Key Insights
- Open-to-buy (OTB) calculates optimal inventory purchases using the formula: Planned sales + Beginning inventory - Ending inventory = OTB: This measurement helps retailers avoid overstocking and stockouts by determining exactly how much additional inventory to purchase in dollars or units.
- OTB prevents costly inventory mistakes that damage cash flow and brand reputation: Overstocking ties up capital in unsold products requiring deep discounts, while stockouts cause missed sales opportunities and customer dissatisfaction during peak seasons.
- Retailers with many SKUs benefit most from open-to-buy planning: Clothing stores and trend-based businesses gain the most value, while grocery stores with staple items and brands using limited-edition drops find OTB less relevant.
- Accurate OTB requires current financial data and inventory turnover tracking: Retailers must maintain updated records of sales, inventory levels, and turnover rates in spreadsheets or integrated tools to feed the formula reliable information.
- OTB calculation frequency matches inventory replenishment cycles: Businesses ordering every two weeks calculate OTB biweekly, while quarterly buyers calculate it every three months to align with their purchasing patterns.
New businesses might succeed or fail based on their ability to correctly forecast how much inventory their store needs. A good balance of inventory can prevent headaches like unsold stock or selling out of products during a key shopping season. Open-to-buy, a framework for forecasting how much inventory a store needs on hand, can help retailers plan with confidence.
Following the open-to-buy process can protect shop owners during unexpected slow seasons, helping you build a more resilient retail business that can predict what inventory it needs, no more, no less. That means fewer wasted products and more revenue.
What is open-to-buy?
Open-to-buy (OTB) is a measurement that helps you avoid ordering too much or too little inventory. The Open-to-buy formula assesses the amount of inventory you currently have on hand, incoming inventory, and anticipated sales to calculate how much more you need to buy, which can also be influenced by a brand's minimum order quantity (MOQ). A store's OTB can be measured in dollars or units, but dollars might be a better metric to start with since currency is less variable than units. You can use OTB to pinpoint the quantity you need of an individual product or to manage and plan inventory for your entire store.
Why open-to-buy matters for retailers
You don't want to find yourself at the end of the season with 100 wool blankets in your back room that you haven't been able to sell. That means you used too much of your limited cash on inventory, cash that could have been invested in other areas of your business. And now that you have excess inventory, you'll likely need to mark them down to 30% off and sell them at a loss just to clear your inventory. If you've worked hard to brand your blankets as luxury items, your brand reputation could be damaged by such deep discounts. (Some luxury brands will even go so far as to destroy excess inventory because discounts go against their brand's image.) Too much inventory can open you up to a range of issues that go far beyond simply having a crowded back room.
But you also don't want the opposite, that feeling of regret when your best-selling palo santo candles completely sell out the week before Black Friday. That means that you might miss critical sales goals, so it's essential to fine-tune your inventory strategy to keep your business profitable. Additionally, your customers' satisfaction will plummet when they realize you don't have what they want, and they may move on to another brand instead of building loyalty with yours.
An open-to-buy strategy prevents both overstocking and stockouts, two common problems that can negatively affect a retail business's bottom line. By forecasting inventory needs precisely, retailers can improve cash flow and avoid tying up too much capital in unsold products.
How to calculate open-to-buy: the OTB formula
The open-to-buy formula helps you calculate the right amount of inventory to purchase by factoring in your planned sales, beginning inventory, and ending inventory. This simple yet effective strategy helps you avoid both excess inventory and lost sales opportunities.
The formula for open-to-buy is: Planned sales + Beginning inventory – Ending inventory = OTB.
The formula for open-to-buy is: Planned sales + Beginning inventory – Ending inventory = OTB.
The formula for open-to-buy is: Planned sales + Beginning inventory – Ending inventory = OTB.
As we mentioned before, you can measure this in units or dollars, but for this example, we'll measure in dollars. In order to calculate OTB, you need to collect several pieces of information. First is your planned sales, or how much you anticipate selling during a given period, which you can inform with resources like the 2026 Faire Forecast. You can base this on your sales data from previous months. Second is your inventory level at the beginning of the month, and third is your inventory level at the end of the month.
