Open to Buy is the amount you have available to spend on additional stock during a defined trading period. It is one of the most important financial tools in fashion buying because it helps you control how much stock you commit.
Your OTB is driven by four things: what you plan to sell, the stock you already have, what is already on order, and the stock you want to have left at the end of the period.
It is one of the least formally taught areas of buying, which is why many buyers are not confident when it comes to managing it.
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What Open to Buy Actually Controls
Most buyers can tell you what the three letters OTB stand for. They can also confirm that these are probably the most “feared” letters in fashion buying ! However not many can explain exactly where the numbers come from, what assumptions have been made, or how they work to support the business.
Open to buy is not a fixed amount waiting to be spent. Many buyers think it is simply the amount your have left over if you subtract what you spend from your budget.
Spoiler alert: It’s not! It is actually a dynamic calculation ( a changing figure) that moves as your sales, your stock position and your committed orders move. Its important to be clear on that point because it is where most of the confusion starts.
To put it simply the budget is the amount of money the business has made available for you to spend on stock in a specific period, in order to meet a planned sales figure. Spending the full season budget up front is not advisable or sensible. It ties your hands to make any new buying decisions before you have seen any customer reaction to what you bought.
How you plan and split your buying budget over the seasons varies from business to business. Some retailers plan almost the whole season ahead and keep 30% per cent approx open. Others may hold as much as sixty per cent open for in-season reactive buying, which reflects how much faster consumer demand moves than it did a five or even ten years ago. There is no right or wrong approach. What matters is that the split is deliberate and that you know how to use and working with it.
Podcast Thrive in Fashion Buying & Merchandising
Episode 042, What is OTB , why it exists, and How to use it confidently.
Also on this topic:
If open to buy is the part of the job you have been working around rather than working with, the Thrive in Fashion Buying and Merchandising course takes you through the full working calculations with the commercial reasoning behind the numbers. It is for all buyers who want to understand why the number changes, not just what it currently says.
The Open to Buy Formula
The calculations of the numbers are not difficult. The decision and assumptions you make behind the numbers is what takes time for you to learn and build confidence using..
The OTB figure is pulled from the following numbers: Your opening stock figure, plus the stock already ordered or committed figure, minus your sales and markdown figures. The result you get after calculating these is what your ‘open to buy’ amount is.
For Example: Take a mid-market womenswear dress category. You start April with $120,000 of stock already on hand and a further $40,000 is confirmed orders for delivery in April. The Planned sales for April are $200,000. You plan to end the month with $80,000 worth of stock. Your open to buy is $200,000 plus $80,000, minus $120,000, minus $40,000, which leaves $120,000.
That $120,000 is your purchasing capacity for the month. If you spend more than that, then you are “overbought” and you create a cash flow problem for the business no matter how good your product is. On the other hand if you are behind in confirming your orders you start April understocked ( with a larger OTB) against your sales plan. This situation can cost you loss of sales and missed opportunities. This is not a situation you want to find yourself having to explain.
The monthly OTB calculations
The next thing to understand is that each month’s closing stock becomes the next month’s opening stock. When you are reading your spreadsheets, look for these numbers, they should be matching. When you understand this part and see this number moving forward it is what makes the open to buy a changeable monthly number.
For Example: July month closes at $400,000 with of stock , so August opens with $400,000. Subtract August sales of $200,000 and markdowns of $30,000, and add in a planned intake of $150,000, and September opens at $320,000. Can you follow the the method?
Now say your actual sales came in below plan at $180,000 instead of $200,000 and you have not adjusted your intake ( $150,000). Your closing figure will be +$20,000 higher than planned, and that extra amount carries straight into the following month.
If you are not careful your stock holding can build quietly across three or four periods with carry forwards like this. While each month may be a “small” amount it all adds up. If you are not achieving your targeted sales or higher you will end up with a big overstock problem at the end of the season.
Why do Buyers use OTB
Open to buy is sometimes seen as a buying restriction. Once you understand where the numbers come from and how they relate, it makes using and reading OTB spreadsheets clearer and less daunting.
Cash flow is when money physically leaves the business. In a large retail business where you are not seeing physical cash coming in and out this may be harder to appreciate. When you confirm and place an order, this creates a commitment that is due, depending on your payment terms (whether that is 30, 60, 90 or 120 days.) In a large retailer the finance team is managing this closely. In a smaller business the connection between your buying decisions and the bank balance is more immediate and you will see the impact more quickly.
Preparing your buy plan and strategy is key. Before the season starts, you and your merchandiser build a buy plan setting out how much stock is needed, when it needs to arrive, and by category. Once that is signed off it becomes the basis for the open to buy calculation across the season, broken down monthly and then by category.
A buyer can make genuinely good product decisions and still create a problem by front-loading. Spending eighty per cent of the season budget in the first two months leaves months three, four and five without the capacity to react to anything. This become a phasing problem not a product mistake.
