Open-To-Buy (OTB): Financial Planning for Retail Buying

Every retailer faces the same balancing act: buy too much stock and your cash gets locked up in goods that may end up on the discount rack, but buy too little and you turn customers away empty-handed. Open-To-Buy planning, usually shortened to OTB, is the financial tool that helps buyers walk this tightrope. Instead of ordering on instinct, it gives a clear rupee or unit figure for how much new merchandise you can still purchase in a given period. This article breaks down exactly what OTB is, how to calculate it, how to convert it from retail to cost, and why it sits at the heart of smart buying.

What is open-to-buy (OTB)? 🔗

Open-To-Buy is the difference between the inventory a retailer needs for a period and the inventory it already has or has committed to. In simple terms, it is the budget that remains available for buying fresh stock once you have accounted for everything already in the pipeline. That pipeline includes stock physically in hand, stock in transit from suppliers, and stock on pending purchase orders that have not yet arrived.

OTB works as a budgetary control mechanism that keeps purchasing decisions aligned with financial goals while still maintaining enough inventory to satisfy customer demand. It can be expressed in two ways. The first is in rupees, which tells you how much money you can still spend. The second is in units, which tells you how many physical pieces you can still order. Both views are useful. A value-based figure helps the finance team manage cash, while a unit-based figure helps store teams plan shelf space and assortments.

The open-to-buy formula explained 🔗

The core OTB calculation is a single line of arithmetic that buyers across the world rely on. Expressed at retail value, it reads:

OTB (Retail) = Planned Sales + Planned Markdowns + Planned End of Month Inventory − Planned Beginning of Month Inventory

This is essentially a refined version of the classic planned purchases concept, which is the difference between what a store needs and what it already has on hand.

Breaking down each component 🔗

Planned sales is the revenue you expect to generate in the period, based on past performance, seasonality, and market trends. Planned markdowns is the value of the discounts and price reductions you anticipate, since marked-down goods still leave your inventory but bring in less money. Planned end of month (EOM) inventory is the stock value you want sitting on the shelves when the period closes, ready to support the next period’s early sales. Planned beginning of month (BOM) inventory is the stock value you start the period with. Subtracting the opening stock makes sense because you do not need to buy what you already own.

A worked example in rupees 🔗

Consider a store planning a single month. Suppose it expects Rs. 48,000 in sales, anticipates Rs. 750 in markdowns, wants to close the month with Rs. 152,000 in stock, and begins the month holding Rs. 150,000 in stock. The OTB at retail works out as follows:

Rs. 48,000 + Rs. 750 + Rs. 152,000 − Rs. 150,000 = Rs. 50,750

This means the buyer has Rs. 50,750 of retail value still open to purchase. Anything beyond that figure risks overstocking; anything well below it risks running short. The formula gives the buyer a hard number to anchor decisions, rather than a vague sense of “we probably need more.”

Converting OTB from retail to cost 🔗

The OTB figure above is stated at retail value, which is the price the customer pays. But buyers negotiate with suppliers at cost, so they often need to know how much they can spend at wholesale prices. The conversion uses the initial markup percentage applied to the merchandise.

Initial markup, sometimes called IMU, is the difference between an item’s original retail price and its cost, set when the goods first arrive in the store. It is the markup a retailer hopes to achieve before any reductions kick in, and it must be planned carefully because not all goods sell at full price.

To find OTB at cost, the retail OTB figure is multiplied by the initial markup percentage. Using a 40% markup on our earlier example:

Rs. 50,750 × 40% = Rs. 20,300 OTB at cost

So while the buyer has Rs. 50,750 of selling value open, the actual purchasing budget at supplier prices is Rs. 20,300. Knowing both numbers is important. The retail figure ties back to sales and stock targets, while the cost figure is what the buyer actually commits when placing orders. Shopify’s retail guide similarly shows that an OTB at cost is derived by applying the markup to the retail OTB before any purchase is finalised.

OTB in units versus rupees 🔗

Although value-based OTB is the most common form, unit-based OTB has its own role. When a store’s binding constraint is physical space, such as a fixed planogram or a limited shelf area, counting pieces is more intuitive than counting rupees. Unit OTB tells the store team how many items they can still bring in before the floor is full.

