Do You Track your Open To Buy

[Bob Carter]

I was exchanging emails with a Grumbler and I asked whether they tracked their Open to Buy (Open to Spend) and they did not know what I was asking

So, my questions are a) Do you track such and b) How do you do it?

It's such a simple tool that can easily keep people out of "stale inventory" problems

(Maybe a June Poll?)

[Jay H]

The only inventory that I move enough to monitor that closely is moulding. If I were to monitor initial buys of other items, every season majority of my inventory would be “stale” and my overstock would be mind numbing annually.

I’m sure this is true with many of us as topics like “what else do you carry” comes up so often.

A.) Not formally.
B.) When I’m tired of looking at it or its damaged.

I'm assuming your talking about specific inventory and not catagories like custom frames, name frames, prints, etc.

[Terry Scidmore CPF]

Bob! How about another lesson for those of us who are "business challneged"?

Loved the sliding markup post - it generated a lot of discussion among my framer friends here. Got us all thinking.

Thanks again for your posts - they have helped me look at things from a different perspective.

Thanks to Jim Miller, too - 'cause he always brings more food for thought to the table, as well.

[Richard Darling]

I've read a little about Open to Buy, but have not fully understood it. Maybe I'm thinking too hard? I'd love to understand it better.

I agree with Terry on the sliding markup post. It's got me thinking about a lot of things.

[ERIC]

A) No
B) would love to know how

[johnny]

Years ago we made a huge change from heavy inventory to almost completely just-in-time inventory and haven't looked back. Now that Ohio is phasing out the tax we would pay on inventory it would be a little less costly, but still, I love just-in-time.

For artwork and gifts the overriding condition is what's currently available - great release by a popular artist? New gift item we can be first on the block on? Not a lot of room left to track something like Open to Buy.

[Val]

Okay Bob, I'll bite:

What is Open to Buy?

[Bob Carter]

You guys are killing me. This is one of the first things you should know when establishing any level of Budgeting or Inventory Control and is fundamental in any cash flow predictions

C'mon, somebody step up and tell me that you absolutely know what this means and how you use it

And, I'm not going to tell you how we do it until somebody else does or Tuesday PM whichever comes first

[Doug Gemmell]

www.profitsplus.org (http://www.profitsplus.org) has an Open to Buy calculator formatted in excel.

Haven't used it...haven't seen a need.

I suspect Bob will convince me otherwise!

[Jay H]

Ok, I cheated.

http://www.the-retail-advisor.com/pdf%20files/Are%20You%20Open-to-Buy.pdf

Simply put its an obscure accounting term that few mortals know what it is and fewer know how to use.

I think I have the slightest clue how to make heads or tails in a very simplified state (OTB = Sales+ending inventory - begining inventory) but I still can only think of one season where I could make use of it.

Who knows, maybe I should stick to searching for porn on the internet instead of business terms.

[johnny]

Originally posted by Jay H:
Ok, I cheated.

http://www.the-retail-advisor.com/pdf%20files/Are%20You%20Open-to-Buy.pdf

Simply put its an obscure accounting term that few mortals know what it is and fewer know how to use.

I think I have the slightest clue how to make heads or tails in a very simplified state (OTB = Sales+ending inventory - begining inventory) but I still can only think of one season where I could make use of it.

Who knows, maybe I should stick to searching for porn on the internet instead of business terms. For almost all of what we sell, we order after it's already sold. I suspect many other framers operate much the same. Really, the limits of my OTB calculations extend to looking at a shelf and saying "Oh, sh!t, we need more photo frames. I'm open to ordering more!*" The numbers are inconsequential in the overall scheme of things, because framing constitutes an overwhelming proportion of sales and we don't stock it anymore.


*I hereby freely admit that I've had a few picnic beers and that line was mainly to tease Bob. graemlins/shutup.gif

[Bob Carter]

Okay, Guys-This might be one of those areas where the "theoretical" gets lost in the true world application. Been there recently-don't want to do that again

Real simple, OTB measures your purchases for a given period of time against Sales for same period to ensure that you do not overspend on Inventory

Make a ledger sheet (or Spreadsheet) to do this at home

Establish what your projected Sales are for a period (let's say for Month of June it's $20,000)

Since that is a "retail" number,lets multiply that projected CoG (say 30%)

So we multiply $20K by .30 and get $6000, which for this period is your Open to Spend (Buy). In essence, if you meet your sales goal and you do not exceed the $6,000 purchases (at cost) then you will meet or exceed youir Gross Profit Goals

Now, if you sell by departments, it migh be helpful to set up a column for each department

So,let's assume that you track sales in the following Depts Custom Framing, Photo Fames and Prints.


And, on the first of June you order $300 from vendor A and it's all framing inventory.

List it and subtract $300 from the $6000 leaving $5700 Open to Buy. The next day you order $500 of art, put that in the Prints column and subtract it leaving $5200 and so on.

