A 2017 survey by the Small Business Administration shows that 50 % of small to mid-size businesses fail within five years, and only 1/3 survive more than ten years. This is largely due to a lack of cash flow. It is critical for the business owner to know their cash balance at all times. In addition to the Balance Sheet and Profit and Loss statements, a cash flow forecasting system is a necessary tool for a small business. For companies with inventory, the cash flow forecasting system should include an Open to Buy.
An Open to Buy is a financial budgeting tool that companies use to manage inventory and make the best use of their purchasing dollars. Companies can use the Open to Buy to project their revenue and inventory purchases, therefore having a better understanding of their cash flow. Sales projections (and actuals once they are realized), the costs of goods sold and inventory levels are laid out by month. This information is tracked against the company sales and profit goals, providing the company with a roadmap to follow to attain these goals. The inventory levels necessary to meet these goals are laid out and the company can manage to optimal inventory levels as actual sales and profits are recorded.
Business owners need to be aware of their cash balances at all times. It is important that the Open to Buy is updated and reviewed regularly. Many successful companies review their Open to Buy on a weekly basis. At minimum, it should be reviewed monthly. The tool should project sales and inventory balances for six months out at minimum. As trends change, sales and gross margin projections must be adjusted, allowing business owners to make strategic decisions that increase sales and profits, thus increasing their cash flow. Businesses must adapt to the unexpected and use the roadmap that Open to Buy provides to get back on track to achieve their goals.
The balance sheet is not enough to determine the health of the inventory. Can the inventory assets on the balance sheet be turned into profits? Or does the company carry excess inventory that will drain cash and lead to unprofitable sales or write-offs? An Open to Buy tool enables a company to monitor the true value of the inventory at the category level and increase its cash flow. Margins are continually reviewed and compared to the original plan. As sales are realized, projections for future months are made. If there are problems with the profit margins or sales are not meeting plan, those issues can be addressed on a timely basis. That category can be minimized and the opportunities within more profitable categories can be capitalized on.
An Open to Buy can also help a company measure its Key Performance Indicators (KPI’s). Often, the high-level KPI’s of a business include Revenue, Expenses, Profit and Turnover. All of these indicators are included in an Open to Buy. Therefore, by using an Open to Buy, a company can see early warning signs that improvements must be made to achieve their core business objectives.
Many small businesses do not survive because of a failure to plan. Without a plan that has measurable goals and a system to evaluate results realistically, a company is not able to adjust when the unexpected happens and capitalize on what is working in the business. Cash flow suffers and a company is unable to keep up with its obligations. An Open to Buy system provides a plan and a roadmap to companies with inventory, enabling them to adjust and increase their cash flow and profitability.
