Open To Buy Formula
Open-to-buy (OTB) is an inventory management strategy and formula businesses use to create buying budgets for specific periods of time. It takes into account expected beginning-of-month and end-of-month inventory, planned sales, and planned markdowns. Basically, an open-to-buy budget tells retailers how much they can spend on inventory at some future date, whether it be the holiday season or the month of May.
open to buy formula
With open-to-buy planning, retailers can forecast and spend proportionately to sales, meet demands for popular products, and prepare for seasonal surges. By helping retailers keep track of on-hand inventory compared to what is actually needed, open-to-buy planning reduces excessive spending and minimizes waste.
Like any effective budgeting tool, the OTB formula helps companies make reasonable predictions based on past performance while considering circumstances that might alter those expectations in the future. The formula creates a framework for best practices and helps you detect month-over-month changes in sales volume. Use the calculator below for your OTB budget:
Say you want to create an open-to-buy plan for the holiday season (November to January) at your clothing store. You anticipate heading into the season with $7,000 of inventory. Last year you made $78,000 in sales during this time. This year, however, your customer base has grown and your business is making slightly more, so you anticipate making closer to $90,000. Additionally, you plan to mark down summer items valued at $3,000 by 20% ($600), and you anticipate having about $5,000 of inventory in stock once the holiday period is complete. With all this, your OTB calculation would be:
While larger businesses and corporations make longer-term open-to-buy plans (quarterly, semi-annually, etc.), those running smaller operations with tighter budgets should use shorter-term plans.
For businesses that see large seasonal spikes, create open-to-buy plans for each week. This will ensure you stay on top of seasonal flows and also help your buyers understand which products need to be ordered at higher volumes more frequently during busy periods.
Understanding your inventory and making accurate projections is a key part of open-to-buy planning, and it all comes down to good inventory management. Make your life easier with a fully integrated POS system with inventory controls, so that you can get automated reports, insights, and real-time data on your inventory.
While open-to-buy planning is a replenishment tool used by all types of businesses, it is not suitable for all commodity categories. The industries that will benefit most from OTB are those where product specifications change regularly, but the classifications and subclassifications of those products remain the same.
Finally, open-to-buy planning is not designed for everyday items. Your most popular items, such as soft drinks or small accessories, are better suited to run on an automatic replenishment schedule. This is especially true for items that sell consistently throughout the year with no real peaks and dips in sales figures.
The success of OTB planning depends on the accuracy of projections for each aspect of the formula. Realistic forecasts are essential to achieving actionable results and getting the most out of the OTB concept.
Retailers adopt the open-to-buy approach because it is an inventory management strategy that allows for optimal stock levels, more flexible inventory, and the identification of product trends that are likely to be appreciated by consumers.
An open-to-buy plan is a purchasing budget for future inventory orders that a retailer creates for a specific period. It helps a retailer 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.
The open-to-buy formula will help you create forecasts for your OTB plan. The values in your open-to-buy are projections, so they may not be perfectly accurate. But a sensible way to check your numbers is if your actual month-end inventory is within 5% of your prediction.
Inventory budget should be set well in advance, as inventory purchasing should begin no later than one month prior to opening to account for potential shipping delays and merchandising needs adequately.
OTB calculation is one of the most important tasks to master when starting a retail business. Failing to calculate the open to buy budget can be detrimental for the business, due to stock problems that will soon arise from improper planning. In fact, a lot of retail & ecommerce startups fail, mainly due to cash flow problems created by poor inventory management.
The scientific method to calculate how much inventory you should have is the Open to Buy process. It takes into consideration your sales, margins and desired stock level, and applies a certain formula to determine how much inventory you should buy.
If you were budgeting for a period that starts tomorrow, this would have been your current stock value (at cost). However; since we always budget for a period well in advance (usually 6 months ahead) this would mean calculating your opening stock well in advance.
Once you have defined your sales, margins and opening stocks in the previous steps, you will plug those numbers in one of the Open to Buy tools we discuss below, to calculate your total buying budget.
