Open to buy: the budget behind your next order
Open to buy planning is how retailers work out how much money is still free to spend on stock in a given period, usually a month, usually per category. It answers a different question from a reorder point: not when to order, but whether the budget is there to order at all.
What open to buy means
Open to buy is the value of stock you can still commit to in a planning period. It counts the stock you already hold and the orders you have already placed against the plan for that period. It is a budget, held at cost, for a window of time.
The formula is plain arithmetic:
- Open to buy = planned closing stock + planned sales for the period, minus stock on hand, minus stock already on order
Every figure is at cost, not retail, unless you deliberately plan the whole thing at retail and keep it consistent. Mixing the two is the most common way the number goes wrong.
Two of the four inputs are decisions, not data. Planned closing stock is the cover you want on the shelf the day the period ends. Planned sales is your forecast. The other two, stock on hand and stock on order, you should be able to read off your records today.
A month of open to buy, worked through
| Line | This month | Where the number comes from |
|---|---|---|
| Planned closing stock | $12,000 at cost | The cover you want on the shelf on the last day of the month |
| Planned sales for the month | $9,000 at cost | Your forecast for the month, costed, not priced |
| Stock on hand | $14,000 at cost | What is in the warehouse today |
| Stock already on order | $3,000 at cost | Purchase orders placed but not yet received |
| Open to buy | $4,000 | 12,000 plus 9,000, minus 14,000, minus 3,000 |
How a small store actually uses it
The figures above are an illustration, not a benchmark. The method is what carries over.
Four thousand dollars is the cheque you can write this month without breaking the plan. That changes the conversation with a supplier. It also changes what you do when three SKUs all hit their reorder point in the same week and the suggested quantities add up to six thousand dollars. You are now ranking, not just reordering.
Where the number goes wrong
- Stock on order is forgotten. A purchase order placed six weeks ago for goods still on a boat is already spent money. Leave it out and your open to buy looks generous twice.
- Planned closing stock is set by feel. If you want thirty days of cover at the end of the month, derive it from your own velocity rather than last year's closing figure.
- One number for the whole store. Candles and candle trays do not compete for the same shelf, but at store level they compete for the same cash. Category level is usually the grain worth planning at, because that is where buying decisions actually compete; SKU level is too fine to plan a budget at.
- A negative result is ignored. Negative open to buy is information: you are over-bought for the period. The answer is usually to delay an order, not to delete the number.
Open to buy and reorder points disagree on purpose
A reorder point is a timing signal for one SKU. Open to buy is a spending ceiling for a period. When the signals conflict, the ceiling caps the total and your own SKU ranking decides who gets the money. Starving a fast seller to top up a slow one is the expensive version of that decision.
Related terms
Open to buy sits on top of several numbers that are defined elsewhere in this glossary.
- Reorder point. The stock level that triggers an order for a single SKU. Open to buy decides whether you can afford to act on it.
- Sales velocity. Units per day. It drives your planned sales line, and the window you pick changes the figure.
- Days of inventory on hand. How long current stock lasts at current velocity. Useful for setting planned closing stock honestly.
- Safety stock. The buffer you hold against demand and lead time varying. It sits inside planned closing stock and inside your reorder point.
- Inventory carrying cost. What holding stock costs you per year. It is the argument against setting planned closing stock high just to feel safe.
- Minimum order quantity. A supplier's floor can push one line over your open to buy on its own.
- ABC analysis. The ranking you reach for when the budget is smaller than the list of SKUs asking for it.
- Dead stock. Money already spent that will not come back as sales. It shows up as stock on hand, inflating what you think you hold.
Questions
What is the open to buy formula?
Planned closing stock plus planned sales for the period, minus stock on hand, minus stock already on order. Keep every figure at cost, and count purchase orders you have placed but not received as spent.
Is open to buy calculated at cost or at retail?
Either, as long as you are consistent across all four inputs. Smaller stores usually plan at cost, because that is the figure the cheque to the supplier is written in. Planning sales at retail and stock at cost is what produces a wildly flattering budget.
How often should a small store redo it?
Monthly fits most buying calendars, with a mid-month look if a large order lands or a hero SKU moves faster than forecast. The point of the cadence is that stock on order changes every time you place an order.
Does open to buy replace reorder points?
No. They answer different questions. The reorder point tells you a SKU needs ordering now, given its velocity and its supplier lead time. Open to buy tells you how much you can commit this period in total. You need both, and you need a ranking for the weeks they disagree.
Can open to buy be negative?
Yes, and it is worth knowing when it is. A negative figure means the stock you hold plus the stock on order already exceeds what the period's plan calls for. The usual response is to push an order back rather than cancel the plan.
What do I do when the reorder list adds up to more than the budget?
Rank before you cut. Order the list by how much each SKU earns you and how soon it runs out, fund the top of the list in full, and push the tail into next period. Trimming every line by a third usually means every line is short.