How well do you understand your ecommerce performance? If you’ve been in business for even a few months, you are sitting on some of the most valuable information to grow your business. The question is, are you taking advantage of it?
Business performance data is your key to success, and it should be able to tell you everything you need to know – internally, at least – to develop strategic plans, and make informed business decisions. The problem is, most people do not know what they should be measuring, nor how to measure it.
In this post, you will find over 50 retail KPI formulas used by retail merchandising experts to measure sales, pricing, profit, and inventory performance. When used to your advantage, these retail math formulas will help you:
- Buy the right inventory
- Buy the right amount of inventory
- Set inventory pricing
- Increase profit margin
- Increase sales revenue
This post is for business owners, decision makers, and key contributors who want to improve their retail acumen, and get a better grip on their business. To take your retail reporting learning a step further, checkout the Retail Reporting Workbook (COMING SOON).
Retail KPI Categories:
BASICS
SALES
PRICING
PROFIT
INVENTORY
Retail Math: Basic Calculations
Decimal to Percent Conversion
In a variety of KPI calculations, manual arithmetic may result in decimal values that must be converted to percentages to be most insightful. Computer programs like Excel and Google Sheets naturally take care of this for you by simply changing the cell format (commonly used options include Number, Text, Percent, or Dollars). However, manually calculating conversion of a decimal to a percentage on the fly is easy. Multiply decimal values by 100 (or for a quick mental shortcut, move the decimal two places to the right), then add a percent sign.
Decimal to Percent Conversion = (Decimal Value x 100)
Percent Change (%▲)
Percent Change (%▲), also known as “build”, is a measure of the change (▲) in any KPI relative to the same KPI from a previous period (i.e. last year, last season, last month, etc). You can use %▲ to see how your business is changing over time. This calculation should be performed on all KPIs for your business so you can respond to changes in sales with strategies and action.
Percent Change = ((New Figure – Old Figure) ÷ Old Figure)
Percent Contribution (%Cont)
Percent Contribution (% Cont) is useful for analyzing sales performance and inventory levels. Additionally, % Cont is a key component in forecasting, demand planning, purchasing, and distribution. You can use this metric to discover imbalances in your stock-to-sales ratio, identify underperforming categories, and chase into more inventory of merchandise that is outperforming expectations.
Percent Contribution = (Portion ÷ Total)
Retail Sales KPIs
Net Sales Revenue ($ Sls)
Net Sales Revenue ($ Sls) is the sum of gross revenue dollars driven by a style or department of goods, minus any returns or refunds. Calculate this metric for each product category and compare it to previous seasons to understand how your business categories are growing and changing over time.
Net Sales Revenue = ($ Gross Sales – $ Customer Returns)
Net Sales to Last Year ($ to LY)
Net Sales to Last Year is the percent change in dollar sales of a particular SKU, style, or department of products relative to last year. The core of this formula is the same as Percent Change (▲%) calculation above. It is important to calculate the changes in your sales revenue each month, season, quarter, and year. When you compare yourself to our past performance, you can see where your business is growing and where strategic changes need to be made.
Net Sales to Last Year = ((Net Sales This Year – Net Sales Last Year) ÷ Net Sales Last Year)
Dollars Per Transaction (DPT)
Dollars Per Transaction (DPT or $PT) is the average amount of money your customers spend when they purchase from you. Driving this metric up will result in higher revenues and more margin dollars. You can do this a number of ways. For example, you could run quantity promotions, offer payment plans, or even bundle complimentary products together in an irresistible offer.
Dollars Per Transaction = ($ Net Sales ÷ # of Transactions)
Dollars Per Store ($PS)
Sometimes referred to as DPC (Dollars per Channel), Dollars Per Store ($PS) is the average amount of revenue driven per Store/Channel for a particular SKU, style, or category of merchandise. Tracking your $PS during In-Season Management as well as Post-Season Analysis, helps you understand how productive your channels are on average. When you identify channels with results below this average, it should be a cue to analyze those channels on a deeper level. Your goal is to uncover opportunities to tailor the assortment to meet the unique demand of that channel/store.
