Open-to-Buy in Retail: Process, Calculation and Challenges

Open-to-buy (OTB) is an inventory budgeting strategy that determines exactly how much merchandise a retailer can purchase over a specific period to meet forecasted sales targets without overstocking. When you are scaling a multi-location business, relying on gut feelings for your purchasing budget usually leads to tied-up cash and dead stock.

Let’s break down exactly how to calculate your OTB budget, the variables you need to track, and how to build a purchasing plan that protects your profit margins. We’ll go over:

What is open-to-buy (OTB) in retail?

Open-to-buy (OTB) is an inventory budgeting framework that determines exactly how much merchandise a retailer can purchase over a specific period to meet forecasted sales targets without overstocking. You can think of it as a financial boundary to help you manage inventory, prevent overstocking or understocking and optimize cash flow. By balancing planned sales, desired stock levels and existing inventory, OTB ensures you have enough stock to meet demand without tying up excessive capital.

When you run a growing business, managing cash flow becomes a daily balancing act. You want to have enough products on the floor to keep customers happy, yet you want to avoid a backroom full of unsold goods. OTB provides a mathematical limit for your purchasing decisions. Instead of guessing how much to buy for the upcoming season, you use your historical data to create a precise purchasing budget.

Implementing an OTB framework helps you achieve a few specific goals:

• Financial control: It prevents you from spending cash you do not have.
• Inventory balance: It keeps your stockroom organized and your sales floor full.
• Strategic growth: It provides a roadmap for scaling your business sustainably.

Open-to-buy vs inventory planning vs reorder point (ROP)

You might be wondering how OTB fits into your broader retail operations. While people often use the terms interchangeably, they serve distinct purposes in your day-to-day workflows. Let’s look at how they differ.

OTB vs inventory planning

Inventory planning is the overarching framework that dictates what products you carry, how they are priced and where they are stored. OTB is a specific financial subset of that broader plan. It gives you the exact dollar amount or unit count you have available to spend right now.

For example, your inventory plan might dictate that you will expand your footwear category next year. Your OTB calculation will tell you exactly how many dollars you can allocate to that footwear expansion this month.

OTB vs reorder point (ROP)

A reorder point (ROP) triggers a specific action for an individual product. It tells you exactly when stock is low enough to order more. Meanwhile, OTB looks at the big picture, giving you a budget for a category or department over a set timeframe.

ROP is highly tactical and item-specific. If you sell white t-shirts, the ROP tells you to order more when you drop below 20 shirts. OTB is strategic, telling you that you have $5,000 to spend on all apparel for the month of June. You can automate your ROP within your POS system to maintain baseline stock levels, while OTB requires strategic forecasting to allocate funds for new collections.

When should retailers use OTB?

You will typically use OTB planning when preparing for upcoming seasons, managing monthly budgets or navigating periods of rapid growth. It is especially critical for multi-location retailers who allocate purchasing dollars across different stores without draining their working capital.

If you operate an ecommerce site alongside a brick-and-mortar store, OTB helps you split your budget effectively between channels. You can use it to ensure neither channel runs dry during peak shopping events.

Key components of open-to-buy in retail

To calculate your budget accurately, you rely on a few core metrics. Let’s look at the variables that make up your OTB framework.

Beginning inventory

This is the total value or unit count of the stock you have on hand at the start of your planning period. Keeping your inventory management on point is crucial here, as a miscount will throw off your entire budget. This includes everything on the sales floor, in the backroom and in any off-site warehouses.

Pro tip: Accurate open-to-buy planning starts with accurate inventory data. With Lightspeed’s inventory management tools, you can track stock levels across every store and sales channel in real time, set reorder points and low-stock alerts, and monitor inventory movements from a single platform. That means less time spent reconciling inventory and more confidence that your OTB calculations reflect what’s actually on your shelves.

Planned sales

Planned sales represent the revenue you expect to generate during the month or season. You base this figure on historical data, market trends and expected retail foot traffic. Forecasting sales requires a mix of art and science. You look at what you sold during the same period last year, then adjust for current growth rates and upcoming promotions.

Planned purchases (receipts)

Planned purchases are the goods covered by existing purchase orders that are scheduled to arrive during the period. You factor incoming orders in so you don’t accidentally double-order merchandise. Tracking open orders accurately prevents you from tying up cash in duplicate inventory.

Planned ending inventory

Planned ending inventory is the amount of stock you want to have left over at the end of the month to transition smoothly into the next period. It acts as your safety stock buffer against unexpected demand spikes. A common rule of thumb is to set your ending inventory to match the projected sales of the upcoming month, ensuring a seamless transition.

