Page 86 - DMGT553_RETAIL_STORE_MANAGEMENT

Unit 5: Retail Arithmetic

extent, you may be able to use the extra margin you earn when you first bring the item in Notes
(and it’s still new and exciting enough to attract customers in spite of its higher price) to
help finance the lower margin sale you run subsequently.

Open to Buy(OTB)

The purpose of an Open to Buy, or OTB, system is to tell you exactly how much merchandise you
must purchase to satisfy the amount of inventory you have budgeted for a specified period of
time, usually one month.
The simplified way of looking at OTB is:
Planned end-of-month (EOM) inventory for March $100,000

Plus planned sales for March +$40,000
Plus planned Markdowns for March +$ 2,000
Minus merchandise on order and due to arrive in March –$15,000
Minus BOM (beginning of month) inventory for March –$90,000

Open to Buy $37,000
Before you ever commit to buying product, you must have your OTB plan in front of you. That
way, you’ll know when you need (and can afford) to buy new merchandise. You may not have
the money to bring it in during March, but with your plan in front of you, you’ll be able to see
that there is room during the first week of April. Without your OTB plan, you may inadvertently
overextend yourself. You may be the best buyer in the world, but if you do not have the money
to pay for goods, you won’t last long in retailing.
The only way to stay on top of this crucial facet of the business is to have a plan. The first step in
developing this plan is to project your sales by month for the first year. Of course, this is a
moving target, so you need to re-project them, or make sure your prior projection is still on
target, at the start of every month.
The second step in your planning is to establish the turn of your inventory so you know how
much inventory you will need at the start of each month to feed your projected sales. Once you
know your sales and turn, you can quickly calculate your OTB to see how much to purchase each
month. If, during the year, you are trending up or down in sales, OTB can easily be adjusted to
meet those specific needs.

5.2.3 Break Even Point

The point in business where the sales equal the expenses. There is no profit and no loss.
Formula:

Break-Even Point ($) = Fixed Costs ÷ Gross Margin Percentage
It is also known as Breakeven Analysis.

Example: A retail store buys widgets for $15 each, marks them up and sells them for $30.
Our monthly expenses (fixed costs) are $10,000. This means that breakeven point would be
$20,000 or 667 units.
$10,000 ÷ (15/30) = $20,000
$20,000 ÷ $30 = 667

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