Open-to-buy: how to buy inventory to a budget when cash is tight

Reorder suggestions answer "what do we need?" They don't answer "what can we afford?" For most growing brands, those two questions have different answers several times a year: ahead of peak season, after a slow month, or while waiting for a big wholesale customer to pay. Open-to-buy is the discipline of working out how much you can spend on stock, and then spending it where it protects the most sales.

Key takeaways

• Open-to-buy (OTB) is the amount you can commit to new stock in a period without overshooting your planned inventory.
• OTB = planned sales + planned closing stock − opening stock − stock already on order, all at cost.
• OTB is a budget, not a cash forecast. Check supplier payment terms to see when the money actually leaves.
• When the budget is short, fund products that will stock out before a later order could arrive, and defer the ones with plenty of cover.
• Excess and dead stock eat OTB. Clearing them is one of the fastest ways to free budget.

The open-to-buy formula

For a month, at cost:

OTB = planned sales + planned closing stock − opening stock − on order arriving this month

Planned sales and planned closing stock are what you need. Opening stock and on order are what you already have or have committed to. OTB is the difference.

Worked example

For November, at cost:

OTB = $40,000 + $60,000 − $55,000 − $20,000 = $25,000.

You can commit up to $25,000 of new stock that arrives in November and still end the month at your planned $60,000.

Two notes. First, use cost, not retail, unless your whole plan is at retail. Mixing the two is the most common OTB mistake. Second, the planned closing stock should be the stock you need going into the following month, which for a brand heading into December is usually higher than normal.

Setting planned closing stock

The easiest way to set closing stock is as cover for the next month. If December's planned sales at cost are $50,000 and you want to start December with 1.2 months of cover, planned closing stock for November is 1.2 × $50,000 = $60,000, which is where the figure in the table came from.

Choose the cover multiple from your lead times. If most of your suppliers take six weeks, one month of cover going into a busy month is thin, because anything you order in December won't arrive until it's over. Brands with long lead times usually need to carry more cover into peak, and to place peak orders earlier, which means their OTB for October and November is larger and their OTB for December is close to zero.

Rolling the plan forward three months at a time keeps you honest. If November's OTB looks generous but December's is negative, spending all of November's budget will leave you over-stocked in January.

OTB is not cash

A $25,000 budget doesn't mean $25,000 leaves your account this month. Payment terms decide that. If a supplier takes a 30% deposit with the order and the 70% balance before shipping, a $25,000 order means 0.30 × $25,000 = $7,500 now and 0.70 × $25,000 = $17,500 roughly a month later, when goods are ready to ship.

So check both:

• OTB keeps your stock level on plan.
• A simple cash schedule of deposits and balances by week tells you whether you can pay for it.

If OTB says yes and cash says no, cash wins. Negotiate terms, stagger orders, or reduce the buy.

When needs are bigger than the budget

Here's the usual situation: your reorder suggestions total more than you can spend. Say five products need ordering from suppliers with lead times around a month:

Total: $4,000 + $9,000 + $6,000 + $8,000 + $11,000 = $38,000. Budget: $25,000. Something gives.

Rank by how soon the stockout bites

The question for each line is: if I don't order today, will I run out before stock could arrive?

• A has 12 days of cover and a 30-day lead time. It runs out 30 − 12 = 18 days before even today's order lands. Fund it.
• B has 25 days against 30. It's already going to be short for about 5 days. Fund it.
• C has 40 days against 30, a 10-day margin. Ordering next week would still work, but only just.
• D has 55 days against 21: 55 − 21 = 34 days of slack. It can wait.
• E has 90 days against 30: 60 days of slack. It can definitely wait.

Funding in that order: A ($4,000, running total $4,000), B ($9,000, total $13,000), C ($6,000, total $19,000). That leaves $25,000 − $19,000 = $6,000.

What to do with the remainder

You could spend the $6,000 on 6,000 ÷ $8 = 750 units of D. But D has 34 days of slack, so there's no rush. Better options are often:

• Hold it for the next cycle, when D comes due and something else might be urgent.
• Top up A and B if their suggested quantities were trimmed to fit.
• Buy the stock with the highest margin or revenue at risk, if two products are equally urgent.

Revenue at risk is a useful tie-breaker: a stockout on a $60 product selling 20 a day costs more than one on a $15 product selling 5 a day, even if both have the same days of cover.

Trim cover rather than dropping lines

Another approach is to buy every urgent line, but buy less of each. If your suggestions aim to cover lead time plus a 30-day buffer, cutting the buffer to 15 days shrinks every line, and the next order cycle catches up. This works well with suppliers who accept frequent small orders; it works badly with high minimums or long lead times, where each order needs to last.

Where OTB goes negative

Run OTB by category, not just in total. A category with lots of slow stock can have negative OTB (more stock than its plan) while another category starves. If outerwear is $8,000 over plan and skincare is $6,000 under, the overall number looks fine but skincare is about to stock out.

Negative OTB is a signal to:

• Stop or delay open orders in that category if the supplier allows it.
• Mark down or bundle slow stock to turn it back into cash.
• Move budget to categories that are under plan.

Dead stock is the worst OTB drain: it sits in opening stock month after month, reducing what you can buy, while selling nothing.

A monthly OTB routine

1. Update planned sales for the next three months from your forecast.
2. Set planned closing stock for each month, higher before peak periods.
3. Pull opening stock and on-order from your inventory system.
4. Calculate OTB by category.
5. Rank reorder suggestions by urgency and fund down the list.
6. Check the cash schedule for deposits and balances.
7. Review excess and dead stock, and decide what to clear.

How Stokrio helps

Stokrio's replenishment lets you enter an open-to-buy budget and funds the products most likely to stock out first, with order-by dates and revenue at risk shown on each line. Its inventory reports cover excess and dead stock, inventory aging, open POs, turnover and GMROI, the numbers you need to find budget that's stuck on the shelf. The ranking logic above works just as well in a spreadsheet; the point is to decide on purpose which stockouts you'll accept.