Managing your pre-season commit percentages is one of the keys to having a profitable season.
With the Fourth of July now gone by, and the dog days of summer settling in, the attention of many small retailers turns to clearing out their remaining spring and summer merchandise, and finalizing initial shipments of back-to school and early fall merchandise. While business may be slowing down at the cash register, it's a busy time behind the scenes transitioning from one selling season into the next.
It's also a very appropriate time to review your fall sales plans and your pre-season commit percentages. Developing your pre-season commit percentages goes hand in hand with developing an accurate sales plan. One without the other is a job only half done.
A pre-season commit percentage is the percentage of the season's sales plan that you have already committed to before the season begins. It's the bets you've already placed before the season has even opened up.
Every seasonal retailer has to place these bets. Based on the prior year results, and any new items or trends in the market since then, a seasonal retailer has to commit to enough fresh merchandise to set displays and cover early sales, sales which are a critical early indicator of the season to come. Similarly, a retailer frequently has to commit up front to merchandise scheduled for delivery later in the season to assure they'll have core stocks of key items and categories at that critical time.
On the other hand, the greater the pre-season commit percentage the greater the risk associated with those commitments. The best way to think of this is in terms of the calendar. The higher the pre-season commit percentage, the further out into the selling season those commitments will cover, before any sales have been made to indicate which way the season will go. Will I run an increase or a decrease? Will the styles or colors I've bought be the hot sellers? The further out the commitments go the greater the risk that overall sales volume may not be as high as planned, or that the fashion trend may develop in a different direction than anticipated.
The risk is not just markdown risk, although unwise pre-season commitments can easily lead to markdowns that will quickly torpedo the profitability of any season. It's also obsolescence risk, damage risk and packaway risk. And its cash flow risk. As you go through a season, your cash flow plans assume your sales will generate enough cash to pay the bills as they come due. Too much inventory brought in too soon runs the risk of payables coming due without the cash to pay for it, as well as tying up cash needed for critical purchases later in the season.
There's no hard and fast rule for evaluating pre-season commit percentages, except to say that 0% is almost always too low and 100% is to be avoided unless absolutely necessary. Appropriate pre-season commit percentages are unique to each retailer, their product lines, merchandising strategy and vendor structure. That said, here are a few thoughts to help you evaluate your pre-season commit percentages:
The bottom line is that the greater the pre-season commit percentage the greater the inventory risk associated with those commitments. Understanding the nature of this risk, and managing your pre-season commit percentages accordingly is one of the keys to having a successful season, in terms of sales, gross profits and cash flow.