RETAIL GLOSSARY

Merchandise Financial Planning

The practice of forecasting and managing the financial aspects of a retail business, such as sales, margins, inventory levels, and open-to-buy budget.

What is Merchandise Financial Planning?

Merchandise financial planning involves strategically managing a retailer's inventory investment. It includes forecasting sales, setting inventory targets, and creating budgets to optimise profitability and ensure sufficient stock levels. This process involves analysing historical sales data, forecasting future sales, setting inventory targets, and using financial tools like open-to-buy budgeting. Retailers also consider market trends, customer preferences, and performance analysis to make informed decisions about product assortment and inventory management. By implementing merchandise financial planning, retailers can optimise their inventory investment, improve profitability, and align their merchandise assortment with customer demand.

How Merchandise Financial Planning works

Sales Forecasting: Retailers use historical sales data, market trends, and other factors to predict future sales. This helps them understand customer demand and plan their inventory investment accordingly.

Inventory Planning: Based on sales forecasts, retailers set inventory targets to ensure they have sufficient stock to meet customer demand. They determine optimal stock levels, safety stock requirements, and reorder points to balance inventory costs and avoid stockouts or excess inventory.

Open-to-Buy (OTB) Budgeting: Retailers allocate available funds for purchasing new inventory using OTB budgeting. They control spending by comparing actual sales and inventory levels against planned targets, making adjustments as necessary to optimise future purchasing decisions.

Assortment Planning: Retailers strategically plan their merchandise assortment based on customer preferences, market trends, and performance analysis. They select product categories, determine assortment sizes, and identify key product attributes to meet customer needs and maximise sales potential.

Performance Analysis: Retailers continuously monitor and analyse the performance of their merchandise financial plans. They compare actual sales, inventory levels, and financial results against planned targets to identify deviations and make necessary adjustments for future planning accuracy.

By following these steps, retailers can effectively manage their inventory investment, optimise profitability, and align their merchandise assortment with customer demand. It involves analysing sales data, setting inventory targets, budgeting, and assortment planning while continuously monitoring and adjusting performance. This data-driven approach helps retailers make informed decisions and improve their overall financial performance.

Pros of Merchandise Financial Planning

Improved Inventory Management: Merchandise financial planning helps retailers optimise their inventory levels by aligning them with sales forecasts and customer demand. This leads to better inventory turnover, reduced carrying costs, minimised stockouts, and improved overall inventory efficiency.
Increased Profitability: By accurately forecasting sales, setting inventory targets, and controlling purchasing through open-to-buy budgeting, retailers can optimise their buying decisions. This ensures that inventory investment is allocated effectively, minimising excessive markdowns, maximising sell-through rates, and ultimately improving profitability.
Enhanced Customer Satisfaction: Effective merchandise financial planning ensures that retailers have the right products available at the right time. This reduces out-of-stock situations, increases product availability, and enhances the overall shopping experience for customers. Meeting customer demand leads to higher satisfaction levels and increased loyalty.

Cons of Merchandise Financial Planning

Uncertain Demand Forecasting: Despite efforts to forecast sales accurately, demand can be unpredictable due to various factors such as market trends, changing customer preferences, and external influences. Inaccurate demand forecasts can lead to imbalances in inventory levels, resulting in excess stock or stockouts.
Rigidity in Planning: Merchandise financial planning involves setting targets and budgets based on assumptions and forecasts. However, if market conditions or customer behaviour changes unexpectedly, the planned inventory levels and budgets may become inflexible and difficult to adapt in real-time. This can lead to missed sales opportunities or inefficient inventory allocation.
Cost and Complexity: Implementing merchandise financial planning requires investment in technology, data analysis capabilities, and skilled personnel. This can involve costs and resource allocation that may pose challenges for smaller retailers with limited budgets. Additionally, the complexity of data analysis and decision-making processes may require training and expertise.

FAQ

Below you will find answers to common questions

How can merchandise financial planning help retailers optimise their inventory investment?

Merchandise financial planning helps retailers optimise their inventory investment by aligning it with sales forecasts and customer demand. By accurately forecasting sales and setting inventory targets, retailers can ensure they have the right amount of stock available to meet customer needs without excessive inventory carrying costs. This leads to improved inventory turnover, reduced stockouts, and increased profitability.

How does merchandise financial planning contribute to assortment planning?

Merchandise financial planning plays a crucial role in assortment planning by considering factors such as customer preferences, market trends, and performance analysis. By analysing sales data and customer insights, retailers can identify the most profitable product categories, determine the appropriate assortment sizes, and identify key product attributes that resonate with their target market. This helps retailers curate a well-balanced merchandise assortment that aligns with customer demand, improves sales performance, and maximises profitability.