgeted, the equipment needed to start an in-house cleaning program is a capital expense that occurs all at once. Often, after the initial start-up cost for machines and equipment the monthly expense, the monthly expense that the hotel will incur with an in-house cleaning program is less than the monthly expense it would incur with an outside contractor.
In addition, many executive housekeepers believe that an in-house staff will perform higher-quality work than an outside contractor because of the opportunity for increased control.
The executive housekeeper may be asked to demonstrate how long it would take to recover the initial start-up costs for machines and equipment through the monthly savings achieved by an in-house cleaning program. By dividing the savings achieved each month into the total amount of capital expenditure for the needed equipment, the executive housekeeper can calculate how many months it would take to pay back the initial investment. In determining monthly expenses that an in-house operation would incur, the executive housekeeper needs to consider costs of salaries and wages, employee benefits, materials and supplies, training and supervision. The decision as to whether the initial investment is possible and worth the monthly savings is one that belongs to the hotel’s upper management and ultimately to the owners.