Open-to-buy formula (with explanation)

The open to buy formula is straightforward once you have your data organized. You can calculate the budget in units or retail dollars.

The core formula: OTB = (Planned sales + Planned markdowns + Planned ending inventory) – (Beginning inventory + Planned purchases).

First, you add up everything you expect to sell, discount and keep in stock by the end of the month. Then, you subtract the inventory you already have and the orders already on their way. The resulting number is your open to buy budget.

You might be thinking about how markdowns fit into this equation. When you mark down an item, it loses retail value. To maintain your overall inventory value target, you have to purchase additional goods to replace the value lost to that markdown.

It is also important to distinguish between calculating this at retail value versus cost value. OTB at retail uses the final selling price of the goods. To find your OTB at cost—the actual amount you will pay your vendors—you multiply your retail OTB by your cost of goods sold (COGS) percentage.

How to calculate open to buy (step-by-step example)

Let’s put the formula into practice with a real-world scenario. Imagine you run a growing apparel store and want to calculate your OTB for the month of October.

Using the formula, you first calculate your total inventory requirements. You add $50,000 (sales) + $2,000 (markdowns) + $30,000 (ending inventory) to get $82,000. Next, calculate your available stock by adding $40,000 (beginning inventory) + $15,000 (on order) to get $55,000.

Finally, subtract your available stock from your total inventory requirements. Your OTB is $27,000, meaning you have exactly that much budget to spend on new inventory for October. If the final number were negative, it would mean you are overstocked and can hold off on buying.

Let’s say your average markup is 50%. To find your OTB at cost, you would multiply the $27,000 retail OTB by 50%. This means you have $13,500 in actual cash to spend with your wholesalers.

Benefits of open-to-buy for retailers

Implementing a structured OTB plan transforms how you run your business. Here is how the framework directly impacts your day-to-day operations.

Prevent overstocking and dead stock

Accumulating surplus and overstock inventory ties up your capital and clutters your stockroom. OTB gives you a strict limit, ensuring you only buy what you can realistically sell. Dead stock is one of the biggest drains on retail profitability. By adhering to your OTB budget, you prevent the accumulation of items that will eventually require deep discounts to move.

Avoid stockouts and lost sales

On the flip side, running out of popular items frustrates customers and hurts your bottom line. A solid OTB plan guarantees you have enough budget allocated to keep your bestsellers on the shelves. When you pace your buying correctly, you always have funds available to replenish high-demand products.

Improve cash flow management

Cash is the lifeblood of any growing retail business. By pacing your purchases, you keep cash available for payroll, marketing and unexpected expenses. Instead of spending your entire quarterly budget in month one, OTB helps you spread your capital out. This steady approach prevents cash flow bottlenecks and keeps your business agile.

Enable data-driven buying decisions

Gut feelings only get you so far in retail. OTB forces you to look at the numbers, making your purchasing strategy objective and measurable. When a vendor offers you a bulk discount, you can check your OTB to see if you actually have the budget to absorb the extra inventory.

Case in point: Boutique Chaussures Shawville Shoes rebuilt its inventory strategy using Lightspeed’s sales and inventory insights after purchasing the business with very little historical data.

By relying on product performance data instead of instinct, the retailer doubled the size of the business, identified slow-moving inventory using a 90-day aging formula and shifted inventory investments toward high-demand categories.

As owner Stephane Landry explains: “It’s all a simple click away for us to find out how we are doing as a business. Because as a small business owner, you doubt yourself. And the system is there to confirm what’s going on. Luckily for me, it’s reassured me more than anything that we were doing the right things.”

Adapt to changing market trends

Consumer preferences can shift overnight. Leaving a portion of your OTB budget unspent allows you to quickly pivot and invest in sudden trends mid-season. If a specific style goes viral on social media, having open budget means you can place an immediate order to capitalize on the hype.

How open-to-buy improves retail profitability

Profitability isn’t just about selling more; it is about managing your costs efficiently. OTB directly protects your profit margins by reducing the requirement for steep markdowns on unsold goods.

When you buy the right amount of stock, your inventory turnover rate improves. This means products achieve a stronger sell-through rate, spending less time on shelves and more time generating revenue. A higher turnover rate directly correlates with a healthier bottom line.

Furthermore, leveraging retail analytics alongside your OTB plan helps you identify high-margin categories. You can then confidently allocate more of your budget to the products that drive the highest return on investment.