Dollars Per Store = ($ Net Sales ÷ Total # of Stores/Channels)
Dollars Per Square Foot ($/SqFt)
For Brick+Mortar or Pop-up retailers, calculating Dollars Per Square Foot ($/SqFt) can help you strategically allocate square footage to product categories that drive more volume, and decrease selling space that is dedicated to slower selling (“low velocity”) items. The selling space consists of the sales floor, merchandise displays, and register area—just don’t count your back stock, breakroom, or other employee-only areas.
Dollars Per Square Foot = ($ Net Sales ÷ Square Footage of Selling Space)
Revenue Percent Contribution ($ Cont)
Revenue Contribution ($ Cont) is the percent of total revenue driven by any SKU, style, or department to the total. Allocating your inventory investments proportionally to this metric is a smart way to approach your purchasing decisions. For example, if you know that Category A drives 60% of your total revenue, and Category B drives 40%, then it would be wise to consider these proportions for new unit buys. However, as prices vary across product categories, be sure you also pay close attention to the Unit Sales Contributions.
Net Unit Sales (U Sls)
Net Unit Sales often shortened to Unit Sales (U Sls), is the number of units sold of any SKU, style, or department, minus any applicable returns or refunds. Use this metric for each product category and compare it to previous seasons to understand how your business is growing & changing over time.
Net Unit Sales = (Total Unit Sales – Total Unit Returns)
Units Per Transaction (UPT)
Units Per Transaction (UPT) is the average number of units sold when your customers purchase from you. Driving this metric up will result in higher revenues and more margin dollars. There are many ways to drive up your UPT, but the most common methods are running Percent-Off promotions, Buy-More-Save-More promotions, and Buy-One-Get-One Promotions.
Units Per Transaction = (Total Unit Sales ÷ # of Transactions)
Unit Sales Percent Contribution (U Cont)
Unit Sales Contribution (U Cont) is the percent of total unit sales driven by one particular SKU, style, or department. This calculation, when monitored closely, helps you will identify shifts in consumer demand between styles, colors, or even categories of merchandise that you sell. These shifts are indicators that adjustments should be made to your unit buy contributions in future season to better meet the demands of customers.
Unit Sales Percent Contribution = ([SKU/Style/Dept] Unit Sales ÷ Total Unit Sales)
Unit Sales to Last Year (U to LY)
Unit Sales to Last Year is the percent change in unit sales of a particular SKU, style, or department of products relative to last year. The core of this formula is the same as our basics equation Percent Change (▲%). It is important to calculate the changes in your unit sales each month, season, quarter, and year. When we identify shifts in unit sales, it tells us if a product category is outpacing past performance which would indicate a need to invest more in that style. Or perhaps you’ll notice a decline in unit sales of a particular product that used to be a big part of your business. This would indicate a decline in sales demand and likely a need to begin an exit strategy for that product so you don’t end up with excess inventory.
Unit Sales to Last Year = ((Unit Sales This Year – Unit Sales Last Year) ÷ Unit Sales Last Year)
Sell Through Percent (ST%)
Sell Through Percent (ST%) is the total unit sales divided by the total beginning inventory, or unit buy. This helps you understand what percent of your beginning available inventory was sold over a specified period.
For SEASONAL, or short-term products, you should target a Sell Through rate of 90-100% for the anticipated selling period.
For SEASONLESS, or “”basic”” products that are carried year-round, you should target a Sell Through rate of ~70% between purchasing cycles. This will ensure that towards the end of the season, you will be left with enough inventory to still service a full size range of customers before you absolutely need replenishment.
