Want to know the "Secret Sauce" to spending $100,000's on inventory for your business each year and increasing profitability with eliminating "stale" merchandise that just sits there and in some cases, you can't even give away. Look no further, our Co-Founder, Larry Hebert lays it all out in the blog below!
Before you start in, be sure to get Larry's gems and gold nuggets of financial wisdom in your inbox:
But first, a special plug for our favorite podcast, The Retail Whore! Live and breathe retail, then this is a must watch/listen podcast. We love Michelle and her program so much, we're an official sponsor, CHECK IT OUT!
Creating an OpenToBuy for your retail business consists of two areas to be successful. First, establishing your base inventory, highlighting each month with how much is available to spend, assures you have ample inventory to meet your projected sales. This is a formula developed through projected and actual sales, COGS, annual inventory turns and and beginning inventory each month.
The second critical step in the OpenToBuy process is managing your Key Product Categories to ensure you have invested your inventory dollars properly based on each category's % of overall sales. Not managing this area will cause you to have too much inventory in some areas and too little in others. And both cause the same issue, lower cash flow and profitability.
Having too much inventory will mean product is on the shelves not selling which ties up cash and forces you to lower the price to eliminate goods. And too little will mean you are missing sales when product is "sold out" causing cash flow and profitability to decrease.
The goal (the "secret sauce") is to closely manage the Key Product Categories that generate 75%-90% or more of your business. This generally is between 6-8 categories with everything else being miscellaneous. You DO NOT want to manage every category but only those responsible for generating 75% to 90% or more of your business.
How are Key Product Category % arrived at?
1) Use your POS system as the tool to obtain these numbers.
2) Take data from the last 12 months, separate into the top category sellers by total sales for each one and divide each into the total sales for that period.
3) These will provide you with the % that the Product Category represents of overall sales.
And purchasing inventory in this % (how to use the "secret sauce") will ensure you have ample inventory based on customer sales (feedback) to meet demand resulting in greater cash flow and greater profitability. The Key Product Category amount is the % times the total Cost of Goods Sold for the 12-month period of your open-to-buy.
When you do this for your Key Product Categories generating 75%-90% or more of your overall business, you will have a specific dollar amount to spend for the year in each category equaling the annual COGS amount of $500,000 with all categories including Miscellaneous equaling 100%. It's recommended to check your POS system quarterly and verify these Key Product Categories % have not changed significantly based on actual sales. If their % of overall sales for categories have adjusted, change those categories to align with your current sales data. This will adjust each category's open-to-buy to better correspond with sales and allow for the proper amount to be purchased to ensure your sales goals are met. Make sure all categories after an adjustment continue to equal 100%. Doing this can and will transform your inventory purchasing, increase cash flow and enhance your profitability.
OpenToBuy.co is designed to create the two critical pieces necessary to develop and manage your inventory purchases. A proprietary formula is embedded in the template to automatically calculate the base inventory and determine how much to spend each month, cumulative for each subsequent month and for the year on merchandise.
It also includes Key Product Category management based on the top 6-8 categories generating 75%-85% and more of the total revenue to ensure you have the correct amount of goods in the proper categories to maximize your inventory investment. Using OpenToBuy.co WILL increase your cash flow and profitability by not under or overbuying and ensuring your cash is in the right products based on customer demand.
If you enjoyed these tips, be sure to sign up for Larry's finance made easy eblasts that are loaded with all sorts of advice to get you on top of your numbers and overall cash flow growing.
Larry Hebert, our Creator and Co-Founder has helped hundreds of retailers both keep their doors open & scale their operation to great success...this is where he drops his knowledge gems and gold nuggets so you can thrive!