How hard it is for you to make inventory purchasing decisions? Do you often have more than you need and it slows down your cash flow? Or less than you need and you miss sales opportunities?
Merchandise Financial Planning helps you to figure out how much money you need to spend on inventory to achieve your financial goals.
It sounds like something complicated for large retailers. Wrong! It looks a lot more complicated than it really is. Just like large retailers, you can also benefit from better planning and it’s simply about understanding some numbers.
Let’s say you’d like to maintain the same level of revenue for your store in the next quarter. You take the revenue from the last quarter, subtract the inventory you already have and apply the average markup to get the purchasing budget.
Simple, right? Let’s go into some more details.
Step 1 - Plan your revenue
The revenue planning should be aligned with your marketing activity. If you plan sales for a new season you can simply take these numbers from the previous season and adjust them for store growth. If you make in-season planning it’s better to use recent sales numbers and alter them for upcoming holidays and marketing campaigns.
Step 2 - Plan your markups
Usually the cheaper the product, the higher the markup. Check out different pricing strategies here and choose one of them for your store.
Step 3 - Subtract the existing stock cost
Using the planned revenue and markups you can figure out the cost of the products needed to achieve the goal. Assuming you already have some stock, you should subtract its cost from the planned cost. The budget you've just calculated is Open-to-Buy at cost.
In some cases when your assortment changes quickly (fast fashion) you may want to ignore the current stock in open-to-buy computations.
Pretty amazing, right?
Break down your planning
You can use these 3 steps for the whole store but it gives you a rough estimate - you probably don’t have the same markup for the whole store. It becomes more meaningful when you apply these 3 steps to each category or vendor. It shows you which categories are overstocked (you have more products than needed to achieve your financial goal and open-to-buy in this case is zero), and which are understocked (non-zero open-to-buy).
Overstocked vendors or categories
In case the open-to-buy is zero for a vendor or a category, your planned revenue for this vendor is lower than the current retail value of the vendor’s inventory. Sometimes it can happen that the overstock in one category zeroes the open-to-buy plan for the whole vendor. Check the vendor-by-category breakdown to identify which categories have non-zero open-to-buy plan.
Inventory Planner
To make the financial planning even easier, we’ve put all these techniques together into Inventory Planner. It helps you to:
plan the revenue based on any period in the past
calculate markups knowing your cost prices
see the most detailed breakdowns to identify in which vendor or category you should invest
get rid of tiresome and error-prone Excel files
We hope this brief overview helped you to see the power of financial planning. To learn more about it please check out our website or contact us at contact@inventory-planner.com. We look forward to speaking with you soon.