Sell Through Percent =
(Units Sold ÷ Initial Unit Buy)
or
(Units Sold ÷ Beginning of Period Inventory)
Rate of Sale (ROS)
Rate Of Sale (ROS) is the average number of units sold per week of a particular SKU, style, or department over a selling period. This figure helps you easily compare how quickly various products are selling per week. The average rate of sale is often helpful to review Month-To-Date (MTD), Quarter-to-date (QTD), and Year-to-date (YTD), and should always be considered in unit sales forecasting. If you notice a product has a much higher or lower ROS than usual, this is a cue that the product is over- or under-performing, and action might be needed to stimulate sales or meet growing demand.
Rate of Sale = (Total Unit Sales ÷ # of Weeks Selling)
Retail Pricing KPIs
Cost of Goods Sold (Unit COGS) (Ttl COGS)
The Cost Of Goods Sold (COGS) is the final cost of a product, including materials, production, freight, packaging, and any other costs associated with getting the finished product in your possession.
COGS is often expressed in both dollars and units, and the most savvy business owners typically calculate, track, and target COGS at the SKU level, the category level, and the total level. Minimizing your COGS without decreasing the quality of your product increases the gross margin (a.k.a. “profit”), driven by each unit sold. This translates to a more profitable assortment and improves your bottom line. To decrease COGS, you may need to negotiate discounts with vendors, manufacturers, suppliers, and logistics partners.
Unit COGS = (SUM (Materials + Production + Freight + Packaging) *(1- Discount Percent)
Total COGS = (Unit Cost Of Goods Sold * Unit Buy)
Average Unit Cost (AUC)
The Average Unit Cost (AUC) is the average cost for one unit of merchandise across all SKUs in a class, category, or an entire assortment. This figure is often calculated using the COGS, sometimes referred to as “Landed Cost”, which factors in the costs for materials, production, freight, packaging, and any other costs associated with owning the finished product. (*TIP* At the SKU and unit level, Unit Cost, COGS, and AUC would all match, but they will differ at the category, department, or total level.)
Average Unit Cost = (Total Cost Of Goods Sold of all products ÷ Total # of Units)
Average Cost (Avg Cost)
Average Cost (Avg Cost) is the weighted average of the total Cost Of Goods Sold (COGS) of the products in your assortment, or within a specific department or category. Not to be confused with AUC (which is the cost you pay for a single unit), Average Cost is the average amount of money you spent on each SKU you purchased within that department, category, or assortment. In terms of analyzing past performance, Avg cost tells you the average amount of money you invested into each SKU within a category or an assortment. In terms of planning future performance, skilled merchandisers will use the Avg Cost from previous seasons to help define the Avg Cost they’ll target in their Open-to-Buy planning. This ensures that all purchasing decisions are in line with past performance, and deliver on their planned markup and gross margin targets.
To calculate Avg Cost, you must write a compound formula, meaning more than one calculation occurs in the same cell. First, you must multiply the Unit COGS by the Unit Buy for EACH product, separating each with its own set of parentheses and commas between each. Then, you’ll close another set of parentheses around all of those, and use the AVERAGE function in front of all that to arrive at your Avg Cost per SKU.
Average Cost = AVERAGE ( (Unit Cost Of Goods Sold × Unit Buy for each product) )
Average Initial Retail (AIR)
The Average Initial Retail (AIR) is the average price you set across all SKUs or categories – in other words, your average “ticket price” before any discounts are taken. Ticket prices should be set strategically to achieve the desired markup percentage, which in turn, should also deliver on your gross margin objectives, meaning the percent of profit you want to make from your products.
Average Intial Retail = ($ Net Sales ÷ Total Unit Sales)
Average Unit Retail (AUR)
The Average Unit Retail (AUR) is the ACTUAL selling price, considering any promotions, coupons, or markdowns that were taken. This figure is helpful to monitor to ensure that not only are you not discounting your merchandise too heavily, but also to study what discount rate drives the most gross margin dollars for your business. For any business, there is a sweet-spot when their discounts and promotions drive enough traffic and subsequent sales, that they generate enough additional profit dollars to offset the actual discounts taken at the checkout.
