What is an Open-to-Buy (OTB) Plan? A Guide to Smarter Retail Inventory Management

So when you come to restock, if you’re looking to free up some space and some cash, keep shrinkage to a minimum, and find a fresh balance in your business, an OTB (Open-to-Buy) plan could be the way to go. Not sure what this means? Don’t worry! We’re giving you the 101 today. We’ll explain:

• What open-to-buy means in retail

• How to enact an open-to-buy plan

• When to use an open-to-buy plan

• Pros and cons of open-to-buy
  

If you want to remedy your inventory ailments, an OTB plan could be your route to smarter inventory management in retail. So let’s get straight into it!

What open-to-buy (OTB) means in retail

As much as OTB focuses on inventory, ultimately, it’s a financial planning tool which determines how much stock they want to purchase in a certain period of time. OTB aligns inventory with sales forecasts and budget to define the amount of money available for purchasing new inventory after considering what’s currently in stock and expected sales.

Many retailers look at shelves, spot gaps, and look for opportunities when restocking, operating on instincts and experience. Most retailers have been able to rely on this for years, but when things get tough, doubt can creep in, and they’re not sure which products to go for, and which to drop. This is where OTB comes into play.

An OTB plan brings limitations, which can inspire creativity and innovation when restocking, while fencing off the extra purchases that, in truth, the business can afford to go without. It begins with a planned inventory level, which looks at what you have on the shelves, what you have already ordered, and you’re left with a budget and a spare amount of stock you can purchase with confidence, either to replenish or replace as you sell, while never overspending.

This works because inventory is one of your bigger investments, and is always a risk. So controlling how much of your money goes into inventory helps you manage your other expenses. Freeing up that cash can help you pay outstanding bills, cover your payroll, or save for a fresh investment elsewhere. On the other hand, you can’t afford to lose sales by reducing your inventory too much. OTB offers retailers balance, control, and a plan for both finances and sales.

How to enact an open-to-buy plan

So long as OTB is a financial concept, it can be difficult to understand. But the moment you break it down into a clear formula and a repeatable process, it becomes much simpler.

The open-to-buy formula

At its core, the OTB formula looks like this:

Estimated Sales + Planned EOM (End of month) Stock Value + Planned Markdowns  Minus  Planned BOM (Beginning of month) Stock + On-Order Stock

From this, your open-to-buy is calculated as:

Planned ending inventory
− (Current inventory + On-order inventory)

In simple terms, you decide how much stock you want to have by the end of a period, subtract what you already have and what’s already on the way, and the remaining figure is how much you can spend on new inventory. This formula keeps buying decisions grounded in financial reality rather than instinct.

Running through an OTB plan from start to finish

Okay, so there are simpler formulas out there, and it’s important to get each step right for your OTB plan to work. So let’s go through this step-by-step.

Estimate sales for the period
Sales forecasting is the backbone of OTB. Here are the main factors to consider:

• Historical sales data: Past performance for the same month or season provides a strong baseline. Your POS system should have reports from the same period in previous years. Take a look at how your business tends to perform at this time of year, and use that for your baseline.
  

• Seasonality and trends: Consider the current weather, any holidays, promotions you’re running, or changing customer preferences. Is business going well at the minute? Are you over or under-performing based on previous years
  

• Planned marketing activity: Sales campaigns, discounts, or product launches can significantly lift demand. So if you’re marketing more than usual, expect that to be reflected in your sales.
  

• Growth or contraction goals: Factor in whether you’re aiming to scale up, hold steady, or tighten spending.

Calculate current and target stock levels
Next, assess your beginning inventory. This is the retail value of stock you have on hand at the start of the period (Once more, your POS or inventory management system ought to know this). Then decide on your planned ending inventory, which reflects how much stock you want left once the period ends. This target should balance availability with efficiency: enough to support sales continuity and ensure you don’t lose sales, but not so much that excess stock contributes to any cashflow issues.

