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Profitable Times Newsletter

Open To Buy as a Budgeting Tool

Every person associated with museum store management, from store managers and buyers to CFOs, routinely deal with the construction and management of budgets. The preparation of an Open To Buy (OTB) is just another budget that is a management tool unto itself and a support document for the financial monitoring of a/the major expense category for the museum store. Just as budgets are ubiquitous to financial management, so too should be the creation of an OTB within the museum store budgeting process.

Many times it's suggested that doing an OTB is too much work. Frequently this evaluation is based on a misunderstanding about how an OTB is used. The goal of an OTB is relatively simple. The OTB helps to plan overall inventory receipts by taking the planned ending inventory, plus planned sales, markdowns and inventory adjustments, less the prior month's ending inventory.

An OTB is generally not used to tell you what to buy or to manage the inventory levels of individual items. If that level of management is required an assortment plan, using pre-determined minimum and maximum inventory levels, typically established and triggered within the point of sale system, is more effective and less time consuming.

An OTB is most appropriate for departments or categories where the items may change but the desired inventory levels are relatively well established. It is also especially helpful, such as for special exhibits and exhibit shops, when inventory needs to be reduced at the end of a time period or the exhibit.

Many typical components of a generic budget are also applicable to an OTB.

  • It is a standardized way for measuring a specific aspect of performance.
  • It is future oriented. It can tell management how much inventory is needed in any future time period to make the sales and ending inventory plans, given current purchase order commitments.
  • It is a tool specifically designed to help manage a museum store's biggest asset/expense category.
  • It takes into consideration estimates of expected income and expense for a set period of time.
  • The merchandise for resale purchases line item in the institution's financial statements is derived from the results of the OTB.
  • It is the underpinnings of a plan of action that also affects proprietary product development, staffing, travel, supplies, possibly short-term borrowing and a host of other line items.
  • It is a tool for dealing with change and is especially important in challenging environments such as when visitation is disappointing. In situations, such as when visitation and resulting sales are subject to the popularity of an exhibit or weather, an OTB automatically compares actual results to the plan and helps to make adjustment decisions including how to allocate remaining resources. The comparisons can include actual sales to planned sales, actual inventory received to planned receipts, actual ending inventories to desired ending inventories, and open purchase order quantities to future needs.

Most often an OTB is done in retail dollars, but many non-profit institutions prefer an '@cost' OTB because it helps to understand the product buying expense in a unit that is the same as other budgeted items. To help spot any potential issues, once the OTB calculations are computerized, it is relatively easy to do an OTB at both retail and cost.

The accuracy of an OTB is improved by building it by month or season, by product category, and perhaps by location such as store, ecommerce, wholesale and catalog, and then amalgamating them into an OTB for the retail presence as a whole.

When done properly, the impact of an OTB beyond budgeting includes increased inventory turnover, more dollars to spend throughout the process, improved cash flow, which can be particularly important since paying for products typically comes before the revenue generated from visitation is realized, improved Gross Margin Return on Investment (GMROI) and other measures of productivity. (GMROI is the return in dollars for every dollar invested in buying inventory. This is an excellent calculation for determining department and vendor performance.)

The important concluding point is not how you do an OTB, it's that you do it.

 
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