The trade-off is that unit OTB ignores price differences between products. Two hundred units of a low-priced accessory and two hundred units of a premium item occupy the same “unit budget” but carry very different financial weight. For this reason, most planning teams run value-based OTB as the primary measure and keep unit OTB as a supporting view for floor-level decisions.

Why OTB planning matters 🔗

OTB is more than a formula. It is a discipline that protects both customer experience and cash flow. Its benefits cluster around three outcomes.

Preventing overstocking and unplanned markdowns 🔗

Excess stock is expensive in ways that are easy to underestimate. It ties up working capital, increases storage and insurance costs, and raises the risk of goods becoming obsolete. When too much inventory piles up, the usual escape route is heavy discounting, which erodes margins. OTB acts as a ceiling that stops buyers from ordering beyond what sales can realistically absorb, so the store carries fewer goods that eventually need to be marked down.

Avoiding understocking and lost sales 🔗

The opposite problem is just as damaging. A stockout means a customer who wanted to buy walks away, and in a competitive market they may not come back. OTB sets a floor as well as a ceiling by making sure enough budget is reserved to keep popular lines available. By aligning purchases with forecasted demand, retailers keep products on the shelf precisely when shoppers want them.

Budgeting for seasonal and volume discounts 🔗

OTB planning also creates room to act strategically. Festivals, end-of-season sales, and supplier volume deals all require funds to be set aside in advance. A buyer who knows their open budget can hold back capacity for a Diwali or wedding-season surge, or commit to a bulk order that unlocks a better unit price. Without an OTB figure, these opportunities are easy to miss because the budget is already spent on routine reorders.

Crucially, OTB is not a “set it and forget it” exercise. As actual sales come in, the numbers should be revisited so that purchases can be reduced if demand is soft or increased if a line is selling faster than planned. This mid-period course correction is one of the most valuable uses of the tool.

How OTB connects to the wider merchandise plan 🔗

OTB does not work in isolation. It sits at the intersection of the merchandise financial plan and the day-to-day buying process. The financial plan sets the guardrails – sales targets, inventory targets, and margin goals by category – while merchandise financial planning translates company-level financial goals into tactical inventory decisions. OTB then turns those targets into a concrete purchasing budget that buyers can act on.

Inventory turnover is a close partner to OTB. Turnover measures how many times average stock is sold during a period, and accurate turn data feeds directly into how much budget should be available for new buying. A useful rule of thumb from retail planning literature is that total purchases should not exceed 120% of planned sales, which keeps buying ambitions tethered to realistic demand. For high-ticket categories such as electronics, even a modest turnover ratio can be healthy, whereas fast-fashion lines are expected to turn far more frequently.

Putting OTB into practice 🔗

Applying OTB starts with getting realistic inputs. Begin by forecasting sales for the period from historical data and known seasonal patterns. Estimate the markdowns you expect based on past discounting behaviour. Decide the opening and closing stock levels you need to support those sales. Then run the formula to find the retail OTB, and convert it to cost using your initial markup so you know what you can actually commit to suppliers.

Two cautions are worth keeping in mind. First, OTB is less suited to staple items with steady, predictable demand, where simple replenishment rules often work better. Second, the numbers are guidelines, not guarantees. They should be reviewed regularly against real performance and adjusted, because the value of OTB lies in the discipline of planning and revising, not in treating the first calculation as final.

What do you think? If you were managing the buying budget for a clothing store heading into the festive season, would you set your planned end-of-month inventory higher to avoid stockouts, or lower to protect cash flow? And how often do you think a buyer should recalculate OTB during a fast-moving sales period to stay on plan?

References

1. https://www.relexsolutions.com/resources/open-to-buy/
2. https://vidyamitra.inflibnet.ac.in/data-server/eacharya-documents/56b0853a8ae36ca7bfe81449_INFIEP_79/50/ET/79-50-ET-V1-S1__unit_4.pdf
3. https://study.com/academy/lesson/initial-maintained-retail-markup-definition-calculation.html
4. https://www.shopify.com/blog/open-to-buy-plans
5. https://www.toolio.com/post/the-ultimate-guide-to-retail-merchandise-financial-planning
6. https://pressbooks.library.torontomu.ca/popup/chapter/chapter-10-merchandising-inventory-and-logistics/
7. https://plutuseducation.com/blog/inventory-turnover-ratio/