Open to Buy

Open to Buy (OtB) is a purchasing management method that is based upon a budget. It is always broken down by department. The purchase budget amount begins with estimated sales, estimated margin percent and the number of inventory turns that you expect from your inventory for the year. The calculations are all done month by month. POSIM then calculates the needed inventory based upon these factors for each month. It suggests the amount of product that you need to purchase to meet the budgeted goals by Month as you “Open to Buy”. As you purchase inventory to be delivered in a particular month, the “Open to Buy” is reduced by the amount of the purchase.

  • Building Your OtB Budget
    • To open OtB, go to Inventory Analyzer >> Window >> Open To Buy. Click on the Step 1 tab.
      • Entering the Budget. POSIM assists you in creating the Budget. This is done by bringing up historical data from a previous period on the screen. POSIM then allows you to adjust it by a percentage (increase/decrease) or override it totally.
      • The previous period is determined by selecting the desired year and the beginning month.
      • Be sure that all of the budget year is in the past and that none of the months used are the current month or forward (because there is no history in those months).
  • Definitions
    • Margin %: The percent of the sale price that is profit. If an item is sold for $10.00 and the profit on that item is $4.00, then the Margin % is 40%. The cost then is 60%.
    • Inventory Turns: A measurement of how many times your inventory has been sold and replaced during a year. It is always expressed for the whole year. If the total cost of sales for a month for a department is $50.00, and if the average value of inventory on hand is $300.00, then the turns are 2. This is how it is calculated:
      • $50.00 X 12= $600.00 to determine the total years cost of goods sold.
      • Then $600.00 / $300.00 = 2 to determine how many times the $300.00 of inventory was sold and replaced during the year.
  • How to Build your Budget
    • Open Inventory·Analyzer >> Window >> Open to Buy.
    • Click the “+” button to create a new card for a specific department.
    • Type the name of the department in the Description field.
    • Select a base year – be sure that the total year will be in the past, not overlapping into the current month and into the future.
    • Select the month that you want the budget to begin with; this is typically January.
    • Select the department(s). Usually, the entries in the Sort On Department field will be the same department name, but it is also possible to group several departments together, for example; “shoes-children” to “shoes-women” (which includes shoes-men)in order to develop a “shoes” OtB budget.
    • Click Calculate. The calculations may take a few minutes to complete; POSIM is sorting through a lot of data to calculate all the information.
    • You may now modify the data for this year’s budget. This can be done by one of the following methods:
      • insert a percent change number below the budget item (3.5=3.5% increase,-4.0=4% decrease)
      • type over the calculated number.
    • Insert any notes that may be helpful in the process (or in reviewing the process throughout the year).
    • You may print the budget worksheet at any time – printing will not change the data. You can send the print job to:
      • a printer
      • a text file so that it can be opened in a spreadsheet program
      • PDF file that can be emailed to a business partner for review.
    • Read the notes and warnings on the screen carefully.
  • Working with Open to Buy
    • Once you have completed the budgeting process, you are ready to begin working with that budget to manage your purchasing. From the Step 1 screen click the “Steps 2 and 3” tab.
    • Note: you can recalculate the “Open to Buy” worksheet by clicking on the “Last Updated” button.
  • Understanding the Open To Buy screen
    • The Red Line: The red line represents the division between completed months and current and future months.
    • Projected and Actual Data: The Budget is displayed as Projected Data. The Actual numbers for months that have past or are in process are displayed in the Actual Data lines.
    • Actual/Projected Receipts: This line represents incoming inventory. Both purchase orders and transfers are tabulated on this line. The numbers on the left of the red line are actual received inventory values. The numbers on the right side of the red line reflect anticipated receipts of inventory based upon processed purchase orders with “Ship On” dates for that month. The current month may be a combination of both actual and anticipated receipts.
      • Note: POSIM determines the anticipated receipt date of purchase orders by using the “Ship Date” on the processed purchase order. If the “Ship Date” is a word like “ASAP” then POSIM will consider it as a current month date.
    • Desired Ending Inventory: The amounts in this row represent the calculated “Desired” ending inventory balance for the month. This amount is calculated using the budgeted projections of sales, margin %, and turns. Example: If the monthly budgeted amounts were: sales of $100.00, Margin % of 60, and turns of 3 then the desired would be calculated as follows.
      • Sales $100.00 – Margin (x60%) $60.00 = Cost of Goods $40.00
      • Annualize CoG (x12) $480.00 / Desired Turns 3 = Desired Inventory $160.00
    • Projected Inventory: This line represents the calculated ending balance of inventory for the month. The calculations start with the last “Actual Number” for the last month that has been completed. These are the calculations used, if we assume that May was the last actual completed month, then:
      • Projected Inventory calculations for June:
        • Last Actual Balance Available from May (-) Projected Cost of Goods Sold June (+) Anticipated Receipts from June (=) Projected Inventory for June
      • Projected Inventory calculations for July:
        • Projected Inventory for June (+) Open to Buy amount for June (-) Projected Cost of Goods Sold for July (+) Anticipated Receipts for July (=) Projected Inventory for July
    • Actual Ending Inventory: This value represents the actual ending balance of inventory for the selected department (s) for that month. It will match with the “On Hand”report for the current month. There is not a value for future months because they have not been completed.
    • Open To Buy: This is the value of inventory that you will need to purchase in the month to meet your goals. It is calculated by simply subtracting “Projected Inventory” from “Desired Inventory”.
      • Desired Inventory – Projected Inventory = Open To Buy
    • How To Use Open To Buy Value:
      • Look at the Open to Buy number. This is the amount of merchandise that POSIM is suggesting that you purchase for that particular month.
      • When a purchase order is placed for a month, it needs to be posted with that month’s date in the shipping date. If an order is given and it is going to be released in multiple months, then you will need to create multiple purchase orders, each with its own items on the purchase order.
      • Fluctuations in the sales volume may cause some months to have negative Open to Buy values. The astute buyer will look at the season as a whole and add all Open to Buy values together and then allocate as seems best. The end result is that the buyer should not buy more than the aggregate value of the OtB value for the season.
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