How to Calculate OTB
In retail planning, open-to-buy (OTB) is one of the most important concepts to understand. By calculating your OTB you can ensure maximum profitability and keep your inventory management practices on target. Here are the simple steps to calculating your OTB.
- Determine your planned sales – Based on history and other factors, forecast your sales for the month.
- Determine planned markdowns – Based on your planned discounts and promotions, calculate the amount in dollars of product markdowns for the month.
- Determine your planned end-of-month inventory – How much inventory do you expect to hold at the end of the month?
- Determine your planned beginning-of-month inventory – How much inventory will you have at the beginning of the month?
- Add the first three calculations then subtract beginning-of-month inventory – Let’s say your planned sales for the month of September 2019 is $25,000. Add your planned markdowns (+$1,000) and how much inventory you expect to hold on the last day of the month (let’s say $30,000). Total = $56,000. Now subtract your beginning-of-month inventory ($40,000) = $16,000.
Based on the above calculations, you determine that your OTB at retail is $16,000.
You can also calculate your OTB at cost. This is the OTB based on the price you pay for the products on your shelves. You’ll need to determine your initial markup (IMU) on each product and total your entire inventory markup. If your IMU is 75%, multiply that by your OTB at retail ($16,000). Your OTB at cost is $12,000.
When you create an OTB plan, do so for at least three months out, but try to go out to a year. Make a plan for the three-month mark, six-month mark, and the year mark.
Do You Know Your Inventory Turnover Rate?
Another thing you might want to determine is your inventory turnover rate. Knowing this can also help you in the planning process.
Let’s say you sell $25,000 in products in August 2019. On the last day of August, if you’re holding $30,000 in inventory,
If you’re holding $50,000 in inventory at the end of that time period, then your turnover rate would be .83. You simply divide your sales for the month by the value of the inventory you’re holding.
That’s all for today. Happy open-to-buy planning!