Welcome to our latest guest blog from our amazing sponsor, OpenToBuy.co's Larry Hebert. As their Creator and Co-Founder, he's overflowing with gold nuggets and gems to help make the back end financials of running your retail operation a whole lot easier.
Quick plug, one of our listeners signed up with them, hopped on the phone with Larry, and almost instantly realized they were overspending by over $60,000...that's the power of using OpenToBuy.co. Their 14-day FREE trial could help find your $60K, try it out, nothing to lose so use promo code "RWP" and get 1/2 off your first month after your trial ends!
So here's the latest game changing tip from this devoted small business advocate...you'll think about inventory in a whole new way after reading this.
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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 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.
Example
- Forecasted Sales Revenue: $1,000,000
- COGS 50%: $500,000
- Key Product Category %: 20%
- OTB for the category: $100,000
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.