Average Unit Retail = ($ Net Sales ÷ Total Unit Sales)
Markup (MU$) (MU%)
A Markup (MU) is difference between the cost (COGS) and the retail price (AIR). MU$ is just the dollar value of a product’s markup, and is quite simply the difference between the AIR or ticket price and the COGS for the same product. In analyzing performance of a past season, your MU% will be evaluated against the planned MU%, as the objective in setting the target is to ensure a favorable gross margin figure that not only covers expenses, but also generates a reasonable profit.
Buyers and inventory managers at big corporations are usually given a target markup percentage that they must adhere to during their process of choosing and purchasing new goods for their sales floor. In small businesses, the onus of creating the annual and quarterly sales plans, inventory plans, and markups plan typically falls to the business owner, or whomever manages finance. Regardless of who handles your planning and purchasing, if you aren’t operating with a MU% target, you’re likely missing opportunities to assort and price merchandise that will be most profitable.
Markup Dollars = (Average Initial Retail – Cost Of Goods Sold)
Markup Percent = ((Average Initial Retail-Cost Of Goods Sold) ÷ Average Initial Retail)
Average Retail Value (ARV)
The Average Retail Value (ARV) allows you to strategically assort merchandise that, when retail prices are set, will deliver on your markup goals. A skilled inventory buyer has a knack for buying the right goods, at the right time, and in the right amounts. Business owners also need to set a target markup percentage to ensure that the desired profits are generated from new inventory investments. ARV also helps you understand what amount of revenue would be generated if all the units were sold at “reg” price, meaning without any discounts taken.
To calculate Avg Retail Value, you must write a compound formula, meaning more than one calculation occurs in the same cell. First, you must multiply the Unit AIR by the Unit Buy for EACH product, separating each with its own set of parentheses and commas between each. Then, you’ll close another set of parentheses around all of those, and use the AVERAGE function in front of all that to arrive at your Avg Retail Value per SKU.
Average Retail Value = AVERAGE ( (Average Initial Retail × Unit Buy for each product) )
Markdown (MD$) (MD%)
A Markdown (MD) is any permanent reduction to the selling price of a product as a means to drive more traffic, unit sales, &/or sell-through of inventory. Markdowns are expressed in dollars or as a percentage, and reflect the difference between the original retail price and the new retail price. Often referred to as “clearance”, marked down goods are considered “aged inventory” that must be turned over quickly to make room in your Open-To-Buy. If you notice during a selling period that you are not meeting your sell-through targets, then you should use temporary promotions to attempt to sell through the inventory before the selling period ends and any permanent markdowns must be taken.
*NOTE: Your Markdowns should always be calculated and expressed as a negative number. This will help ensure that your books remain accurate, and any additional calculations that may be needed as a derivative of this figure will be correct.
Markdown Percent = ((($ New Price – $ Original Price) × # of Units) ÷ $ Net Sales)
Markdown Dollars = ($ New Price – $ Original Price) × # of Units
Discount Rate (DR%)
Related to markdowns, the Discount Rate (DR%) is the percent difference between the AIR and the AUR, which indicates not only permanent decreases in price, but also temporary ones driven by short-term promotions. This figure shows the average discount being taken on a given SKU, style, or department of products. Monitoring this metric ensures that you’re not cutting into profits on various SKUs due to frequent and/or unnecessary discounting &/or promotions.
Discount Rate = ((Average Initial Retail – Average Unit Retail) ÷ Average Initial Retail)
Retail Profit KPIs
Gross Margin (GM$) (GM%)
Gross Margin Dollars (GM$) is the difference between the retail value of goods sold ($ Net Sales) and the total cost of those goods (COGS). This figure shows the value of profit dollars generated by a SKU, style, or department of products. (This can be calculated off of the AIR, but AUR is more accurate).
