Open to Buy (OTB)

OTB represents the amount of money or budget left for purchasing inventory after accounting for planned sales, planned markdowns, and the desired ending inventory.

Open to Buy (OTB) is a budgeting and planning tool used by retailers to manage their inventory levels. It represents the amount of money or budget left for purchasing inventory after accounting for planned sales, planned markdowns, and the desired ending inventory.

OTB helps retailers avoid overbuying or underbuying inventory by providing a clear financial framework for merchandise planning. It is calculated based on the following formula:

Open to Buy = Planned Ending Inventory + Planned Sales + Planned Markdowns - Beginning Inventory

Here's what each component means:

Planned Ending Inventory: The desired inventory level at the end of the period.
Planned Sales: The forecasted or budgeted sales for the period.
Planned Markdowns: The reductions in the original selling price of products planned for the period.
Beginning Inventory: The actual inventory level at the beginning of the period.

OTB is important because it helps retailers maintain the right inventory levels, ensuring they have enough stock to meet customer demand without tying up too much capital in unsold goods. It also helps in making informed purchasing decisions, managing cash flow, and maximizing profitability. By regularly calculating and adjusting their OTB, retailers can respond to changes in sales trends and market conditions more effectively.