Definition: A merchandise purchases budget is a financial plan that reports the total estimates costs or units of merchandise inventory that are expected to be purchased by a retailer in an accounting period. In other words, this is the budget that managers use to plan inventory purchases for the upcoming periods. It’s also the budget that dictates the amount of money the purchasing department can spend on inventory purchases for the year.
What Does Merchandise Purchases Budget Mean?
For retailers, inventory is often one of their biggest assets on the balance sheet, so buying is extremely important. Purchasing too much inventory can create a cash shortfall while not purchasing enough might turn away customers. There are several different ways that companies help their managers plan and strategize inventory purchases depending on the systems that the company uses.
For instance, many retailers use just-in-time systems while others use the safety stock approach.
Just-in-time inventory systems typically rely on fast transit and order times. A real time inventory count is kept and inventory is only purchased when it’s needed. In other words, there isn’t any excess inventory sitting in storage rooms.
The safety stock approach is completely different. Since not all manufacturers can conveniently ship goods on a regular or daily basis, a certain amount of product needs to be kept in storage in case the retailer needs it. This is the safety stock. A lot of people call this just-in-case inventory.
No matter what system is used, the merchandise purchases budget usually expresses the amount of inventory to be purchased in both dollars and units with a simple equation.
Inventory to be purchased equals the budgeted ending inventory plus the budgeted cost of sales for the period minus the budgeted beginning inventory.
Like most other budgets, the merchandise purchases budget relies on the estimated sales for the period and can’t be made until the sales budget is finished.