Retail Budgeting : Introduction to Open - To - Buy
Good inventory control is critical to ensuring an adequate level of stock is on hand for the number of sales being generated.
Having too much inventory (or the wrong type) during certain periods can slow your cash flow and reduce profits with too many markdowns. On the other hand, if you under-buy (meaning buy too little product) and miss sales opportunities, then you are not making your potential profit (plus damaging the customer experience). A retailer can be sure to stock the right amount of the right products at the right time by using an Open-to-Buy plan.
So what exactly is an Open-To-Buy?
The clearest and simplest definition is that it is a financial budget for retail merchandise. An Open-To-Buy is a budget and involves the full range of budgetary functions. It begins with the planning process, is future-oriented, provides guidance on how much to buy, and provides benchmarks for evaluating progress and adjusting future plans. Let's look at this more closely.
The Open-To-Buy Formula
+ Planned Markdowns
+ Planned End of Month Inventory
- Planned Beginning of Month Inventory
= Open-to-Buy (retail)
An Open-To-Buy relates directly to retail merchandise, is structured specifically to address the needs of retailers, and is a tool designed to assist retailers to manage and replenish their most significant asset, their inventory investment. An Open-To-Buy can work on any level that a retailer needs it to. It can be used to track merchandise at the company, department, classification or sub-classification level. In rare cases for a small retailer, it can even be used to track an individual item.
Why you need an Open To Buy plan?
While you may have the steps to create an Open To Buy plan, it won’t mean much if you don’t understand why you need to implement a plan. After all, without answering the ‘Why’, there isn’t any motivation.
The answer to the ‘Why’ question in the case of Open To Buy comes in the form of the benefits that arise from creating a plan. These include:
- You’re able to estimate how much money you need to invest in inventory from month to month.
- You can keep a fresh flow of merchandise coming in, which will mean your customers will keep coming back.
- You’re able to restrict your merchandise commitments so that you don’t get too much new merchandise too quickly.
- You can have an adequate amount of stock on hand, which will support your planned sales.
- You’re able to pinpoint those areas of your plan that needs to be strengthened to maximise your output.
Without such a plan in place, your store runs the risk of mismanaging its inventory, which can ultimately affect the overall health of your business. In fact, manage it poorly for an extended period of time and you may even have to close down.
How can you implement Open-To-Buy using software?
Implementing such a stocking mechanism can be a tough task using spreadsheets. Fortunately, a robust inventory management solution can help ease the pain of retailers. For example, Retail Pro comes with an “Auto Replenishment” feature that takes multiple parameters into account, such as sales trends, MOQ etc. Retail Pro also comes with Auto PO, which stands for an automatic purchase order, which automates a lot of actions that a retailer would have to do at the expense of their valuable time.