Step by step process for open to buy planning

Ready to build your own plan? Follow the steps below to create a dynamic purchasing strategy.

Forecast sales for the period

Start by predicting your revenue for the upcoming month or season. Look at your historical retail sales data, factor in seasonal trends and account for any planned marketing campaigns. If you are planning for November, look at last November’s sales. Then, adjust that number based on your current year-over-year growth rate and any new product launches.

Set inventory targets

Determine how much stock you want to start and end the period with. Your ending inventory target ensures your store remains visually appealing and ready for the following month. You never want a customer to walk into a sparse store on the first of the month.

Calculate open-to-buy (OTB)

Plug your forecasted numbers into the OTB formula. This will give you your baseline purchasing budget in either retail dollars or units. You can calculate this at the store level, or break it down further by department to give your buyers specific budgets.

Create buying plan

Use assortment planning to break down your total OTB budget by department, category or even specific product lines. This granular approach ensures your buyers know exactly where to allocate funds. If your total OTB is $50,000, you might allocate $20,000 to apparel, $15,000 to footwear and $15,000 to accessories based on historical performance.

Pro tip: Once you’ve determined what to buy, Lightspeed Wholesale helps you put your buying plan into action. Browse millions of products from thousands of brands, create purchase orders directly from your POS and sync product information into your inventory automatically. With wholesale buying, inventory management and selling connected in one platform, you can reduce manual work, get new products to the sales floor faster and spend more time optimizing your assortment instead of managing spreadsheets.

Monitor and adjust the OTB

Your plan is not set in stone. Review your actual sales against your forecast weekly or monthly, and adjust your remaining OTB budget to reflect real-time performance. If sales are pacing 10% higher than expected, you can increase your OTB to capture the extra demand. Conversely, if sales are slow, you can freeze purchasing to protect your cash flow.

Challenges in open-to-buy planning

While OTB is incredibly powerful, it does come with a few hurdles. Here are the most common pitfalls and how to navigate them.

Data inaccuracy

If your beginning inventory numbers are wrong, your entire OTB calculation will be flawed. Conducting regular cycle counts and using a reliable POS System for retail ensures your data is always accurate. Manual data entry often leads to typos and miscounts. An automated system removes human error from the equation, giving you a reliable foundation for your financial planning.

Another point for having accurate inventory data? It doesn’t just improve OTB planning—it saves hours of operational work.

For instance, when Teskey’s Saddle Shop modernized its inventory system, the business reduced the time spent managing inventory by 75% while gaining real-time inventory visibility across the business. As Jordan Cooper, IT Manager, explains: “With Lightspeed, we have an inventory that is up to date and accurate, which helps everything go smoother.”

Market volatility

Unexpected economic shifts or sudden viral trends can render your initial forecasts obsolete. To combat market volatility, keep your OTB flexible and avoid spending your entire budget upfront. Many successful retailers hold back 10% to 20% of their OTB budget to act as a buffer for unexpected changes in demand.

Integration with other retail systems

Manually pulling data from disconnected sales, inventory and accounting platforms is tedious and prone to errors. Upgrading to a unified commerce platform automates data syncing, making OTB planning seamless. When your ecommerce platform and physical store POS talk to each other, your OTB calculations reflect your true omnichannel reality.

Talk to an expert to learn how Lightspeed can help grow your business.

FAQs on open-to-buy in retail

What is the best way to set up an OTB system?

The most effective way to set up an OTB system is by integrating it directly into your POS and inventory management software. This automates data collection and ensures your calculations are based on real-time sales and stock levels.

How often should OTB be adjusted?

You will want to review and adjust your OTB plan at least once a month, though weekly check-ins are ideal for fast-moving categories. Frequent adjustments allow you to react quickly if sales are pacing ahead of or behind your forecasts.

What are the risks of not using OTB in retail?

Without an OTB plan, you risk tying up your working capital in excess inventory that eventually requires margin-killing markdowns. You also increase the likelihood of stockouts on popular items because your purchasing budget was spent elsewhere.

How does OTB affect profitability?

OTB protects profitability by ensuring you only purchase what you can sell, which minimizes holding costs and dead stock. It also improves inventory turnover, allowing you to reinvest cash into high-performing products faster.

Difference between OTB at retail and OTB at cost?

OTB at retail calculates your purchasing budget based on the final selling price of the merchandise. OTB at cost calculates the actual wholesale dollar amount you will pay your suppliers, which is determined by applying your initial markup percentage to the retail OTB.