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Planning and purchasing merchandise inventory for a retail business is a difficult endeavor partly because everyone from store associates to vendors all claim if you’ll just buy more so will customers. Unfortunately, this is seldom true. Generally, buying “a little extra” results in excess inventory that will only move with excess markdowns that leave a store dealing with insufficient gross margins and profit. When the same choice of buying a little extra affects all classifications, cash flow suffers and, eventually, bills are in arrears. Now cash flow is in trouble.

There is help. The best inventory planning tool available is an Open-To-Buy. Proper use of a retail Open-To-Buy can improve cash flow, reduce markdowns, improve gross margin, increase overall store profitability, improve customer satisfaction, and get and keep more customers coming into the store. Consider that the top three causes of retail business failure are (3) failure to maintain adequate gross margin, (2) failure to control inventory purchases and (1) failure to produce an adequate cash flow. Each of these items goes back to a failure to follow an Open-To-Buy.

Purchasing merchandise inventory is difficult because retail stores must have merchandise to sell but it has to be the right merchandise. If the wrong items (wrong color, wrong style, wrong fiber) are purchased, the only way to move these merchandise errors is with markdowns. Markdowns decrease profit. Sometimes buyers believe they have a true “deal” and purchase too much of an item or a line. If the sales forecast is $5500 for walking shorts, a “great deal” for $7000 in walking shorts fails to be a great deal if the store fails to sell $7000 in walking shorts. How will you move the additional shorts? Remember, markdowns decrease gross margin and profit.

While markdowns are a necessary part of the retail cycle, excessive markdowns can spell doom. A good Open-To-Buy will track markdown plans and actual markdown data so that you can determine if you are on track for success. Excess markdowns indicate that the sales plan did not make. Perhaps the plan was not realistic, a major weather event changed circumstances or the customer did not like the merchandise presented. If merchandise in excess of plan is presented, it may not move. Similarly, items that fail to please your customers because of an incorrect style or color also do not move as planned. Buyers are balanced on a tightrope of choice vs. need vs. appeal.

The good news is that buyers and owners seldom purchase an entire season of unmovable merchandise so the errors can be absorbed and the store fairs well enough. However, if too many errors are made or the sales fall too far short of plan, there may be major cash flow issues.

The final “nail in the coffin” of any retail store is a lack of cash flow. When merchandise fails to move as planned, markdowns are increased and profits suffer. Eventually, there are not enough funds available to pay bills or salaries. Liquidations, i.e. going out of business sales, are the last efforts to raise funds to make partial or final payoffs to vendors, employees and other bill collectors.

Do not allow this to happen to your business. Use an Open-To-Buy. Our Open-To-Buy is priced with small and mid-sized independent retailers in mind. If your computer system provides an Open-To-Buy but you are not experienced in using it, let us help you learn to use and appreciate your existing system. Protect your business. Plan for success and follow your plan.

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