What is a Merchandise Purchases Budget?
A merchandise purchases budget is a detailed list of inventory-related items a retailer expects to purchase over a given period.
“A detailed plan of goods that must be purchased.” -American University of Beirut
Meaning of Merchandise Purchases Budget
A merchandise purchases budget, also known as budgeted cost outlines inventory purchases a retailer expects to make based on historical sales data. It provides the following:
- A clear roadmap for the purchasing department as to inventory needs over a given period.
- Helps a retailer identify an optimal level of inventory.
- Identifies spending limits.
Inventory may be a retailer’s biggest asset. Therefore, buying the correct amounts ensures they’re able to meet market demand. High levels of inventory can result in low levels of cash. In addition, low levels of inventory can result in missed sales opportunities.
Several inventory management techniques exist intended to optimize the inventory management process including:
Just-In-Time
The just-in-time (JIT) inventory management strategy centers on holding the least amount of inventory possible while minimizing stockouts. It relies on fast transit times when placing orders. Furthermore, the technique intends to minimize costs associated with holding large amounts of inventory and reduce risk related to maintaining large amounts.
Bulk Order Shipments
The bulk order shipments inventory management strategy focuses on buying products in bulk to maximize cost savings. The technique assumes all ordered products will sell within an expected timeline. Additionally, if a product doesn’t sell as expected, a retailer may find they have an unnecessary surplus of inventory.
Example of a Merchandise Purchases Budget
Janice owns two retail stores that sell a variety of chocolate products. Her sales volume varies at different points in the year, especially during holidays. Bulk order shipments is the inventory management technique Janice relies upon.
As an owner of the business for 10+ years, she has a good understanding as to inventory needs at various points throughout the year. Furthermore, Janice utilizes a merchandise purchases budget each quarter to ensure she has adequate inventory year-round. She reviews quarterly sales reports and past receiving reports before placing bulk order shipments multiple times per year.
Budgeting helps Janice optimize her floating capital by ensuring she has enough inventory to satisfy customer demand while avoiding stockouts and a surplus of inventory.
Additional Resources
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