The Gross Margin Percent (GM%) shows the percentage of profit margin that is generated by a SKU, style, or department of products.
Note: Gross Margin can be calculated off of your AIR, and should be during your Pre-Season Planning phase. However, calculating margins during In-Season Management or Post-Season Analysis is more accurate when you use the AUR instead, as it is reflective of actual results.
Gross Margin Dollars = (Average Unit Retail – Cost Of Goods Sold)
Gross Margin Percent = (GM$ ÷ COGS)
Net Profit $ (NP)
Net Profit (NP) is the dollar value of profit achieved by a business in a season or year. It is calculated by subtracting the COGS and Operating expenses from the Total Net Sales Revenue, and this information lives on your income statement (or Profit & Loss Statement). You can strategically lower COGS, increase AIR, or lower operating expenses to improve your NP.
TIP: Divide this figure again by your Net Sales to see Net Profit expressed as a percentage.
Net Profit = (Net Sales – SUM (COGS + Operating Expenses))
Gross Margin Return on Investment (GMROI)
Gross Margin Return on Investment, or GMROI, pronounced “Jim-Roy”, is the measurement of the efficiency of your inventory investments. GMROI is a financial metric that is used to measure capital turnover, and is expressed in dollars to illustrate how many Gross Margin Dollars (GM$) are produced from each dollar invested in the products sold.
This figure can be calculated using 2 different methods depending on the data-points that are available to you. If your Average Inventory @ Cost and Gross Margin Dollars are available, use the first method. If only your Gross Margin % is available, use your Inventory Turnover and Markup rates to calculate using the second method.
Gross Margin Return on Investment =
(Avg Inventory @ Cost ÷ Gross Margin Dollars $)
or
(GM% × Inventory Turnover Rate) / (1-Markup)
Retail KPIs for Inventory
Inventory @ Retail (Inv @ Rtl)
Inventory at Retail Value (Inv @ Rtl) is the total value of all your owned inventory as it relates to the Average Initial Retail (AIR) also known as “ticket price” or “original price”. This figure represents the amount of revenue that would be generated from a 100% sell through at regular price. While most of the time we speak to our inventory levels in terms of cost, it is also helpful to monitor your inventory levels at retail value, as this correlates directly with how much sales revenue can be generated, while inventory @ cost does not.
Inventory @ Retail = (# of Units On Hand × Average Initial Retail)
Inventory @ Cost (Inv @ Cost)
Inventory at Cost Value (Inv @ Cost) is the total value of all your owned inventory as it relates to the Cost of Goods Sold (COGS). This figure is used in calculating the profit margins and Gross Margin Return on Investment (GMROI) of your assortment. Inventory @ Cost is also calculated during the assorting and buying process to ensure that all new merchandise that you have assorted is at or below your Open-To-Buy budget prior to placing orders with your vendors.
Inventory @ Cost = (# of Units On Hand × Cost Of Goods Sold)
Weeks of Supply (WOS)
Weeks of Supply (WOS) compares the number of units sold per week by the number of on-hand inventory units remaining in order to understand the number of weeks before an item is expected to sell out completely.
It is important to have at least a basic understanding of the typical WOS for your various product categories, so that when a style is dramatically higher or lower than this average, you’ll know that action is necessary to prevent excess inventory or stock-outs.
Given that there are 13 weeks in each quarter, and 52 weeks in a year, you can quickly look at WOS of a product and identify whether you have too much or too little inventory on-hand. If you have 26 Weeks Of Supply in swimwear and summer is almost over, you know you must take action! If your WOS is too high, this could trigger actions such as promotions or markdowns. Alternatively, if your WOS is too low, you might consider getting a rush order of replenishment inventory from your supplier, adding another colorway of that same style, or even a price increase, as there is a clear demand for this merchandise.
