The Basis of Open To Buy for Retailers
Use a budget of expected expenses (use monthly averages for payroll, rent, utilities, supplies, etc.) combined with planned sales and purchases to create a monthly cash flow budget. Manage your store to that budget by making adjustments to purchases, pricing and payroll based on weekly sale rates. Give yourself visibility to early warnings about cash flow difficulties and take steps to abate them. If you must, consider talking to your banker about unique situations where cash flow shortages are expected (especially prior to holiday or other seasonal inventory build ups.) Ask for a line of credit – the interest on short-term loans will be cheaper than bank overdrafts and late payment penalties.
Balancing Purchases with Cost of Goods Sold (COGS) each month is critical. The most simplistic early warning indicator for cash flow health is making sure that inventory purchased does not exceed Cost of Goods Sold for any given month. Naturally, there are a couple specific times of year when inventories build up in anticipation of seasonal sales. But generally keeping an eye on inventory purchase levels is a smart gauge to measure cash flow. This, at its most basic level is the basis for an “Open to Buy” budget. Striking a balance between capital tied up in inventory and cash freed from that inventory in sales is critical to keeping any retail enterprise afloat.