This is the most basic formula for open-to-buy and may shift depending on your business. Do you have a major sale planned for the upcoming season? Then you should add those markdowns to your planned sales. For example, if your beginning inventory is $60,000, your planned sales are $30,000, your markdowns are $700, and your end-of-month inventory is $50,000, then your OTB is $40,700.
How often should you calculate open-to-buy?
The open-to-buy formula can be used at any time interval that's best for your business and will depend on how often you tend to need more inventory. Maybe you have a high inventory turnover and replenish stock every two weeks. Then you should calculate OTB on a biweekly basis. If you order inventory on a quarterly basis, then you should calculate open-to-buy only every three months.
Which retailers should use open-to-buy?
Open-to-buy can be useful for retailers across industries when it comes to forecasting inventory needs. But depending on your type of business, open-to-buy may not be as relevant. If you're a grocery store that sells staple items, then OTB isn't as useful. People will always buy the same amount of certain things, like flour or rice, every week.
Another segment of retailers who might not use OTB are those who specialize in limited-edition drops that are intended to completely sell out. For example, a popular streetwear company like Supreme or Off-White may do a special release without any warning to maintain hype and exclusivity around their brand. For brands that use sudden product drops like this, OTB would be difficult to calculate and not worth the hassle.
Most often, an open-to-buy strategy is best for shops with many SKUs, like a clothing retailer that keeps up with the latest buying trends. With many SKUs, an OTB plan helps you stay organized and ensure you have the right products on the shelves, which is the first step to effective retail merchandising.
Tips for building an accurate open-to-buy plan
1. Track inventory turnover
Inventory turnover is the rate at which you can sell products to customers. It will tell you if a SKU is selling quickly or no longer in demand. If you have an inventory turnover rate that is very high, meaning you sell through inventory quickly, then your open-to-buy amount will be larger than a brand with low turnover.
2. Keep your financial data current
For open-to-buy formulas to work, you need to feed them accurate data, which is why tracking your retail KPIs is so important. If you have poor recordkeeping, then your OTB will be inaccurate, leading to costly mistakes. You should keep all the information you need (planned sales, beginning inventory, ending inventory, and planned markdowns) in a regularly updated spreadsheet or use an integrated tool like the Shopify POS integration to simplify inventory management.
3. Stay flexible when conditions change
Plans are important, but plans should also be flexible to change. Let's say you know there's a supply chain disruption in your niche or that your preferred wholesale vendor is going out of business. Then it may be difficult to source the organic cotton dresses you need next season. You might increase your open-to-buy to span three months instead of one to avoid selling out of your bestseller.
Frequently asked questions
What is an example of open-to-buy in retail?
Say your beginning inventory is $60,000, your planned sales are $30,000, your markdowns are $700, and your end-of-month inventory is $50,000. Using the formula (Planned sales + Beginning inventory – Ending inventory = OTB), your open-to-buy would be $40,700. This tells you how much additional inventory you can purchase for that period.
What does a negative open-to-buy mean?
A negative OTB means you already have more inventory on hand than you need for your planned sales. This signals that you should hold off on new purchases until you sell through some of your existing stock. It's a common situation after a slow sales period or if you over-ordered in a previous cycle.
How is open-to-buy different from a regular buying budget?
A regular buying budget is a fixed amount you've set aside for inventory purchases. Open-to-buy is more dynamic because it factors in what you already have, what's coming in, and what you expect to sell. OTB adjusts based on real inventory levels, while a static budget doesn't account for those changes.
Can I calculate open-to-buy in a spreadsheet?
Yes, a simple spreadsheet works well for tracking OTB. Create columns for planned sales, beginning inventory, ending inventory, and planned markdowns. Set up a formula to calculate your OTB automatically, and update the numbers at the start of each buying period.
