What it means
Open to Buy, often abbreviated as OTB, is a crucial financial planning tool for retail and wholesale businesses. Put simply, it acts as a budget for buying goods.
Managing inventory is one of the biggest challenges for business owners because having too much stock ties up precious cash, while having too little leads to lost sales and disappointed customers. OTB calculations bridge this gap by looking at what you plan to sell, what you currently have on the shelves, and what is already ordered.
To calculate OTB, you start with your planned sales for a period, add the stock you need to have left over at the end of that period, and subtract the inventory you already own. You also subtract any goods you have already ordered that have not arrived yet.
This calculation tells you exactly how much budget remains for new purchases. In practice, OTB is reviewed weekly or monthly.
If a product line sells much faster than expected, your OTB will increase, giving you the green light to buy more. Conversely, if sales slump, your OTB will shrink to zero, stopping you from buying stock you cannot sell.
This dynamic approach keeps your cash flow healthy and your storeroom manageable. For non-finance managers, understanding OTB means you can make better purchasing decisions without risking the financial health of the business.
It stops emotional buying based on what looks nice in a catalogue and replaces it with data-driven purchasing based on actual customer demand.
In practice
Real-world examples.
Example
A boutique clothing shop calculates it needs £15,000 worth of new winter coats for November. After accounting for existing stock and unfulfilled orders, the manager has an Open to Buy budget of £6,000 to spend at the upcoming trade fair.
Example
An independent bookshop plans for £10,000 in sales for May and wants £4,000 in closing stock. Subtracting current inventory of £5,000 and incoming orders of £2,000 leaves an Open to Buy budget of £7,000 for new titles.
Example
A hardware store manager checks their plumbing supplies budget and finds the Open to Buy figure is negative £1,500. This means they have over-ordered, and they must pause all new purchases until existing stock sells.
Think of it
“Open to Buy is like your weekly grocery budget. You check what food is already in your fridge, estimate what you will eat this week, and only spend the remaining cash on new items so nothing goes to waste.
Formula
Calculation
Open to Buy = Planned Sales + Planned Ending Inventory + Planned Markdowns - Planned Beginning Inventory - Inventory on Order. For example, if Planned Sales are £10,000, Planned Ending Inventory is £5,000, Planned Markdowns are £500, Beginning Inventory is £4,000, and Orders are £2,000, the calculation is: 10,000 + 5,000 + 500 - 4,000 - 2,000 = £9,500 Open to Buy.Case study
Seen in the real world.
GreenEarth Gardening, a growing independent garden centre, struggled with cash flow because the managers bought plants and tools based on guesswork rather than sales data. During spring, they spent heavily on decorative pots, only to find customers wanted gardening tools instead. This left them with overflowing storerooms and no cash to buy the popular tools.
The owner decided to introduce a formal Open to Buy process. For the summer season, they calculated planned sales of £40,000, a desired ending stock of £10,000, and accounted for £8,000 of stock already in the warehouse and £5,000 in pending orders. This gave them an Open to Buy budget of £37,000 for new summer goods.
Armed with this clear figure, the buying team split the £37,000 budget accurately across soil, seating, and barbecue equipment based on previous year trends. When barbecue sales spiked in June, they checked their updated OTB and found a small buffer of £3,000 to order more grills. By autumn, GreenEarth increased their profit margins by 15 percent, reduced clearance discounting by half, and maintained a healthy cash balance throughout the year.
Watch out
Common mistakes.
- Treating Open to Buy as a static figure and failing to update it when actual sales differ from forecasts.
- Forgetting to include stock that has been ordered but not yet delivered in the calculation.
- Confusing gross profit with available purchasing cash.
Questions
People also ask.
How often should Open to Buy be calculated?
Most retailers calculate and review their Open to Buy budget monthly, though fast-fashion or high-turnover stores may do it weekly.
What happens if my Open to Buy is negative?
A negative OTB means you have over-committed and ordered more stock than your sales plan justifies. You should pause new purchases immediately.
Can service businesses use Open to Buy?
No, OTB is specifically designed for retail, wholesale, and manufacturing businesses that manage physical inventory for resale.
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