Now, on the 15th and end of month review your sales projections vs actual and adjust your OTB accordingly. If you are running ahead add that percentage to your total-but if you are running a decrease subtract the corresponding. If you continue to buy for a $20K month, but only sell $15K, you won't meet your Gross Profit goals, you won't attain your proper turnover and you have probably bought yourself some potential old inventory

So, what's it good for?

It tells you if you are buying correctly on a day to day basis. It also highlights that when running increases you may need to adjust your buying to ensure that you have adequate inventory instead of just looking at the display and say "Oops, need more photo frames"

It also tells you (if you track by department) where you may be loading up on inventory in one area, while stil being in "balance" overall. That just means you may be shorting an area where sales may actually be growing

In essence, when done daily, it is a "mental" checkbook that tells you when spending goes awry, but does it before the bills come due. Too often, we spend as there will be plenty of sales tomorrow. And, when those sales don't come tomorrow, the bills will but you don't have the bucks to pay for them

Sound familiar?

It just applys the "buying" brakes a little quicker than when you just run out of money.

It doesn't mean that you quit buying everything, but it does highlight when danger might be around the corner

There are plenty of exceptions and other methods, but this is a simple and easy method that can be done manually easily or on spreadsheet format.

We use it with a few wrinkles assigning different values for departments where we have differing margins

But, if you start it in June, it will help future purchasing

Can't help much for bad buying in month's past, but you have to start somewhere

Let the questions fly before we got off on a tangent

[Baer Charlton]

I think I get it, and THAT in and of itself, is very cool.

Is it overkill if I run this on a month to month leveraged agains the last years sales and YTD?

Or should it be quarterly?

[Bob Carter]

Hey Baer-I think it helps t do it in a monthly basis.

Sales are "projected" (assuming you do a Budget) but for simplicity, if you did $20K June 05 and you are running a 10% increase YTD, then $22K might be logical

That's why we make mid-month corrections to adjust "optimistic (or pessimistic)" projections

It's just another tool to help control what you spend

I must say that I have worked in a vey sophisticated venue that took an 8 week insight an dadjusted OTB Daily by adding the prior day's purchasing and deducted prior day's sales. When you went into the "red" on your buying, you had to have approval to make any future buys.

That embarrassment alone made you a better buyer. But, in essence everytime you "sold" something, theoretically you had dollars to buy something new.

You may need to make some seasonal allowances, though

As I said it's just another tool.

We just feel it's a great 30 day cash flow predictor

[Jim Miller]

Bob, I think Open-To-Buy is a wonderful calculation for more complicated, capital-intensive businesses. I hadn't heard that term in a while, but when I was in the distribution business the managers' quarterly and annual bonuses were tied to OTB and other numbers-game factors.

My frame shop is not a capital-intensive business, it is a labor-intensive business. Every day, I place my finger on the pulse of my little frame shop and decide whether and how much inventory to buy. Of course I buy carefully and keep it somewhat relative to sales, but calculating OTB in my shop might take longer than counting the inventory, for the Sake of Pete.

For little shops like mine, calculating OTB seems a lot like gilding the lily. Truth be told, if I wanted to take advantage of a multi-box-price for my favorite stock mouldings, I wouldn't be the least bit concerned about destroying my OTB numbers for the quarter. I wold make a conscious decision to do that.

Still, it's important to understand the principles of good fiscal management -- even if we don't always apply them. graemlins/faintthud.gif

[Bob Carter]

Jim-You are one of those great operators that truly has "the pulse" thing down; most do not have that skill

The key is understanding the affect of destroying that OTB number in one quarter realizing th epotential gain downstream

But, I know a good friend that never balances his checkbook. He just knows that he puts in more than he takes out and can't understand why I don't

I must be an old school guy that must rely upon controls to keep me in balance

[JFeig]

One thing to remember with operations that use OTB figures religiously, they are for the most part large operations that have lower management, middle management and top management. They all want to hnow what is going on, and have a responsibility to the owners to do things wisely.

As a frame shop, even if we have more than one shop, we have a pulse of what is going on for the most part and can make decisions by ourselves. As Truman said "the buck stops here".... the person placing the order for stock is also the owner. :cool:

[JFeig]

One thing to remember with operations that use OTB figures religiously, they are for the most part large operations that have lower management, middle management and top management. They all want to hnow what is going on, and have a responsibility to the owners to do things wisely.

Originally posted by Jim Miller:


Still, it's important to understand the principles of good fiscal management -- even if we don't always apply them. graemlins/faintthud.gif As a frame shop, even if we have more than one shop, we have a pulse of what is going on for the most part and can make decisions by ourselves. As Truman said "the buck stops here".... the person placing the order for stock is also the owner. :cool:

[Mecianne]

a) no
b) does not apply