Common terms related to your business, explained.
An open-to-buy plan determines how much of each class of merchandise you or your buyers can purchase every month.
The main purpose of an open-to-buy is to make sure that you don’t have too much or too little of each class of product to accurately meet demand. But it’s not just about demand. Properly understanding your inventory is the key to overall financial health. When followed correctly, an open-to-buy plan increases your margins and profits, helps you control cash-flow, and tells you how much money is available to reinvest in the growth of your business.
The basics of an open-to-buy plan are simple: You start with your planned sales for a given period of time, factor in the inventory levels you expect to have at the beginning and end of that period, and then account for markdowns. But while the formula is easy, the projections that go into that formula have to be reliable in order for it to work. That’s where the predictive analytics and expert advice provided by Management One come in. Our technology helps you properly predict sales and inventory levels, so that your open-to-buy plan is as reliable as it can be.
A class is simply a category of merchandise. When you analyze your purchasing by class—instead of by vendor or item—you gain invaluable insight into exactly how much of each class you need. In fact, properly classifying your merchandise is the first step toward building an open-to-buy plan that will help you grow your business.
Your net sale amount reflects the total value of merchandise sold to your customers. Markdowns and sales tax (or VAT) are subtracted. Accurately projecting net sales is very important to understanding the overall financial health of your business.
The initial markup (sometimes referred to as the ‘mark on’), is the difference between the cost of your merchandise and the original price at which you sell it. To calculate your optimal IMU, you start with your desired profit level, and then factor in your expenses and projected markdowns.
Because markdowns are an integral part of the IMU formula, controlling them can really impact your ability to thrive at a given initial markup. Good open-to-buy planning ensures that you don’t get stuck over-using markdowns to get rid of merchandise.
A markup is any increase in the retail price of merchandise after that merchandise has already been stocked. It may also be referred to as an additional markup.
Maintained markup is the difference between the cost of your merchandise and your net sales.
In other words, it’s your initial markup as it is impacted by markdowns. Maintained markup is the key to profit, because it’s the actual measure of how much money you’re making on your merchandise. Comparing your month-to-month MMU is one of many very useful indicators of your overall financial health.
A markdown is any reduction in retail price after merchandise has been initially marked up and stocked. The difference between the new selling price and the former selling price is the dollar amount of the markdown. Discounted sales should always be recorded at the markdown price, and categorized as markdown dollars.
Markdowns are an important tool in retail, but they’re easy to overuse. Having too much inventory leads people to increase markdowns in order to get merchandise off of the floor. For this reason, properly planning inventory is critical for making sure that your markdowns stay under control.
Turnover is the number of times that an your average stock is sold within a given period of time—normally one year. Setting and achieving an optimum turnover goal is hugely important to your profit and overall success.
To calculate turnover, you take your annual sales and divide that by your average monthly inventory. What’s the “right” turnover? That could depend on what your selling, at what cost, and in at what volume. Your Management One retail expert will advise you on the turnover that’s right for your business, your growth, and your goals.
The ratio between the beginning-of-month (BOM) inventory and sales for that same month. This ratio usually changes over the course of a given year, as some months will see you stocking up for a holiday or promotion while other months will liquidating inventory to prepare for a new season.
When your stock-to-sales ratio is properly projected into future months, you’re empowered to achieve optimal turnover.
Sometimes referred to as ‘cost of sales,’ COGS is what it actually cost you to sell what you did during a given period. To calculate your COGS, you take the cost of your beginning inventory, add in the cost of any purchases you made during that period, and subtract the cost of your ending inventory.
For example, let’s say that at the beginning of a sales period you have three pens that you bought for $1 a piece. During that sales period you buy two more pens, at the same price. By the end of that period, you have sold four pens, leaving you with just one in your inventory.
In that case, COGS is calculated as follows:
$3 (initial inventory) + $2 (additional purchases) - $1 (remaining inventory) = $4
Your cost for the goods you sold was $4.00 (even though you spent $5 on goods, in total).
Cost of goods sold is one of many measures that are important for properly calculating—and projecting—the success of your business.
This is a measurement of turnover as it relates to your total sales.
To calculate GMROI, take your gross profit (your net sales minus the cost of goods sold) and divide it by your average cost of inventory. For example:
For every dollar you invested, you generated $5.25 in profit. Lower the price of your pens, and your GMROI goes down. Raise the price and sell fewer pens, and your GMROI also goes down.
Your profit and average on-hand inventory will determine the efficiency of your inventory investment. When you properly predict demand and set the optimal price, you generate more cash to grow your business, pay your employees (and yourself), and save.