As a retailer, the toughest and yet, the most exhilarating job is purchasing inventory for the holiday season. Your first thought is to purchase everything that you think your customers will snap right up as gifts for their friends and family. But what will most likely happen is you will take almost 3 months to sell through it all, even at deep clearance discounts. Be sure to avoid a costly scenario by creating a holiday purchasing budget, also called a “Holiday Open to Buy”.
In the Sweet and Snack industry, there are so many choices in candy, especially when considering the choices for seasonal candy. As a matter of fact, Christmas candy sells only 3rd to Halloween and Easter. But no matter which holiday you are purchasing for, creating a simple budget based on sales history will save you from sitting on obsolete inventory.
To figure your “budget”, take the total January through June sales and compare that total to the previous year’s sales for the same period. Do you see that your sales have increased or decreased? Determine the percentage of the increase or decline and apply it to last year’s holiday sales. Take this number and multiply it to your average cost of goods sold percentage to come up with the budget figure for your holiday buying.
For example: say your holiday sales (between Thanksgiving and December 31st of last year) were $25,000, and your sales are up 10 percent over last year’s first two quarters, you can reasonably predict that your holiday sales for this upcoming season will be around $27,500. If your average cost of goods sold (COGS) is 60%, you budget for your holiday ordering should be approximately $16,500.
Here is the math:
Last year’s holiday sales: $25,000
Sale’s increase between last year Qtr 1 & Qtr 2 over this year Qtr 1 & Qtr 2 = 10%
Average COGS = 60%
$25,000 x 10% = $27,500 x 60% = $16,500 open to buy budget
Knowing how much you SHOULD spend on seasonal inventory allows you to make better decisions when selecting those holiday items for your store. Remember to look closely at what were hot sellers the previous holiday and try to find similar items to ensure that you are not stuck selling discounting inventory into February.
You can use the same method above to help you determine your Open To Buy or Budget for other times of the year as well. Just look at the same period last year that you are trying to figure for the current year. Using buying budgets helps your retail business stay on track to reach your profit goals.