Open to buy is how much a store can still order for a month without ending up with more stock than it planned. Open to buy = planned sales + planned markdowns + planned end-of-month inventory − beginning-of-month inventory − what's already on order. The first four give the month's planned purchases; taking off what's on order leaves what's open. It's worked at retail prices, then turned into cost with the store's cost-to-retail ratio. In the example below, a beach-town gift shop plans its summer and has $15,600 at retail open in May, $36,100 in July, and $7,000 more when July sells ahead of plan. Below is the formula, the summer month by month, the mid-month check, and a free calculator.
The short version
- Planned purchases = planned sales + planned markdowns + planned end-of-month inventory − beginning inventory.
- Open to buy = planned purchases − what's already on order.
- Work it at retail, then multiply by cost ÷ retail for the money to spend.
- Each month's beginning inventory is the month before's planned end.
- Plan end-of-month inventory from next month's sales and a stock-to-sales ratio.
- Check it mid-month: sales ahead of plan open more; sales behind close it.
- TaroStack shows stock value by month and what's on order, and lists reorders in days of cover. More below.
The formula
| Line | May, at retail |
|---|---|
| Planned sales | $30,000 |
| + Planned markdowns | $600 |
| + Planned end-of-month inventory | $70,000 |
| − Beginning-of-month inventory | $60,000 |
| = Planned purchases | $40,600 |
| − Already on order | $25,000 |
| = Open to buy, at retail | $15,600 |
| × Cost complement, 50% | |
| = Open to buy, at cost | $7,800 |
Markdowns are in the formula because a sweatshirt marked down from $48 to $30 takes $18 of retail value off the shelf without a sale, and that has to be bought back to keep the stock where it's planned. Working at retail matches how the shop counts its stock; how the cost-to-retail ratio is found is the retail inventory method's cost complement, and a 50% ratio is the same as a 100% markup, explained in markup vs margin.
An example: a gift shop's summer
Cannon Beach Gift Co., a made-up gift shop in Cannon Beach, Oregon, I use in these examples, sells candles, art prints, kites, sweatshirts, jams and chocolates, and cards. Its summer plan, at retail:
| Month | Planned sales | Markdowns | End-of-month inventory | Beginning inventory | Planned purchases | On order | Open to buy, retail | At cost |
|---|---|---|---|---|---|---|---|---|
| May | $30,000 | $600 | $70,000 | $60,000 | $40,600 | $25,000 | $15,600 | $7,800 |
| June | $42,000 | $800 | $80,000 | $70,000 | $52,800 | $30,000 | $22,800 | $11,400 |
| July | $55,000 | $1,100 | $70,000 | $80,000 | $46,100 | $10,000 | $36,100 | $18,050 |
| August | $50,000 | $3,000 | $50,000 | $70,000 | $33,000 | $0 | $33,000 | $16,500 |
The shop builds stock into June, $80,000 at retail at the end of the month, for the July rush, and lets it fall through August so it isn't holding sweatshirts into a quiet winter. August's $3,000 of markdowns is the end-of-season sale. The beginning stock-to-sales ratio falls from 2.0 in May to 1.4 in August: less stock for each dollar of sales as the season peaks and ends. How the ratio works is in stock to sales ratio, and planning a season's stock in seasonal inventory.
The mid-month check
On July 15 the shop has sold $31,000, against $27,500 for half the month's plan, 13% ahead. It raises July's planned sales to $62,000, and with the same end-of-month target, planned purchases rise by $7,000 at retail, $3,500 at cost: a reorder of the kites and sweatshirts that are selling. Had July run behind, the same sum would have cut the open to buy, and the right move would be to delay or cancel part of an August order rather than mark down more in September.
Get the calculator
Download the open to buy calculator. One sheet: one line for each month with planned sales, markdowns and end-of-month inventory, at retail, and what's on order; you type the first month's beginning inventory and each later month starts from the month before's end. Planned purchases, open to buy at retail and at cost, and the beginning stock-to-sales ratio fill in, with a negative open to buy in red. It's an ordinary Excel file with no macros, and it works in Google Sheets, LibreOffice and Numbers.
Where this stops working
Open to buy is a budget for the whole shop. It can't say which of 2,400 items to reorder, what's on the shelf today, or which orders are still open with which supplier. And when the plan's beginning inventory is a guess, every month after it inherits the guess.
How TaroStack does it
TaroStack shows stock value by month and what's on order, and lists reorders in days of cover.
Stock value by month. Each delivery is received at what it cost, so stock value by site and month comes from real costs, a real beginning inventory for each month's plan instead of a guess.
What's on order. Purchase orders with approval show what's open with each supplier, and an alert comes when a purchase order is overdue.
What to reorder. A reorder list in days of cover, with reorder points suggested from how each item actually sells, says which kites and sweatshirts to reorder when July runs ahead.
| The job | Calculator | In TaroStack |
|---|---|---|
| Beginning inventory | Planned, or a guess | Stock value by month |
| What's on order | Typed in | Open purchase orders |
| Which items to reorder | Not on the sheet | Reorder list in days of cover |
| An order running late | Unnoticed | An alert on the overdue order |
Purchase orders, stock value and reorder lists are on every plan, from $49 a month, with no limit on items; TaroStack connects to Square. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.