I once stood in the backroom of a small shop, squinting at a clipboard covered in penciled numbers that didn’t seem to add up. The owner—a man who smelled like cedarwood and always wore flannel—told me the shelves looked full, but he couldn’t figure out why his cash flow felt empty. That’s when I realized: a store can be packed and still be bleeding money. The culprit? Poor inventory planning. Specifically, not knowing how to calculate Open to Buy.
That day stuck with me. So now, when I talk about retail strategy, I always start here—with Open to Buy. It’s not fancy. It’s just math. But it’s math that saves people from buying too much of what won’t sell and too little of what might’ve flown off the shelves. I’ve since learned how to do it, and I do it regularly. I think every serious retailer should, too.
Key Takeaway
- Open to Buy helps you plan how much inventory to buy.
- You can calculate OTB using a simple formula.
- Regularly checking your OTB can help you avoid overstocking or understocking.
What Is Open to Buy, Really?
Open to Buy (OTB) is a number. A living number. It tells me how much merchandise I can safely purchase during a given sales period without overstocking. Or worse—understocking and missing sales. It’s not just about how much I want to buy. It’s about how much I should buy, based on projected sales, markdowns, and ending inventory goals.
Why It Matters
Retail is risk. And Open to Buy helps manage that risk. It helps me:
- Avoid tying up cash in stale inventory
- Know when to reorder fast-moving items
- Protect my margins by minimizing markdowns
- Maintain balance between demand and supply
- Predict inventory shortages before they become problems
In short, it helps me think ahead.
The Core Formula I Use
There are a few ways to write the formula, but they all aim to answer one question: what can I afford to buy?
Here’s the basic OTB formula I keep taped to my wall:
OTB = Planned Sales + Planned Markdowns + Planned Ending Inventory ? Beginning Inventory
And when I need more precision, especially if I’ve already placed orders, I adjust it:
OTB = (Planned Ending Inventory + Planned Sales) ? (Beginning Inventory + On Order Inventory)
Quick Breakdown of Terms
Let me spell them out the way I learned:
- Planned Sales: How much I expect to sell in dollars during the period.
- Planned Markdowns: Discounts I plan to offer. They eat into margin, but I factor them in.
- Planned Ending Inventory: The inventory I want left at the end of the period.
- Beginning Inventory: What I started with, in dollar value.
- On Order Inventory: Merchandise already ordered but not yet received.
Simple inputs. Tricky decisions.
Step-by-Step: How I Calculate It
If I’m being honest, I didn’t get it right the first few times. It took running through a few full cycles before I saw the patterns.
Step 1: Gather My Numbers
This is the most tedious part—but also the most essential. Without good data, any OTB plan turns into wishful thinking.
Here’s what I collect each time:
- Beginning Inventory: From my balance sheet
- Planned Sales: I estimate using sales from the same season in previous years, adjusted for current patterns
- Planned Markdowns: Usually 5–15% of sales, depending on the product lifecycle
- Ending Inventory Goal: Depends on lead times and sell-through rates
- On Order Inventory: I pull this from my purchase order log
Step 2: Choose My Formula
I ask myself: do I have inventory already ordered? If yes, I use the formula with the On Order adjustment. If not, I use the basic one. That decision makes a big difference. For example:
Let’s say these are my numbers:
- Beginning Inventory: $120,000
- Planned Sales: $40,000
- Markdowns: $2,000
- Ending Inventory: $100,000
- On Order: $8,000
Basic formula:
OTB = 40,000 + 2,000 + 100,000 ? 120,000 = $22,000
Formula with on order:
OTB = (100,000 + 40,000) ? (120,000 + 8,000) = $12,000
That’s a $10,000 swing. I could’ve over-ordered by that much if I hadn’t accounted for incoming goods.
Step 3: Run It Monthly
I calculate OTB every month, but I adjust it weekly. That might sound obsessive, but things shift quickly. If sales spike, I want to know right away—so I can reorder. If they dip, I hold back.
How I Use It to Manage Inventory Smarter
It’s not enough to calculate Open to Buy. I also use it to shape my purchasing decisions.
I Group My Buys
I break down my OTB by category. Tops. Bottoms. Accessories. Footwear. Each gets a share of the pie, based on historical sell-through.
Example:
If my total OTB is $20,000 for the month and accessories make up 10% of my sales, I allocate $2,000 toward them. This keeps my assortment balanced. Platforms like Trendsi make this easier by letting me segment purchases by category with open pack options and no MOQs, which is especially helpful when testing new styles.
I Build in a Cushion
I always keep a 5–10% reserve. That buffer saves me when a vendor offers a last-minute deal or when something unexpected sells out. If I spend every dollar of my OTB, I lose that flexibility.
I Watch the Calendar
Some periods carry more weight than others. I load up ahead of expected high-demand times and scale back during low-demand stretches. My calendar is color-coded to keep me aligned with those rhythms.
Common Mistakes I Learned to Avoid
Basics of Open-to-Buy Plans for Retailers
Credits: 4retailers
Even a good formula can lead me wrong if I mess up the assumptions. I’ve made these errors. So here’s what I watch out for now:
1. Overestimating Sales
I used to dream big. Too big. That led to too much stock. Now I base projections on hard numbers: same period in past years, adjusted for promotions or shifts in customer behavior. Hope is not a strategy.
2. Forgetting Markdowns
During one markdown season, I left markdowns out of the equation. I blew through my OTB and still had unsold goods. Never again. I now plan markdowns just like sales.
