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Open to buy (OTB)
How much inventory do I need to buy to make my sales goals? How much inventory should I have on hand at all times? Running a retail store can be a lot of fun but the key to success is investing in the right amount of inventory, at the right price, from the right vendors, and have it delivered at the right time! If you miss these windows, you could end up sitting on inventory that your customers don’t want meaning your cash is tied up in aging inventory! We all know you can’t spend inventory, you can only spend CASH! That is why we need to turn that inventory into cash as quickly as possible. Therefore, we need to have a Plan! You need an Open to Buy Plan (OTB Plan)!
*Remember – OTB is calculated at Cost.
Step 1: Plan your sales
First, what do you plan to sell in a specific period of time? What can you sell? What is your GOAL?
This is your “planned sales.”
Step 2: Decide How Much Inventory will you keep on hand?
Next, decide how much of your inventory you want to have left over at the end of the month or season. This is what you want to keep in your shop. Remember, you always have to have some inventory at the end of the month, no store sells down to empty on the last day of the month and then fully stocked on the first day of the month! We call this your “planned ending inventory.”
Step 3: Know what you have
Think about how much inventory you already have in your shop at the beginning of the month or season. This is what you had from before. (ie: the planned ending month inventory from November 30 is the same as your beginning month inventory December 1). This is your beginning inventory.
Step 4: Calculate your otb
Now, let’s figure out how much money you can spend to buy new inventory. We use this formula:
OTB = (Planned Ending Inventory + Planned Sales) – Beginning Inventory
So, OTB tells you how much money you have to buy new inventory. It’s like your shopping budget for the month or season.
Why do we use cost?
By using OTB, you can make sure you have enough new, fresh inventory in your shop without buying too much and spending too much money. It is your roadmap to investing!
Remember- you can’t use inventory to pay bills you can only use CASH! Therefore, having too much inventory on hand will tie up your cash in unsold inventory. Having too little inventory on hand will cost you sales, which means less cash flow!
Use this OTB calculator to find the sweet spot in your business, to keep your cash and your inventory flowing smoothly.