What are your business goals in 2017? More sales? More customers? More profit? Maybe you haven’t gotten around to setting goals or perhaps your thoughts are “I’ll do what I do and that will be good enough.” Planning for success requires an honest assessment of current and past performance with a studious look toward the future. Do you have large quantities of merchandise inventory leftover? Everyone has some—broken lots, the occasional unpopular color or style—but if you have a “good selection” of merchandise to move in clearance sales, either you don’t know your customer as well as you thought or you bought too much. Generally too much inventory, i.e. excess inventory, indicates that too much was purchased to begin with.
Today’s retailers have a difficult time because they compete not only with local shops and boutiques, but also with manufacturers and chain stores across the nation thanks to the Internet. I believe one of the most important things a retailer can do to help themselves increase cash flow and profit is to get and use an Open-To-Buy. An Open-To-Buy is a merchandise purchasing plan based on your sales plan. But, an Open-To-Buy is much more than just a merchandise budget. It is a written plan for a more successful future.
The first part of an Open-To-Buy is an examination and development of a realistic sales plan. If your sales have been decreasing the past 2 years by slight percentages and you do not plan to change how you operate, it is not realistic to expect a 5% growth in sales. It is unreasonable to expect sales performance to change if you continue running your business the same way.
Once you have a realistic sales plan written down you are ready to have your Open-To-Buy prepared. When using an Open-To-Buy you will plan Markdowns, Stock Turn Rate, and Gross Profit. A good Open-To-Buy will calculate Stock Turn Rate. Then you can compare your performance to other similar businesses using available industry figures. The important thing about Stock Turn Rate is that it indicates how well your inventory is working for you. If you plan for a stock turn rate of 3.0, it means that the inventory turns three times a year. If a classification has a stock turn rate lower than 1.0 that indicates that at any point in time, there is enough merchandise on hand to meet the next twelve months sales plan. Although there are items in your store that don’t go out of style, such as black socks or handkerchiefs, be sure to avoid stocking merchandise that does not go out of the store.
Merchandise remaining in the store a year or longer risks becoming shop worn, damaged or shabby. The worst thing about merchandise that turns only once a year is that it becomes noticeable to your good customers and although there may be very few items with the lower turns, regular customers will notice the items that hang around. Then they start to wonder what else hangs around. Retail is an industry based on the concept of Last In First Out. Customers want the latest and greatest, not last season’s leftovers.
After these details are planned, (Sales, Markdowns, Stock Turn Rate and Gross Profit) the Open-To-Buy will calculate the optimal amount to have on hand in merchandise inventory. We encourage holding back 20 – 30 percent of the Open-To-Buy for trying in-season buys and new vendors or for accommodating unexpected fads. Some of the new vendors won’t work out but some will be exceptional and you will be happy to have found them . . . if you have money set aside to afford you such opportunity. But, you won’t know if you don’t try. It could provide you with merchandise that allows for a higher initial markup. Usually, the higher initial markup aids in achieving higher profit.
Obviously, errors are made from time to time. There may be political upheaval or societal disasters that redefine consumer priorities. But the smart retailer, who holds some Open-To-Buy back, has a greater ability to weather the storm because they have a plan. The great thing about plans is that usually you have already considered Plan B so you have an idea of what it is.
Maintaining a lean inventory saves storage costs, lowers insurance and tax liabilities and keeps the store looking fresh, spacious and successful. Plus a smaller investment in merchandise inventory means more cash on hand or more cash available to pay off debt. Many retail owners feel that they must have the biggest selection of merchandise the store will hold. They believe that more merchandise equals more sales. Unfortunately, that simply is not true. If it were, why is there so much excess inventory to move at 50% or 75% off—or even 90% off—as many of the major department stores (who are now in trouble) do.
Plan today to increase Profit, Gross Margin and Cash Flow! We want to help you succeed, so check us out on out. Our Open-To-Buy service is priced for nearly every store. Check us out online or give us a call. Let 2017 be your year of amazing
“Making judgments under severe stress is the most difficult thing there is. The more preparation you have prior to the conflict, the more you can do in a critical situation, the better off you will be.”
Bill Walsh, coached the San Francisco 49ers