In retail planning, open-to-buy (OTB) is one of the most important concepts to understand. By calculating your OTB you can ensure maximum profitability and keep your inventory management practices on target. Here are the simple steps to calculating your OTB.
An open-to-buy plan is a purchasing budget for future inventory orders that a retailer creates for a specific period. An OTB plan helps a retailer 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. This includes physical inventory on hand and in transit, as well as any outstanding orders.
To figure out your OTB at cost, multiply the OTB value by the initial markup. For example, using the one-month calculations from above, if your markup is 75%, your open-to-buy at cost for those wallets you want to stock in your store is $10,350 x .75 = $7,762.50.
You can start by creating a six-month open-to-buy plan that takes the form of a spreadsheet. Many small- to medium-sized retailers plan their OTB month-to-month, but for businesses with high spikes in seasonal sales, try creating a weekly OTB plan.
High open interest usually indicates higher liquidity for a contract. This generally means there will be less of a difference between what someone wants to sell an option for and what someone else wants to buy it for. This can make it easier to either buy or sell. If open interest is increasing and becoming higher, this signals that the market trends around that option are likely to continue."}},"@type": "Question","name": "Is Open Interest Bearish or Bullish?","acceptedAnswer": "@type": "Answer","text": "Rising open interest usually means that there is new buying happening, which is a bullish trend. However, if open interest grows too high, it can sometimes be a bearish signal that indicates a coming change in market trends.","@type": "Question","name": "What Happens When Open Interest Increases?","acceptedAnswer": "@type": "Answer","text": "When open interest increases, this usually means new money is coming into the market for that option. As long as this is happening, the current trend will continue. When open interest decreases, this is usually a sign that the market is liquidating and more investors are leaving. This often means that the current price trend is ending."]}]}] Investing Stocks Bonds Fixed Income Mutual Funds ETFs Options 401(k) Roth IRA Fundamental Analysis Technical Analysis Markets View All Simulator Login / Portfolio Trade Research My Games Leaderboard Economy Government Policy Monetary Policy Fiscal Policy View All Personal Finance Financial Literacy Retirement Budgeting Saving Taxes Home Ownership View All News Markets Companies Earnings Economy Crypto Personal Finance Government View All Reviews Best Online Brokers Best Life Insurance Companies Best CD Rates Best Savings Accounts Best Personal Loans Best Credit Repair Companies Best Mortgage Rates Best Auto Loan Rates Best Credit Cards View All Academy Investing for Beginners Trading for Beginners Become a Day Trader Technical Analysis All Investing Courses All Trading Courses View All TradeSearchSearchPlease fill out this field.SearchSearchPlease fill out this field.InvestingInvesting Stocks Bonds Fixed Income Mutual Funds ETFs Options 401(k) Roth IRA Fundamental Analysis Technical Analysis Markets View All SimulatorSimulator Login / Portfolio Trade Research My Games Leaderboard EconomyEconomy Government Policy Monetary Policy Fiscal Policy View All Personal FinancePersonal Finance Financial Literacy Retirement Budgeting Saving Taxes Home Ownership View All NewsNews Markets Companies Earnings Economy Crypto Personal Finance Government View All ReviewsReviews Best Online Brokers Best Life Insurance Companies Best CD Rates Best Savings Accounts Best Personal Loans Best Credit Repair Companies Best Mortgage Rates Best Auto Loan Rates Best Credit Cards View All AcademyAcademy Investing for Beginners Trading for Beginners Become a Day Trader Technical Analysis All Investing Courses All Trading Courses View All Financial Terms Newsletter About Us Follow Us Facebook Instagram LinkedIn TikTok Twitter YouTube Table of ContentsExpandTable of ContentsWhat Is Open Interest?Understanding Open InterestChanges to Open InterestOpen Interest vs. Trading VolumeThe Importance of Open InterestOpen Interest and Trend StrengthExampleOpen Interest FAQsThe Bottom LineStock TradingStock Trading Strategy & EducationOpen Interest: Definition, How It Works, and ExampleByAkhilesh GantiUpdated January 22, 2023Reviewed by 041b061a72