Merchandise financial planning: a guide to the plan every season starts from
Fashion retailers plan sales, margin, stock and receipts top down before reconciling with bottom up forecasts. The resulting open to buy budget governs every buying decision.
KEY TAKEAWAYS Summary by the editors
- Merchandise financial planning translates revenue and margin targets into category budgets that define inventory investment for each season.
- Top down planning cascades company goals to departments, then reconciles with bottom up forecasts built by planners and buyers.
- The plan calculates four core metrics: sales targets, gross margin, inventory stock levels and receipts by period.
- Open to buy is recalculated each period based on actual sales, receipts and inventory to control spending within budget.
What is merchandise financial planning?
Merchandise financial planning is the planning and analysis of pre season and in season merchandising strategy that enables merchandisers to optimise sales, profit and inventory. It translates revenue and margin targets into category level budgets, defining how much inventory investment each part of the range should receive. An MFP covers sales, markdowns, receipts, inventory levels and expected margins for a season or year, providing a budget for purchases and guiding business analysis, decisions and reactions during the season.
Pre season planning happens six to twelve months before a selling season and covers merchandise financial planning, assortment planning and size optimisation. Pre season, budgets are created for sales, receipts, inventory and margin at a common level of the product hierarchy such as department, category or class based on the size of the organisation. In season, actual performance replaces portions of the pre season plan, and the blended plan governs buying adjustments.
How does top down planning work?
Top down planning begins at the highest level of a retail business, where the owner or senior finance officers establish the business's overall financial goals and targets, then goals are broken down and allocated to different divisions, departments or product categories. The top down plan dissects the strategic plan to a lower level of granularity for each dimension, usually going down to the division or department level and covering the entire year at the season or even month level, calculating sales and margin, inventory and receipts.
The CFO and CEO set a high level goal based on investor expectations, for example needing to grow total revenue by 10 per cent this year to 500 million dollars. The goal is to drive alignment on financial objectives across the business, ensuring that various divisions, departments and product categories align with business goals.
How does bottom up planning reconcile with top down targets?
Bottom up MFP begins with store or product managers and others at the ground level who know their merchandise best and can assess their needs at the SKU level. Buyers and planners look at the product categories individually, for example planning flat sales in denim if it is trending down but planning 15 per cent growth in athleisure if it is hot. Planners and buyers build forecasts based on real customer demand using past sales data and category knowledge, then these plans are compared to the top down goals and any gaps are adjusted through collaboration.
The MFP balances top down sales and margin targets with a bottom up build of sales, markdowns and receipts by period. Reaching consensus between top down corporate strategies and bottom up departmental plans lets cross functional teams work together to achieve financial goals and meet market demand.
What are the four core metrics in a merchandise financial plan?
Retail merchandise financial planning solutions calculate all core merchandising KPIs including cost of goods sold, gross margin, markdown costs and inventory levels. The four primary metrics that structure every plan are sales, receipts, stock and margin.
- Sales: The revenue target.
- Receipts: The dollar value of inventory arriving at the warehouse.
- Inventory: The dollar value of inventory sitting on shelves.
- Gross margin: The profit left over after paying for the goods.
- Markdowns: The budget for discounts, which must be planned so it does not surprise the business later.
Solutions forecast sales based on all internal data and external sources that can be leveraged to develop a better understanding of the current market trends. They calculate the optimum value of inventory receipts required to achieve the sales plan for pre season and in season open to buy.
What is open to buy and how is it calculated?
In practice, MFP outputs the open to buy budget, the spending limit that each buyer works within for a given period. The formula is planned sales plus planned markdowns plus planned end of month inventory minus beginning of month inventory equals receipts or open to buy. OTB is recalculated each month or buying season based on planned sales, planned markdowns and current inventory.
The OTB ingests the actual sales data from the different channels, the latest forecast and shipment and receipt details, then the data is compared against the original plan and the current forecast and the relevant business indicators are recalculated, providing information on the remaining inventory budget or the delta to achieve the sales target. If sales are slower than expected the OTB shrinks, forcing the buyer to cancel orders to protect cash flow, and if sales are faster than expected the OTB grows, allowing the buyer to chase the trend and bring in more stock.
Why does merchandise financial planning matter in 2026?
IHL Group puts the combined cost of stockouts and overstocks at 1.7 trillion dollars annually across global retail. NRF estimates that US retailers faced 890 billion dollars in merchandise returns in 2025, roughly 17 per cent of annual sales. Excess stock in the fashion industry was estimated to be worth between 70 billion and 140 billion dollars in sales in 2023.
The number of days inventory outstanding, meaning the average number of days a company holds stock before converting it into a sale, reached all time highs in 2024 based on analysis from the McKinsey Global Fashion Index. In the US, the average proportion of discounted fashion items in the first half of 2024 rose 5 percentage points year on year, and Nike said markdowns affected around 44 per cent of its assortment on average in 2024 compared to just 19 per cent in 2022.
Upcoming legislation such as the Ecodesign for Sustainable Products Regulation in the EU and the Responsible Textile Recovery Act in California will penalise unsold or obsolete stock, impose recycling and take back obligations and raise the costs of non compliance. There are tremendous opportunities in more effective demand planning, inventory allocation and management of inventory churn through the full season, maximising the value from inventory while bringing down days on hand.
| Planning software | Core strength | Typical user |
|---|---|---|
| Anaplan | Cross functional planning | Large enterprises |
| Centric Planning | Assortment and product lifecycle | Fashion and apparel |
| Oracle Retail | Merchandising and supply chain | Global retailers |
| RELEX Solutions | Demand forecasting and replenishment | Grocery and specialty |
| Toolio | Mid sized retailer workflows | Emerging brands |
Frequently asked questions
What is the difference between merchandise financial planning and assortment planning?
Merchandise financial planning sets the financial framework and budgets for the season at category or department level, defining how much to spend. Assortment planning translates those budgets into specific product choices, deciding which styles, colours and sizes to stock within the allocated budget.
How often should open to buy be recalculated?
Open to buy is recalculated each month or buying period based on actual sales, receipts, markdowns and current inventory levels. Leading retailers review OTB weekly during peak selling periods to react quickly to demand shifts and protect cash flow.
What retail inventory level is considered healthy?
Days inventory outstanding reached all time highs in 2024, and excess stock in fashion was estimated at 70 billion to 140 billion dollars in sales in 2023. The healthiest retailers balance stock to meet demand without excess, typically targeting inventory turn rates that align with their category and channel mix while keeping markdowns below 20 per cent of the assortment.
Sources
- Gartner: Best Retail Merchandise Financial Planning Reviews 2026
- o9 Solutions: What Is Merchandise Planning? A Complete Guide
- Blue Yonder: What is Merchandise Financial Planning?
- Business of Fashion: Fashion Needs a New Growth Playbook
- Business of Fashion: Tackling Fashion's Excess Inventory Problem
- McKinsey: What to expect in the global fashion industry in 2026
Researched and drafted with AI support, reviewed and released by the editorial team.