Creating an open-to-buy isn’t difficult, but it is time consuming. It is also essential. A monthly open-to-buy acts as the foundation for disciplined purchasing.
STEP 1 One of the most important parts of an open-to-buy is the projected sales for the month by department. Remove all repair and services revenue from the equation. Also remove hold-buying revenue.
ASK YOURSELF: What did I achieve in sales, average sale, units sold and gross margin this year? Calculate what you WANT to achieve (either increase or decrease) for each of these metrics.
STEP 2 With total sales objectives for next year, populate a sales plan or construct a simple Excel spreadsheet and break it down by month, based on the percentage sold last year.
STEP 3 Convert monthly sales objective into cost using gross margin objective.
STEP 4 Allocate the sales at cost to each department (or collections/programs if that is how you analyze your inventory), again based on the sales distribution of last year. This is your opportunity to “massage” the numbers. Do you want to grow a department? Do you need to pull down a loose diamond department because of special-order diamonds?
STEP 5 The second number to input into your spreadsheet is inventory on-hand, at cost, at the end of the prior month. Including consignments and memo is optional, but recommended. Your consignments should be working for you, not just taking up space.
STEP 6 Run an on-order report at cost by department and add to your on-hand number — this is your total stock.
STEP 7 The difference between your projected cost of sales and your total stock is your preliminary open-to-buy.
STEP 8 There are deductions from the preliminary open-to-buy numbers:
- Projected special orders
- Projected sales of consignment and memo
- Projected trade-ins
- Projected estate pieces from gold buying
- Projected allocation of funds to never-outs, fast sellers, or advertised product
- And some additions to preliminary open-to-buy numbers:
- Pending return to vendors
- Pending scrapping of stock
- (There are other miscellaneous inventory adjustments that can go either way, and if significant, they should be taken into account.)
Congratulations! You now have your actual open-to-buy for new purchases.