For independent retailers, finding the perfect balance between having enough inventory to meet customer demand and avoiding excess stock that drains cash flow can feel like walking a tightrope. Open-to-Buy (OTB) is a financial budgeting strategy that helps retailers calculate the amount of money available for purchasing new inventory, ensuring they have adequate merchandise without overbuying. The stakes are high; stockouts cost US and Canadian retailers an estimated $350 billion every year, while overstocking ties up valuable capital and increases storage costs. If you want practical guidance on getting it right, contact us to explore strategies tailored for your business.

Understanding Open-to-Buy Planning

At its core, OTB is an inventory management strategy that helps retailers understand how many products they need to buy. Using an OTB formula, retailers create a plan to calculate the money required for future inventory orders during a specific sales period. This isn’t just about buying inventory—it’s about making strategic decisions that align with your financial goals and customer demand.

OTB planning is critical for reducing overstock, preventing understock, and increasing profitability. It’s a dynamic tool that adapts to your business’s growth stages, whether you’re launching your first store or managing multiple locations. For independent retailers competing against larger chains, mastering OTB planning levels the playing field by optimizing your most precious resource: working capital.

The OTB Formula: Your Blueprint for Success

The basic OTB calculation follows this formula: Open to Buy equals planned sales plus planned markdowns plus planned end-of-month inventory minus beginning-of-month inventory. While this might sound complex, based on your predictions, you can determine exactly how much to spend on inventory to ensure you have the right items in stock at the right time.

Let’s break down each component. Planned sales represent your forecasted revenue for the period based on historical data, seasonal trends, and market conditions. Planned markdowns account for any promotional discounts or clearance activities you anticipate. Your planned end-of-month inventory is the target stock level you want to maintain, while beginning-of-month inventory is what you currently have on hand.

Why OTB Planning Matters for Independent Retailers

The consequences of poor inventory management are severe. A 2023 IHL Group study revealed that inventory distortion costs retailers a staggering $1.8 trillion—equivalent to Brazil’s entire GDP. For independent retailers operating on tighter margins, even a fraction of this loss can be devastating.

Stockouts result in more than lost sales; they also drive negative customer experiences that discourage customers from returning, harm your brand’s reputation, and potentially drive them to competitors. On the flip side, overstocking creates its own problems: tied-up capital, increased storage costs, potential markdowns to clear aged inventory, and reduced cash flow for other business needs.

Implementing OTB Planning in Your Store

Start by analyzing your historical sales data. Look at patterns from the previous year, identifying peak seasons, slow periods, and trending categories. OTB links merchandise, financial planning, and replenishment, translating strategic financial targets into actionable, category-level purchasing budgets. This means breaking down your overall inventory budget into specific product categories based on their performance and potential.

Consider factors beyond just past performance. Market trends, upcoming holidays, local events, and even weather patterns can influence demand. For independent retailers, staying connected to your community and understanding local preferences gives you an edge that national chains can’t replicate.

Review and adjust your OTB plan regularly—at least monthly, but weekly during peak seasons. During in-season planning, retailers create receipt plans to support inventory and sales goals, allowing you to respond quickly to changing conditions. If a product category is performing better than expected, you can allocate more budget to reorder. If items are moving slowly, you can reduce future purchases and implement promotional strategies.

Tools and Technology for OTB Success

While some independent retailers still manage OTB planning with spreadsheets, modern inventory management software can streamline the process significantly. These tools automatically track sales, calculate optimal reorder points, and generate OTB reports that help you make data-driven decisions. OTB planning is essential to bridging the gap between retail operations and planning, providing real-time visibility into your inventory investments.

The good news is that effective OTB planning doesn’t require expensive enterprise software. Many affordable cloud-based solutions are specifically designed for independent retailers, offering features like automated calculations, sales forecasting, and vendor management—all accessible from your smartphone or tablet.

Making OTB Planning Work for Your Business

The key to successful OTB planning is consistency and commitment. Start simple, track your results, and refine your approach over time. Remember that OTB is a planning process that calculates how much inventory a retail business needs to buy to achieve planned sales targets, making it a living document that evolves with your business.

By implementing OTB planning, you’re not just managing inventory; you’re taking control of your retail business’s financial future. You’ll make smarter buying decisions, improve cash flow, reduce waste, and ensure your customers find what they need when they need it. For independent retailers, mastering OTB planning is the difference between surviving and thriving in today’s competitive retail landscape.

For retailers looking to optimize inventory without guesswork, contact us for advice that aligns with your growth goals.