Estimate and minimize shrinkage
Shrinkage, be it from theft, damage, or administrative errors, reduces sellable inventory and needs accounting for in your plan. While it’s often expressed as a percentage of sales, the key here is a prediction for how much stock will be lost before it’s sold (and while you’re at it, why not try to reduce that figure!). Use historical shrinkage rates for a predictive figure for the period of your OTB plan.

Factor in on-order inventory
On-order stock includes any inventory you’ve already committed to purchasing but haven’t yet received. Any pending purchase orders will help your business restock but needs accounting for in your inventory figures. This needs to be deducted from your available buying budget to avoid overspending.

Arrive at your open-to-buy figure
Once all these elements are in place, the final number tells you exactly how much inventory you can still purchase for the period. This figure becomes your decision-making tool. Now you can start thinking about what stock is really worth replenishing, and in what numbers.

When to use an open-to-buy plan

Knowing how to enact an open-to-buy strategy is one thing, but choosing when to use it in a retail business’s lifecycle is key. It’s not just for when things are going wrong. In fact, it’s often most effective when used proactively, to support growth and maintain financial control.

You may want to use an OTB plan when:

• You need to free up cashflow. If too much money is tied up in slow-moving or excess stock, an OTB plan helps rein in purchasing and redirect funds toward essential expenses like rent, wages, supplier and utility payments, as well as faster-selling stock.

• You’re preparing for business growth or expansion. Whether you’re opening a new store, launching a new channel, or expanding your product range, OTB ensures growth is funded sustainably rather than through overbuying.

• You want to make room for a redesign or restructure. Planning a store refit, warehouse reorganisation, or website overhaul often requires space and liquidity. OTB helps you reduce inventory deliberately to create both with minimal interruption to trade.

• You’re entering a new season or sales cycle. Seasonal transitions are high-risk moments for overstocking. OTB keeps buying aligned with realistic demand, helping free up capital for next season’s stock.

• Sales have become unpredictable. During market volatility or shifting customer behavior, an OTB plan provides structure and flexibility without locking you into risky commitments.

In short, whenever control, clarity, and cash discipline matter, an open-to-buy plan can add real value.

Pros and cons of open-to-buy

You know what it is, how to do it, and when to do it, but do you really want to? Well, in case you haven’t already made up your mind, take a look at this pros and cons to help you come to a decision about where you really stand on OTB:

Pros

• Improves cashflow discipline
  OTB keeps inventory spending tight, in line with both demand and your financial limitations, ensuring cash isn’t tied up on your shelves more than necessary.

• Reduces over- and under-stocking risk
  With regular stock planning, you’ll avoid ordering slow-movers but pay more attention to bestsellers, so you’ll only order extras of stock you really need, and never overstock a product that doesn’t sell.

• Supports strategic decision-making
  Because OTB links sales forecasts with purchasing, it gives retailers better visibility and control over margins and growth.

Cons

• Relies on accurate data and forecasting
  If your stock counts or sales forecasts are inaccurate, your OTB plan will be too, which will only compound the problem!

• Takes time and consistency to manage
  OTB isn’t easy. It takes time and regular monitoring of both inventory and finances, and could be a drain on resources.

• You may miss opportunities
  Many retailers keep their eyes out for opportunities, and like to take them when they see them, which OTB would stop them from doing.

Open-to-buy: a means to an end or a great way of stocking your shop?

OTB won’t solve every problem in your retail business. If you have a cash-flow problem, it can help free up some funds. If you have doubts when you place your purchase orders, it can help rein in those wilder ideas. But it is one tool to have in your retail arsenal, and a good one at that!

By setting spending limits that are based on your business reports and financial situation, OTB can bring stability to yoru store, which is valuable when cash is tight, or when you’re going through a period of planned growth. Used the right way, OTB is less about restrictions, and more about protecting your cashflow and making sure your money goes where it’s most effective!