3. Ignoring On Order Inventory
If I’ve already ordered $10,000 worth of product, I subtract that from my OTB. It’s too easy to forget what’s coming in until the boxes arrive and I’ve already overbought.
4. Not Updating Regularly
Retail moves fast. A number I calculated a few weeks ago might be outdated today. So I make time to check and adjust. Ten minutes at the start of each week. That’s it.
5. Forgetting to Check Ending Inventory Goals
One season, I planned to end with $70,000 in inventory but ended with $95,000. Why? I didn’t stop buying when I hit my goal. Now, I chart cumulative purchases and compare weekly.
How I Tie OTB to My Sales Plan
Every Open to Buy calculation starts with a sales forecast. If that forecast is flawed, everything downstream falls apart. So I’ve learned to:
- Use rolling 12-month averages
- Account for promotions
- Build in product seasonality
- Adjust for external factors—supply chain hiccups, shifts in consumer demand, pricing trends
Then I double-check: does my inventory plan support my sales goal? If I want to grow sales 10%, but I’m cutting inventory 20%, something’s off.
Tools That Help Me (Without Naming Any)
I don’t rely solely on memory. I use spreadsheets, and sometimes platforms like Trendsi that help automate inventory syncing and product imports, which saves me time I used to spend on manual tracking. Simple graphs help me visualize OTB vs. actual purchases.
If I’m not in front of a screen, I jot quick notes in a pocketbook: current OTB balance, top 3 selling categories, anything urgent to reorder. That small habit keeps me nimble.
What I Watch Closely Now
- Sell-through rate: tells me how fast things move
- Weeks of supply: how long current inventory will last
- Gross margin return on investment (GMROI): how much margin I earn per inventory dollar
Those three metrics live next to my OTB sheet. They help me tell if I’m buying the right stuff—not just the right amount.
Hard-Learned Lessons from the Stockroom Floor
Staring at inventory sheets in the back office teaches more than any textbook could. After countless cycles of tracking numbers and making expensive mistakes, here’s what actually works in the real world.
- The “Better Safe Than Sorry” Rule
- Add 5–10% to fast-moving items
- Keep extra stock of basics (neutral colors always move)
- Buffer seasonal items by 8%
- Track weekly sell-through rates (anything above 15% needs attention)
- Playing the Numbers Game
The math isn’t complicated, but it’s ruthless:- Match historical category splits
- Keep 30% for top performers
- Save 15% for new tests
- Leave 10% wiggle room for surprises
- Clean House Strategy
Nobody wants old leftovers cluttering new plans. Some tricks that work:- Mark down slow movers after 6 weeks
- Clear seasonal items before the next buying cycle
- Run flash sales for odd sizes
- Bundle slow movers with bestsellers
- Beyond the Calculator
Numbers tell stories, but they don’t tell everything:- Watch what customers actually try on
- Listen to sales staff complaints
- Check current trends
- Study market patterns
- Real-World Fixes
When things go wrong (and they will):- Keep emergency vendor contacts handy
- Build relationships with other stores for stock swaps
- Know your quick-turn options
- Have markdown money set aside
The spreadsheets might look perfect, but retail’s messy. Some weeks you’ll have too much inventory, others not enough. That’s normal. Just keep tracking, adjusting, and learning. And maybe keep some aspirin in your desk drawer—trust me on this one.
FAQ
What is Open to Buy?
Open to Buy is the money you have left to spend on inventory during a specific time period. It’s the difference between your planned inventory purchases and what you’ve already bought, helping you avoid overstocking or running out of products.
Why is calculating Open to Buy important for retailers?
Calculating Open to Buy helps you manage cash flow, prevent excess inventory, and ensure you have popular items in stock. It keeps your business financially healthy by making sure you’re spending money on products that will actually sell.
What’s the basic formula for calculating Open to Buy?
Take your planned sales for the period, add your planned ending inventory, then subtract your beginning inventory. The result shows how much merchandise value you can purchase during that time period.
How do I determine my planned sales figure?
Look at your sales history from similar periods, consider market trends, upcoming promotions, and seasonal factors. Make reasonable projections based on actual data rather than wishful thinking about how much you might sell.
How often should I recalculate my Open to Buy?
Most retailers calculate Open to Buy monthly, but you can do it weekly for fast-moving items. The key is consistency—pick a schedule that works for your business cycle and stick with it.
Should I calculate Open to Buy at retail or cost price?
You can calculate Open to Buy using either retail prices or cost prices, but be consistent. Most merchants use retail prices for sales planning and then convert to cost when placing orders with vendors.
How do I account for markdowns when calculating Open to Buy?
Include expected markdowns in your calculations by subtracting them from your planned sales. This ensures you’re not overestimating available funds when items sell at reduced prices rather than full price.
What’s the difference between Open to Buy and Open on Order?
Open to Buy is the money you have available to spend on new inventory. Open on Order refers to merchandise you’ve already ordered but haven’t received yet. Both figures help manage your inventory pipeline.
Conclusion
Calculating Open to Buy is a vital practice for retailers looking to optimize their inventory management and financial performance. By understanding the components of the OTB formula, following the steps to calculate it, and implementing best practices, retailers can effectively manage their inventory levels, improve cash flow, and maximize sales opportunities.
Regular monitoring and adjustments, along with avoiding common pitfalls, will further enhance a retailer’s ability to make informed purchasing decisions and maintain a successful business. If you’re looking for support with inventory planning, dropshipping, or private label sourcing, a platform like Trendsi can help streamline those workflows while giving you full control over your brand.