Merchandise Financial Planning

Step 1 - Plan your revenue

The revenue planning should be aligned with your marketing activity. If you plan sales for a new season you can
simply take these numbers from the previous season and adjust them for store growth. If you make in-season
planning its better to use recent sales numbers and alter them for upcoming holidays and marketing campaigns.
Step 2 - Plan your markups
Usually the cheaper the product, the higher the markup. Check out different pricing strategies here and choose one
of them for your store.
Step 3 - Subtract the existing stock cost
Using the planned revenue and markups you can figure out the cost of the products needed to achieve the goal.
Assuming you already have some stock, you should subtract its cost from the planned cost. The budget you've just
calculated is Open-to-Buy at cost.
In some cases when your assortment changes quickly (fast fashion) you may want to ignore the current stock in
open-to-buy computations.
Pretty amazing, right?

Break down your planning

You can use these 3 steps for the whole store but it gives you a rough estimate - you probably dont have the same
markup for the whole store. It becomes more meaningful when you apply these 3 steps to each category or vendor.
It shows you which categories are overstocked (you have more products than needed to achieve your financial goal
and open-to-buy in this case is zero), and which are understocked (non-zero open-to-buy).
Overstocked vendors or categories
In case the open-to-buy is zero for a vendor or a category, your planned revenue for this vendor is lower than the
current retail value of the vendors inventory. Sometimes it can happen that the overstock in one category zeroes
the open-to-buy plan for the whole vendor. Check the vendor-by-category breakdown to identify which categories
have non-zero open-to-buy plan.
Inventory Planner

To make the financial planning even easier, weve put all these techniques together into Inventory Planner. It helps
you to:

plan the revenue based on any period in the past

calculate markups knowing your cost prices

see the most detailed breakdowns to identify in which vendor or category you should invest

get rid of tiresome and error-prone Excel files

Calculating GMROI

GMROI (Gross Margin Return on Inventory Investment) indicates how much gross margin you get back for each
dollar invested in inventory.
Through careful analysis, you can see which lines, departments or categories are the most rewarding for your
inventory investment. And which are least productive!
Heres the formula for calculating GMROI:
GMROI% = Annual Sales $ divided by Average Inventory @Cost $ times Gross Margin %
For example, consider this merchandise category:
Annual Sales: $130,000. Average Inventory at Cost: $40,625. Gross Margin: 49%
GMROI % = $130,000 / $40,625 X 49%
GMROI% = 157%
The inventory investment in this category is generating a 157% return in gross margin. Or, stated another way, for
the year this retailer is getting $1.57 in gross margin back for every $1.00 invested in inventory in this
category.
This is a great tool! But, it becomes really powerful once you are able to compare this category to the others in
your store, and/or to last year.
The Power of GMROI: Compare and Contrast!
Consider this example. Which of these four departments is the most productive?

Well, let's see.

Department A has the highest sales (Gotta love a great top line!)
Departments B and C have similar sales, but C has the highest margin.
Sowhich department is the "best" for this retailer?

Careful. That can be answered only after we calculate the GMROI.

Here are the GMROI calculations for each of these four departments. Revealing, isn't it?

Department D - admit it, sometimes overlooked because it has the lowest sales and margin - is
the productivity winner! It has the highest GMROI. Its lower margin is offset by its higher inventory turns.
One key finding to keep in mind: Sales and margin alone cant really tell the whole story.
Prefer a "Down 'n Dirty" GMROI Formula?
Just find the Gross Margin Dollars (of a department) for one full week. Then multiply it by 52 weeks, and complete the calculation by
dividing your current on-hand inventory at cost into the "annualized" figure for Gross Margin Dollars. With many of today's POS
systems, this is quick to calculate and useful for comparing departments on the fly.

Dynamic Management Tool for Retailers

You can calculate GMROI by departments, as above, or by categories, seasons, vendors, regions or individual
stores.

OTB: Example Calculations for a Season

Planning Phase for Early Spring 1999

In September 1998 you begin planning for the Early Spring 1999 season.
You plan to build up Januarys stock in anticipation of the stock needed
February, which is the start of the season. You also determine the planned
revenue and month-end closing stock for the months February through April.
The stock initializer specifies an opening stock of $100 for the planning
horizon (January to April).
In this phase, the OTB is determined by the following formula:

Pln. sales - Pln. opening stock + Pln. ending stock = OTB

For example:
January: $0 - $100 + $600 = $500
February: $1700 - $600 + $900 = $2000

Purchasing Phase
In November you make the first purchases. OTB is calculated as the difference

between the planned

purchasing budget and open
purchase orders.

Pln.
Pln.

sales - Pln. opening stock +

ending stock - Open POs = OTB

For

example:
January: $0 - $100 + $600 - $500
= $0

February: $1700 - $600 + $900 - $1700 = $300

Beginning of the Business Phase

The first merchandise

receipts occur in January
1999. The system takes into
account any differences
between planned and actual
data. Here, the actual
opening stock in February is
greater than planned due to
an overdelivery in January.
Februarys OTB is corrected
accordingly.

Pln. sales - Actual opening

stock + Pln. ending stock - Open POs = OTB
For example:
February: $1700 - $700 + $900 - $1700 = $200
Remember that the actual opening stock of any month is the same as the closing stock of the
previous month.

During the
Business Phase
During the course of any
month, the month-end sales
volume is extrapolated from
the actual data to that point.
Differences between
planned sales and
extrapolated sales are taken
into account in calculating
OTB:
Pln. sales - Actual opening
stock + Pln. ending
stock - Open POs
+ (Extrapolated sales - Pln. sales) = OTB

For example:
March: $2000 - $600 + $400 - $1000 + ($2600 - $2000) = $1400