How to Use Open to Buy Calculation for Retail Planning
Open to buy (OTB) is a method that retailers use to budget for upcoming inventory orders. It helps retailers stock the right amount of the right products at the right time by showing the difference between how much inventory is needed and how much is available.
OTB can be used at different levels of a retail business, such as company-wide, sales channels, departments, product categories, and sub-categories. It can also be applied to different time periods, such as monthly, quarterly, or yearly.
To calculate OTB, you need to know the following variables:
Planned sales: The dollar amount of sales projected within a time period
Planned markdowns: The total amount of discounts planned during the sales period in dollars
Planned ending inventory: The dollar amount of inventory you want to have at the end of the sales period
Beginning inventory: The dollar amount of inventory you have at the start of the sales period
The core formula for OTB is as follows:
Open to Buy = Planned Sales + Planned Markdowns + Planned Ending Inventory – Beginning Inventory
Let’s look at an example calculation. Suppose you are a clothing retailer and you want to plan your inventory for the month of June. You have the following data:
Planned sales: $50,000
Planned markdowns: $5,000
Planned ending inventory: $20,000
Beginning inventory: $25,000
Using the formula, you can calculate your OTB as follows:
Open to Buy = $50,000 + $5,000 + $20,000 – $25,000
Open to Buy = $50,000
This means that you can spend up to $50,000 on new inventory orders for June without overstocking or understocking your store.
OTB is not a static number. It changes as you make sales, receive new inventory, or adjust your plans. Therefore, it is important to track and update your OTB regularly throughout the sales period. This way, you can avoid overspending or underspending on inventory and optimize your cash flow and profitability.
To use OTB effectively, you also need to have accurate and realistic forecasts for your sales and markdowns. You can use historical data, market trends, customer feedback, and other sources of information to make informed predictions. You can also use software tools that can automate and simplify your OTB planning process.
OTB is a powerful tool that can help you manage your inventory and plan your purchases. By using OTB calculation, you can ensure that you have enough products to meet customer demand without tying up too much capital in excess inventory.
How to Implement OTB Planning in Your Retail Business
Now that you know what OTB is and how to calculate it, you might be wondering how to use it in your retail business. Here are some steps and tips to help you implement OTB planning effectively:
Know your inventory turnover. Inventory turnover is the number of times you sell and replace your inventory in a given time period. It is calculated by dividing your cost of goods sold by your average inventory. A high inventory turnover means that you are selling your products quickly and efficiently. A low inventory turnover means that you are holding too much inventory or selling slowly. Knowing your inventory turnover can help you set realistic and optimal sales and inventory goals for your OTB plan.
Run your financials. Before you start planning your OTB, you need to have a clear picture of your current financial situation. You need to know your sales history, cash flow, profit margin, and other key metrics that affect your inventory decisions. You also need to consider your budget constraints and financial goals for the upcoming sales period. Running your financials can help you determine how much you can afford to spend on new inventory and how much profit you expect to make.
Tracking and adjusting. Once you have created your OTB plan, you need to monitor its performance and make adjustments as needed. You should compare your actual sales, markdowns, and inventory levels with your planned ones and see if there are any discrepancies or opportunities. You should also update your OTB plan with any changes in your sales forecasts, market conditions, customer preferences, or inventory availability. Tracking and adjusting your OTB plan can help you stay on top of your inventory situation and avoid any surprises or problems.
OTB planning is not a one-time activity. It is a continuous process that requires constant attention and refinement. By following these steps and tips, you can implement OTB planning in your retail business and reap its benefits.