Open-to-buy
Max Pechonis · Founder, Rebridge ·
Open-to-buy is the amount you can still commit to spend on merchandise in a period without exceeding your inventory plan. It is what the plan leaves you, after the sales you expect, the stock you want to end with, and the orders you have already placed.
The formula
Open-to-buy is calculated at retail value for a single period, usually a month:
| Component | Effect |
|---|---|
| Planned sales for the period | Add |
| Planned markdowns | Add |
| Planned end-of-month stock | Add |
| Planned beginning-of-month stock | Subtract |
| Merchandise already on order for the period | Subtract |
The logic is simpler than the list looks. The first three are everything the period has to cover: what you will sell, what you will discount away, and what you want left on the shelf at the end. The last two are what is already handled: the stock you started with, and the orders you have already committed to.
A worked example
A shop plans March as follows. Sales of $40,000. Markdowns of $3,000. It wants to end March holding $120,000 at retail, and it began the month holding $130,000. It has already placed orders worth $15,000 arriving in March.
$40,000 + $3,000 + $120,000 = $163,000 to cover. Less the $130,000 already on hand and the $15,000 already ordered leaves $18,000 of open-to-buy.
That $18,000 is the honest answer to "can I take this order?" in March. Substitute your own figures and the arithmetic is the same.
The two stock figures usually come from a ratio rather than a guess. Planned beginning-of-month stock is conventionally derived as stock-to-sales ratio times planned sales, so a ratio of 3.25 against $40,000 of planned sales gives the $130,000 above.
Why it is usually negative when people first calculate it
A negative result is common and is not a mistake in the arithmetic. A negative open-to-buy means you have already committed more than the plan allows, normally because prebooks placed months ago are landing in a period whose sales plan has since been revised down.
That is the metric doing its job. It is telling you the choice is no longer between buying and not buying, but between cancelling something, marking down harder to clear room, or accepting that you will end the period overstocked. Knowing which of those you are choosing is the point.
It is also why forward-dated commitments have to be visible somewhere. An order confirmation for goods arriving in four months is already spending a budget nobody has opened yet, and it will not appear in this arithmetic until someone enters it.
Questions
Is open-to-buy calculated at cost or at retail?
Conventionally at retail, because the plan it protects is a retail-value inventory plan. Some retailers run it at cost instead. Either works as long as every component uses the same basis. Mixing them is the error to watch for, because the arithmetic still produces a plausible-looking number.
How often should open-to-buy be recalculated?
Monthly at minimum, and again whenever the sales plan changes. It is a residual of the plan rather than a fixed budget, so a revised sales forecast changes it immediately, and an open-to-buy figure carried over from a superseded plan is worse than none.
What is the difference between open-to-buy and a purchasing budget?
A budget is a number you set. Open-to-buy is a number you derive. It moves as sales, markdowns and receipts move, which is why a shop can be under budget for the year and have no open-to-buy this month.