Weeks of Supply = (On Hand Inventory ÷ AVERAGE(Weekly Unit Sales))
Average Units Per Store (UPS)
Sometimes referred to as APS (Average per Store), Units Per Store (UPS) is the average number of unit sales driven per store or channel for a particular SKU, style, or department. You can use this metric to make decisions about what percentage of inventory buys to allocate to your physical locations, including any Brick+Mortar stores, distribution centers, or warehouses that hold your inventory. You can also leverage your UPS of similar products to calculate the inventory needs for a new product that has no sales history, or potentially even a new sales channel entirely.
Average Units Per Store = (Unit Sales ÷ # of Stores or Channels)
On-Hand Inventory (OH)
On-Hand Inventory (OH) is the number of units currently available, or “on-hand” of a particular SKU, style, or department of products. This figure is often just captured at a moment in time during the buy planning season. However, reviewing your OH inventory can be useful to calculate anticipated inventories during Open-To-Buy planning. It is often helpful to calculate the percent change (%▲) between this current OH and compare it to past seasons.
On-Hand Inventory = (Beginning Of Period Inventory – Period $ Net Sales)
Stock-to-Sales Ratio (Stk:Sls)
Stock-to-Sales (Stk:Sls) ratio tells buyers, in theory, how much inventory is needed to sell one unit of merchandise. After your planned monthly sales target is established, Stock-to-Sales is used to balance planned monthly stocks with planned monthly sales. This figure is used in future inventory positioning and open-to-buy planning. A stock-to-sales ratio around 1.0 is always favorable, because you’d rather not need more than 1 unit on-hand in order to generate the sale.
However, every category of merchandise has a unique ratio that tends to drive the strongest unit sales. Finding this sweet spot means that your service levels are maintained, meaning fewer sizes sell out, and weekly sales demand can be sustained for the intended selling period. Consider denim for example. A single denim SKU might come in 10 different sizes. You’ll need to balance your beginning on-hand stock with your anticipated unit sales to ensure that you don’t run out of any size too early, which almost guarantees a slow-down in unit sales. Conversely, you don’t want to end the selling period with too much inventory either, as that will close up your open-to-buy, meaning you won’t have space for fresh new goods.
For brands that only sell one SKU, this figure is less useful, as it is most valuable in making comparisons across an entire assortment of goods, rather than for just a single product business.
Stock-to-Sales Ratio = (On-Hand Inventory ÷ Period $ Net Sales)
Contribution Delta (Cont ▲)
Inventory is often the most expensive asset a business has. As such, inventory investments should be proportional to the unit sales contribution of any product category. In this workbook you’ve learned to calculate the Unit Sales contribution of a style, department, or class of goods in your assortment. Contribution Delta (Cont ▲) is the difference between this percent value and the percent value this same category makes up to your total inventory.
A contribution delta between (-5%) and (5%) means your inventory buys are pretty aligned with your sales demand! If this is you, good job!
If your delta is (-5%) or less , then you likely have opportunity to drive sales by purchasing more units of this category. A delta (5%) or greater means there is excess inventory and you likely need to buy fewer units, or potentially change your flow dates for these goods to adjust the Time On Offer.
Contribution Delta = (Inventory Contribution) – (Sales Contribution)
Beginning of Period Inventory (BOP – Actual) (BOP – Planned)
Beginning Of Period Inventory (BOP) is the total amount of inventory you have at the beginning of a selling period, whether that period is a month, a quarter, or even a new year. BOP can be calculated for any SKU, style, or category of goods, as well as at the total business level. BOP is often expressed in monthly or quarterly terms.
During your Pre-Season Planning phase for an upcoming selling period, your BOP inventory is projected based on sales forecasts, upcoming receipts, and anticipated changes in consumer demand due to internal or external market factors. This calculation directly impacts your Open-To-Buy (see definition below), sell through rates (ST%), and also your seasonal forecasts.
