What is Purchase budget?

A purchase budget stops you from overspending on stock you do not need yet. If you buy on gut feeling, you can tie up cash in slow sellers while your best sellers run out because there is no money left to reorder them.

To use it, set a spend limit for the period based on expected sales and how much cash you can tie up in stock. Then check every purchase order against that limit before you send it to a supplier, and adjust the budget as the season or sales trend changes.

Formula

Example

A candle store expects to sell $6,000 worth of candles at cost next month and wants to end the month with $2,000 of stock on hand at cost. It starts the month with $1,500 of stock. Purchase budget = $2,000 + $6,000 - $1,500 = $6,500.

Common mistakes

• Setting the budget from last year's sales without checking if demand has changed.
• Ignoring cash already tied up in unsold stock when setting the new budget.
• Treating the budget as fixed and not adjusting it when sales run hotter or colder than expected.

Purchase budget and SteadyShelf

SteadyShelf forecasts sales per variant and suggests order quantities, which gives you the numbers you need to set a realistic purchase budget before you approve a purchase order.

SteadyShelf is launching on the Shopify App Store. Join early access to get the install link first.

Related terms

Open to buy · Demand forecasting · Purchase order · Inventory budget · Working capital

Full inventory glossary

FAQ