Today’s primary focus for store owners is creating a positive–or perfect–customer experience. You’ve probably heard many strategies about engaging your customers, offering top-notch service, and providing that personal touch. So, when you focus on customer experience, why do you need open-to-buy? There’s a bit more to retail than creating the best customer experience. An often-overlooked cornerstone of the store ownership adventure is the art of managing your merchandise.

You can create an incredible, personalized shopping journey that is perfect in every way. Still, it’ll fall flat if your customers walk out empty-handed. It’s not just a letdown for your customers – it’s a setback for you, the retail store owner. On top of letting down your customers, mishandling your merchandise strategy could lead to serious financial issues.

In this blog post, we’ll look closer at a specific retail inventory management method called OTB (open-to-buy). We’ll explain what it is and go over why you need to implement it in your store to achieve a successful retail business.

Open To Buy – What Is It?

OTB is a financial budgeting tool. It uses sales projections, inventory information, and budget specifications to show retailers available funds for new orders and other significant financial insights. It’s also a cash flow plan designed to empower you as a business owner. OTB helps you make decisions about what to buy by considering factors such as current inventory levels, future sales, markdowns, and desired stock turnover rates.

As you start, here are a few concepts to be familiar with.

Terms – Things to Know

Sales Revenue:

Measures the total amount of money generated from the sale of goods and services during a specific period. It is a key financial metric that indicates the financial performance and success of a retail business. Retail revenue can come from various sources, including in-store sales, online sales, and other revenue streams such as advertising or licensing agreements.

Markdowns:

A markdown is a reduction of the original selling price of an item. Discounts can be temporary or permanent. Temporary deals often generate interest in slow-moving items and help sell through existing stock. Permanent markdowns lower the price of an item to clear out inventory that hasn’t sold well.

Inventory:

Refers to the total stock of goods a retailer has available for sale to customers. It includes all the products kept in storage or displayed in a store. Retailers use various methods like barcode systems and inventory software to achieve good inventory management.

Open-to-Buy:

Open-to-buy is a financial budgeting tool. It uses sales projections, inventory information, and budget specifications to show retailers available funds for new orders and other significant financial insights. 

Net Profit:

Net profit is your revenue minus expenses. It represents the amount of money left over after deducting all costs, including the cost of goods sold (COGS), operating expenses, overhead costs, taxes, and other relevant expenses.

Net cash flow:

Net cash flow is the amount of cash that comes into your business minus the expenditures in a given period. For example, you might receive cash into the business that’s not part of revenue, like sales tax.

Inventory Turnover:

Inventory turnover calculates how quickly inventory is sold and replaced within a given period, usually a 12-month period. It indicates inventory management efficiency while identifying potential issues such as overstocking or understocking.

To calculate inventory turnover, you divide the average inventory at retail by the net sales. The formula is as follows.

Inventory Turnover = Net Sales / Average Inventory Value at Retail

Sell Thru:

In retail, sell-through refers to the rate at which a retailer can sell its inventory within a specific time. It measures how effectively products are being sold and is often expressed as a percentage. 

Sell-through is calculated by dividing the total units sold by the initial inventory quantity and multiplying the result by 100 to get a percentage. The formula for sell-through is:

Sell-Through = (Total Units Sold / Initial Inventory Quantity) * 100

Inventory in Retail

Inventory is why people come into your store – it’s what you offer your customers. As an indie retailer, inventory is your most significant investment in your business each year. You create ideal inventory turnover by effectively managing the store’s resources, which is a critical factor in your company’s profitability and success.

Retail inventory management is a critical but often overlooked aspect of running successful indie retail stores. Did you know effective inventory management can influence internal and external factors of your business?

Stock Management In Retail – 7 Reasons Store Owners Do It

You know all about the importance of customer engagement, providing the best service, and striving to add a personal touch they can’t get anywhere else. You may wonder why that isn’t enough. Why use open-to-buy? Well, there’s a bit more to successful retail than just customer experience. The art of managing your merchandise is just as critical and often overlooked.

No matter how ideal the customer’s shopping journey, empty-handed customers are disappointed customers. That puts you behind the curve as a retail store owner. On top of letting down your customers, lacking the right merchandise strategy leads to financial disappointment.