Beginning of Period (Actual) = (AVERAGE (Weekly Sales) × Weeks Of Supply)
Beginning of Period (Planned) = (Planned Period Sales × Stock-to-sales Ratio)
End of Period Inventory (EOP)
End of Period Inventory (EOP) is the total amount of inventory units left at the end of a selling period. During the Pre-Season Planning phase, you should target a specific EOP for every season to reverse engineer your planned sales for that period. Furthermore, your EOP, similarly to BOP, is vital to calculating your Open-To-Buy, forecasting unit sales, and achieving period sales targets. During the In-Season Management and Post-Season Analysis phases, the Percent Change (%▲) in your EOP should be closely monitored, and regularly compared to that of previous periods, like previous month, previous quarter, same quarter last year, etc. This will help you identify areas where results are atypical or unfavorable, meaning adjustments to your unit buys are likely in order.
As a general note, the actual BOP of any selling period will always be equal to the actual EOP from the previous period. For example, if you ended the month of February with 105 units on-hand, your EOP from February would be 105. This would also be the amount you’re starting the month of March with, so your BOP for March would also be 105 units.
End of Period Inventory (Actual) = (BOP Inventory – Period Unit Sales)
End of Period Inventory (Planned) = (Planned Beginning Inventory – Planned Period Unit Sales)
Inventory Turnover Rate (ITR or “Turn)
Inventory Turnover Rate (ITR) is the number of times you sell and replace all your inventory in a year. This figure represents the degree of balance between your stock levels and your unit sales. For most industries, a good ITR would be between 5-10, meaning you sell and replenish your goods every 1-2 months. Though this figure is a calculation of actual results during Post-Season Analysis, it too can be anticipated, planned, and controlled over a current or upcoming selling period.
Inventory Turnover Rate = (Unit Sales for a period ÷ Average Inventory for the same period)
Average Inventory (Avg Inv)
In the Post-Season Analysis phase, Average Inventory (Avg Inv) is your past results of on-hand inventory over a given period. Your Q1 Avg Inv, for example, would be the average amount of inventory that you had in each of those three months. This calculation can be made for a daily average, weekly, monthly, quarterly, or even annual average.
It is best for an organization to choose one or two ways to view this metric and standardize that view across all reporting workbooks and software tools. For example, an organization might choose to monitor their Avg Quarterly BOP Inv, as well as their Avg Monthly EOP Inv for each category and department, as well as the total business.
Average Inventory (Results) = AVERAGE (On-Hand Inventory over each segment of a period)
In the Pre-Season Planning phase, Average Inventory (Avg Inv) is the total amount of inventory needed (which can be expressed in units or retail dollars). Avg Inv is often calculated using the inventory turnover rate. When you know your Planned Retail Sales and your desired Inventory Turnover Rate for a selling period , you can calculate the amount of stock you will need to achieve that sales plan. This calculation then informs your Open-To-Buy, and prevents under-buying (“sell outs”) or over buying (“excess inventory”). This same calculation can be performed in units instead of dollars if desired.
Average Inventory (Plan) = (Planned Sales for a period ÷ Inventory Turnover Rate)
Planned Receipts (Rcpts)
During the Pre-Season Planning phase, Planned Receipts (Rcpts) refers to the amount of merchandise units that your business can afford to bring in during a season. Receipts should be calculated and planned ahead of the selling season as part of your Open-To-Buy planning. These decisions should be based on the sales and inventory performance from the same category and the same time period the previous year, if historical information is available. For newer brands, you’ll be relying on historical sales from last month, or last quarter, in which case the same calculations can be reviewed. However, keep in mind that some products demand changes throughout the year due to seasonality.
Conversely, during the In-Season Management phase, “receipts” often refers to the number of units that are on-order, soon to be delivered to your warehouse/distribution center/storage facility. During the Post-Season Analysis phase, Receipts will refer to the amount of units that were actually delivered during a specified period.
