Open to buy is the dollar amount you can spend on new merchandise without overstocking. The formula: planned sales + planned markdowns + planned end-of-month inventory - beginning-of-month inventory - merchandise already on order. Work it at retail.
If the number is zero or less, stop ordering.
Holding on to old merchandise can kill your profit margins. When running a retail store, learning about OTB, open to buy, is important.
Many retailers have had to deal with excess merchandise due to lower demand; it is still your money sitting there, and you need to cull it often.
I had a couple of roommates when I was just out of college. We shared buying the groceries, each taking a turn at buying based on need.
One day, I poured a glass of fermented milk with clots and mold into a glass. My roommate's excuse? I couldn't see it.
Think of your inventory like you would fresh milk. Unless you look at it, you end up with spoiled, stained, and unsellable merch.
Selling your inventory is your only way to make money.
Yet, as a retail consultant, I've seen that it is one of the least understood aspects of retail for many.
Your merchandise has to come and go regularly, or it will rot.
Would you want to buy tens of gallons of milk but spoil most of it?
No, you manage fresh milk by how much you use. The same must be true of your merchandise.
If you buy too much inventory, it will go bad.
When buying merchandise, you’re certainly hopeful that it will sell, but your orders must be based on more than a hunch if you want to grow your business. That's called an open-to-buy system.
Your stock levels must correspond with your most recent sales trends. For example, you can order 10% more merchandise if sales grew 10% in the previous two months.
Here's how to figure out your open to buy:
At a very basic level, just starting with your full-price inventory divided into your total sales can give you a merchandise turn.
How to make an open-to-buy plan:
- Take a physical inventory of all your merchandise at full value. Be sure to count any returns, holds, etc.
- Run a year-end report. Divide it by 12 to determine how much you sell per month on average.
- Divide your on-hand inventory by your average monthly sales. That tells you how many months of merchandise you're carrying. Some months will be higher than others, so to be accurate, a complete store inventory should be performed at least twice a year.
An example of a basic open-to-buy is to take a physical inventory. Let's say it is $500,000 at retail. Take last year's total sales of $1,500,000 and divide by 12 to get your average monthly sales of $125,000. You get the number four when you divide the total inventory by the average month.
That means you have about four months' worth of on-hand inventory. That isn't good.
You normally want no more than two months of sales on hand. In the example above, that means you should have no more than $250,000 at retail on your sales floor at any one time.
When you have so much unsold merchandise, you have zero open funds to buy merchandise or an open-to-buy of zero. In that case, and whenever you are overbought, you should always look for more ways to increase merchandise turnover.
Yes, you can move on to a much more robust open-to-buy formula, but you'll need to make some assumptions about how much you'll be marking down merchandise every month, what you expect to sell through a month, and account for orders already placed.
Here's that open to buy formula:
Planned sales + planned markdowns + planned end-of-month inventory - beginning-of-month inventory - merchandise already on order = open to buy
Use the same store. You plan to sell $125,000 next month and expect $10,000 in markdowns. You want to end the month at $250,000 in inventory. You're starting with $500,000, and $30,000 is already on order.
$125,000 + $10,000 + $250,000 - $500,000 - $30,000 = -$145,000
That store is overbought by $145,000.
Don't place another order until you move merchandise.
See also, Why and How To Do A Physical Inventory On A Shoestring Budget
How much of my open to buy should I spend up front?
Not all of it. Every buyer with a fixed budget faces the same choice: spread across a lot of styles, or go deep on a few.
Width protects you when you're wrong. Depth pays you when you're right.
Do both on purpose. Buy deeper in what your POS reports prove sells, and shallower in anything new. Then hold part of your open to buy back so you can reorder fast when something takes off.
Just don't cut new merchandise to zero to play it safe. Today's best sellers wear out, and if you stop testing new items, you'll have nothing to replace them with in two or three years.
For more on buying and displaying merchandise, see our guide to retail merchandising.
While looking for direction, look at the last downturn in 2008 when retail giant Nordstrom decided to shrink its year-end inventory per square foot by 12% from the previous year, thereby reducing supplies in line with shrinking demand. That poised them for future growth with new merch rather than stockpiles of unsold goods like Macy’s, a store practically trying to give the stuff away with 70-80% off.
Don’t hold on to past failures.
If it didn’t sell when it was new, don’t think it will suddenly happen six months later when your employees are cold to it.
It’s best to identify as quickly as possible what is not performing, move it out, and bring in fresh merchandise. That allows you to get more of the right merch to grow profits.
While that sounds simple, you’ve likely had the experience of telling your manager, “We are going to get rid of X product because it’s not selling,” and had your manager reply, “We can’t get rid of it; we sell tons of it!”
Then you went to your POS reports and found you only sold a handful. That’s because most employees remember most vividly their last sale or the last thing a customer requested that you didn’t have.
To get the big picture, you need to use your category sales report from your POS system to determine the correct inventory levels. Otherwise, you might think it being out of stock is reason enough for a reorder.
But missing stock could be due to demand or theft, customers taking it when no one is looking, or employees lifting it as they take out the trash. You’ll never know unless you look carefully at your category reports.
In Sum
All of your categories should be able to be profitable. Again, shopworn merchandise is like sour milk; people avoid it.
Take aggressive markdowns when you have shoppers coming in rather than waiting to have a clearance sale when only a few are entering your doors.
That matters more now. AI shopping assistants compare every price online before a shopper sees your tag, so a late markdown there just gives away margin.
In your store, a person can still be surprised by a good price - if someone is there to show it to them.
Before you reach for the red tag, make sure your team can sell it at full price. That's what retail sales training with SalesRX+ does: it trains the selling behaviors, then an unannounced mystery shop checks whether they changed.
FAQ
What is open to buy?
Open to buy is the dollar amount a retailer can spend on new merchandise for a period without carrying more inventory than planned. It ties your orders to recent sales instead of a hunch.
How do you calculate open to buy?
Add planned sales, planned markdowns and planned end-of-month inventory, then subtract beginning-of-month inventory and anything already on order. Work every number at retail. A result of zero or less means you're overbought.
What's the difference between open to buy and inventory turn?
Inventory turn tells you how fast your stock sold over a year: annual sales divided by average inventory at retail. Open to buy tells you how much you can spend next month. A slow turn shrinks your open to buy.
Should I buy more new styles or go deeper on best sellers?
Go deeper on proven sellers and shallower on new styles, and hold some budget back to reorder what takes off. Cut new items to zero and you'll run short of best sellers in a few years.