Using open-to-buy planning is like having a financial compass, helping you steer toward success. Once you keep tabs on your fiscal well-being, you can supercharge your business growth and see progress – all while perfecting that delicate balance between having the right inventory levels and hitting revenue goals. 

Effective inventory forecasting can influence internal and external aspects of your business. Here are seven reasons indie retailers benefit from using open-to-buy planning as part of their retail inventory management scheme.

1. What Are the Potential Internal Uses of OTB?

Reason 1. This strategy holds value for inventory control, balanced income and expenses, and preventing overstocking. OTB allows retailers to manage stock levels using purchase limits and helps you align your purchasing decisions with sales forecasts. 

Reason 2. Optimizing inventory and purchasing decisions ensures you have the right products at the right time. That helps you improve your sales potential and increase customer satisfaction.

Reason 3. An open-to-buy strategy allows retailers to assess their performance compared to predetermined goals. When you improve operations by conducting self-assessments using an OTB strategy, you can make better-informed decisions about inventory adjustments and purchasing strategies. Implementing open-to-buy practices helps you achieve better efficiency, profitability, and more potential for success in your industry. 

2. What Are The Potential External Uses?

Reason 4. Open-to-buy also impacts external aspects of retail. When working with suppliers and vendors, indie retailers like you can act deliberately when placing orders. Doing so reduces the need for last-minute cancellations or accepting orders you don’t need.

Reason 5. Appropriate inventory management enhances your store’s connection with customers via an excellent customer experience and a strong reputation. A well-stocked store welcomes your clientele – and the proper use of OTB allows you to have the correct inventory flow while balancing your cash flow. 

Reason 6. Investors and stakeholders are an external group of key players for which retail inventory management and using open-to-buy is also beneficial. Employing open-to-buy gives investors and stakeholders accurate insights into a retailer’s financial discipline and strategic approach. 

The transparent and effective use of OTB can positively impact investor confidence by displaying your integrity, accountability, and leadership. Also, using a retail inventory management system encourages smoother supplier relations, boosts customer satisfaction, and enhances investor trust. This makes it influential in shaping your external interactions and reputation.

3. How Does Effective Retail Inventory Management Affect the Store’s Operating Capital?

Reason 7. Efficiently managing inventory costs is crucial for the health of your retail stores. By making purchasing decisions based on sales data and customer demand, you can avoid stocking too much inventory, which ties up your funds and increases carrying costs. Conversely, if you don’t manage inventory purchasing, it can lead to insufficient stock levels. 

Understocking increases the risk of lost sales and dissatisfied customers. When popular items are unavailable, you lose potential revenue. This imbalance between supply and demand disrupts your income flow, jeopardizing your financial stability. 

Learn with a Trusted Advisor

In retail, “art” and “science” refer to the dual aspects of running a successful business.

The “art” of retail involves elements like merchandising, customer service, and branding. This approach focuses on creating a unique and memorable shopping experience for customers. While this side of the business may be more creative and fun, we must balance art with science to be successful.

The “science” of retail involves data analysis, using retail metrics, inventory management, and financial forecasting. This approach uses data to make informed decisions about pricing, ordering inventory, and scheduling promotions.

You’re here because you want to enhance and grow your business. Partnering with a trusted advisor like a financially savvy business strategist improves your odds of success. I can help you by offering external insights designed to optimize your business operations and meet customer demand.

With supportive coaching, mindset shifts, and tangible measures, you can embrace the possibility of success with your business. The goal is to remain welcoming to customers without sacrificing your financial stability. 

Do I need it? Get a Free Inventory Evaluation

Whether your business has been open for one year or ten, the savvy indie retailer is always looking for ways to improve, make progress, and grow their business. 

It doesn’t matter where you are in your journey of entrepreneurship. Whether all of this is new to you or if you’ve been at it awhile, an objective Inventory Evaluation will provide:

• Outside eyes to see the potential in the business.
• Determinations about any obstacles to manifesting that potential, any red flags that require immediate attention, or what additional resources may be necessary to help you, the owner, build the desired value. 
• Outside eyes to confirm that you are taking the right steps toward the solution.

Want to learn more about open-to-buy, identify any roadblocks in your business, and address them as quickly as possible? Click here to schedule a strategy call with me.

To your Improvement, Progress, and Growth!

Audrey