The Mistake Most Junior Buyers Make
The most common mistake I have seen junior buyers or sometimes senior buyers too, is treating open to buy as a ‘spending limit’ rather than the planning tool that it is..
For Example; A buyer is told she has $50,000 OTB for June. She goes to a trade show or directly to her supplier, sees product she likes, starts placing orders and keeps a rough mental note of the spend. When she does a calculation how much she has spent finds she is close to it, and still has two key supplier meetings to go. She then ends up cutting short her meeting or leaving products behind that would have been perfect for her range.
Compare that with the buyer who also has $50,000 OTB for June. but goes to the same trade show having already decided how her budget should be distributed. eg, Forty per cent to volume basics, thirty per cent for key items and, thirty per cent for newness or repeats. She knows exactly what she has to spend and what specific products she needs to look for and buy. Same budget, but entirely different approach and level of control.
What Poor OTB Management Costs You
The dreaded monthly OTB meeting is where the bad ( or news) appears !! Once the sales and stock figures for the month are calculated. What the numbers will show are the following;
- No OTB Money tied up in unsold goods, and markdowns are required to clear them. This will impact profits by eroding the margin originally planned.
- Loss of Sales Missed opportunities because the customer bought elsewhere. If a trend like that continues across a season it affects footfall, not just revenue.
- Terminal stock. Old product occupying floor space that newer, faster-selling lines should be holding. It also makes the store read as tired to your customer.
- Broken size curves. The middle sizes sell through, the top and bottom of the range sit, and what is left cannot be sold at full price in any meaningful quantity.
Another thing to be mindful of is inaccurate open to buy data can also cause problems: for example if you are too optimistic with sales assumptions, or the product mix of is wrong, promotions that either over-perform or fall flat, and delays within the critical path that push deliveries into the wrong trading period. A late shipment not only costs you lost sales in the month you had planned but it impacts your stock position for the following months.
How to Build Confidence With Your Numbers
If you are a junior or mid-level buyer who wants to be better at this, there are three practical places to start.
- Understand the calculations, not just the individual numbers. Ask your senior buyer or merchandiser how the planned sales figure was arrived at, what closing stock target is being used, and what assumptions are built in. Most merchandisers are happy to explain this to a buyer.
- Track your spending against your OTB. Some buyers rely on the merchandiser to tell them where they stand. But knowing it yourself , being able to read the data will change the quality of your decision making in supplier meetings.
- Match your orders/ Spend back to the your buy plan. Before you confirm orders, double check the value, quantity etc against your plan. If you are making changes, be clear on what those changes are and what you are cutting out to make room for a new product or increase quantity on an order.
I think of open to buy as a weighing scales, and not the digital kind. The old-fashioned sort that requires balance on both sides. Sales sit on one side, stock on the other, and the work is keeping the two in balance as the trading season is underway. Understanding how to use and work with OTB is complicated because most buyers were never properly taught it. The sooner you can read an OTB sheet competently, the less it is something you dread and instead becomes something you use with expertise..
Related reading
- Fashion Range Planning: How to Maximise Sales and Margin
- Markup vs Margin in Fashion Buying, Explained
- Demand Forecasting in Fashion Buying: A Practical Guide
- Sell-Through Rate: Formula, Benchmarks and What It Tells You
- What Is a Range Review and Why Are They Important?
- Your Guide to Seasonal Planning for Fashion Buyers
- How to Price a Fashion Product: A Buyer’s Guide
- How to Build a Fashion Range in Ten Steps
Some Common OTB questions
OTB stands for open to buy. It is the value of new stock a buyer can commit to for a given trading period after accounting for opening stock, stock already on order, planned sales and the closing stock target. It is a rolling calculation rather than a fixed sum, so the figure changes as sales and deliveries happen throughout the trading season.
The formula is Planned sales plus planned closing stock plus planned markdowns, minus opening stock, minus stock already on order. example: If your April sales are planned at $200,000 with a closing stock target of $80,000, opening stock of $120,000 and $40,000 already on order, the open to buy for April is $120,000.
In most large retailers the merchandiser owns the overall budget and the calculation, and decides what proportion is held open for in-season buying. The strategy behind it is agreed jointly with the buyer, and any reworking is done together. The buyer is expected to know her own position at all times rather than waiting to be told it.
Going over means you have committed money the business has not planned to spend in that period. The immediate effect is on cash flow, because the invoice falls due on your payment terms. The longer effect is on stock. Higher closing stock rolls into the following month and usually ends in markdown, which reduces the margin your category delivers.
It depends on how reactive the business is. Some retailers plan almost the entire season ahead and hold 20 per cent or less open. Others now hold as much as 60 per cent for in-season buying, which requires short lead time suppliers and a supply chain that can deliver at short notice.