Receipts = (SUM (Planned EOP , Planned Sales , Planned MDs) – Planned BOP)
Open-to-Buy (OTB)
Your Open-To-Buy (OTB) plan tells you how much “room” there is to buy new inventory for a future season. This is the most important part of the Pre-Season Planning phase, as it prevents the under-buying or over-buying of inventory, both of which can lead to costly markdowns, missed sales, and lost profits.
After Post-Season Analysis phase of any selling period, OTB planning allows you to leverage your sales forecast to accurately predict how much new inventory you need (and can afford) for an upcoming season. This critical calculation considers current On-Hand inventory, upcoming receipts, and forecasted/planned sales. An experienced merchandise planner first calculates their OTB for an entire year, which can then be broken into quarterly and monthly OTB figures based on the percent contribution of sales that are driven by each period.
OTB is often calculated first in retail dollars, then in cost dollars, which is ultimately translated into a number of units at cost that the company plans to purchase.
Open-to-Buy (Retail) = (SUM (Planned EOP stock, Planned Sales, Planned Markdowns) – SUM (Actual On-Hand Stock, On-Order Receipts)
Open-to-Buy (Cost) = (Retail Open-to-Buy × (1- Planned Markup%))
Open-to-Buy (Unit) = (Cost Dollars Open-To-Buy ÷ Average Unit Cost)
Inventory to Last Year (Inv to LY)
Inventory To Last Year (Inv to LY) is the same calculation as Percent Change (%▲) listed in the basics section above. As such, Inv to LY is the percent difference in the on-hand inventory of a particular SKU, style, class, or department of products relative to the same time period last year. It is important to monitor changes in your inventory levels across styles, categories, and at the total, as it can help you understand correlating changes in sales during your In-Season Management and Post-Season Analysis.
For example, if you know that in Q1 2020, your swimwear sales were down -5% to last year, but your available inventory was actually down -20% to last year, then your swimwear performance is actually not suffering. We know this because the sales are only down slightly, despite the category having far less inventory available than the previous year. This means that more sales were driven by fewer SKUs. It’s a clue that whatever styles were low on inventory this year, were likely underperforming styles to begin with, and you should focus your unit buys on the more productive inventory.
Inventory to Last Year = ((BOP This Year – BOP Last Year) ÷ BOP Last Year)
Time on Offer (TOO)
Time On Offer (TOO) is a decision to be made, rather than a result to be calculated. TOO is the total number of weeks that a given product in an assortment is planned to sell at regular price before any markdowns are taken. During Pre-Season Planning, it is important to create a planned TOO for each product you invest into, especially if it is a highly seasonal product with a short-term window of opportunity to sell.
The TOO can be calculated retroactively by counting the number of weeks an item was available on your sales floor, or proactively as the predetermined “selling period” before it is purchased. The TOO is important because it directly impacts your unit buy of an item. You can calculate your inventory demand by multiplying your TOO with your weekly ROS, and the result is the number of units you’d expect to sell over the time period in question.
For example, highly seasonal merchandise like floral, embroidered, capri length denim will have a very short TOO of 2-8 weeks. Conversely, basic 5-pocket denim in medium wash with no destruction will likely be a year-round product, thus its TOO would be much longer, likely between 26 and 52 weeks.
Conversely, during the In-Season Management phase, “receipts” often refers to the number of units that are on-order, soon to be delivered to your warehouse/distribution center/storage facility. During the Post-Season Analysis phase, Receipts will refer to the amount of units that were actually delivered during a specified period.
For basic or year round styles, this could be up to 52 weeks, for seasonal or trend products, it could be 1-13 weeks.
ABOUT THE AUTHOR
Hi, I’m Taylor Daniel, CEO and Founder of FOMO agency. Before starting my Fashion Launch Coaching business, I earned a B.S. in Fashion Merchandising, and gained two decades of retail experience, including work as a fashion buyer for numerous popular retail corporations.
I’m on a mission to help small busiensses take over the fashion industry, one profitable launch at a time. I help business owners go from confused-about-where-to-start to having a clear vision and path toward profit!
Cheers,
