Backlog Definition

Ultimately, if businesses are only filling backlogs, that means they have no new sales and revenues will quickly decline. Sales backlog is typically expressed as a ratio that compares daily, weekly or monthly order totals with order processing capacity. Sales backlog refers to when the number of orders your company has taken but hasn’t yet completed. It is common in growing businesses and can indicate a higher demand for a product. The letter comes after a labor shortage has continued to affect the U.S., according to data from the U.S. And the record lows in net international migration to the U.S. are a major contributing factor to the issue, experts have said, with immigration backlogs deepening the shortage.

The 2008 housing crisis resulted in a backlog of foreclosures in which lenders had large inventories of residential properties they needed to sell and get off the books. With homes going into foreclosure at a much faster rate than usual, lenders did not have the capacity to process all the foreclosures in a timely manner. In many cases, these lender backlogs resulted in situations where delinquent borrowers were able to remain in their homes for several years without making any mortgage payments. The housing recovery did not begin in earnest until such backlogs were mostly cleared. Typically, this level of production is right in line with the demand for the company’s shirts, as it receives approximately 1,000 daily orders, give or take. In simple terms, a backlog is a list or inventory of work that needs to be completed.

Portraying backlog in accurate detail supports significantly stronger valuations. A more accurate and honest sales forecast, built on a backlog and pipeline that can be supported with documentation and logic, isn’t just important for third parties – it matters for you, the business owner. Recently, I received a sales forecast from a client who was seeking a bank loan, and wanted me to review  the projections before submitting it to a lender. It predicted staggering growth for a company with questionable financial capability in a market where growth is hard to attain. By implementing a backlog in your financial management strategy, you can bring structure, clarity, and focus to your financial goals.

Why Are Inventories Important to Manufacturing Companies?

It can include revenue for both subscription and non-recurring services such as training and implementation. Deferred revenue refers expressly to individual periods within a contract. Revenue backlog is about total contract value, regardless of what’s been fulfilled and what hasn’t. I am not sure if conceptually there is a big difference if there is a backlog of orders that might get cancelled, or if demand itself simply drops for the product.

  • Revenue backlog is calculated by taking the total value of contracts, orders or products not yet invoiced, subtracting any potential discounts or write-offs, and adding tax and shipping charges.
  • As their reputation grows and sales increase, they’ll begin to exceed their maximum capacity each week.
  • If backlogs continue to increase month over month — from 0.09 to 0.2 to 0.5, for example — it means customers are waiting longer and longer to get their orders.
  • Then, you’ll know whether to focus on a company’s backlog or deferred revenue.

Let’s go back to home builders, a great example of disclosed backlog accounting in a 10-k. Keep in mind that this is in contrast to deferred revenue, where revenue is recognized but not yet delivered. As an example, a customer who is approved for a mortgage on a new home goes into a home builder’s backlog. Once that transaction closes, the customer’s purchase is added to revenue and removed from the backlog. I find that backlog accounting is best explained by the home builder industry.

The main purpose of a backlog is to prioritize tasks based on their importance and urgency. By having a clear and organized list of financial tasks, you can ensure that you are focusing on the most critical aspects of your financial management. Like with the backlog, each can give you an insight into the company’s future demand and growth potential based on what the company has done so far. Understand the key difference between a contract that gets put on the backlog and a contract in which revenue is recognized. Then, you’ll know whether to focus on a company’s backlog or deferred revenue. Yes, various project management and workflow automation software tools can assist in backlog management.

How do you calculate backlog?

The amount of production is usually right in line with the demand for the company’s umbrella, as it receives about 10,000 daily orders. None of those policy changes would be effective in isolation, Malde said—simply raising caps without adding more capacity at agencies like USCIS could lead to more visas going to waste. The projections of missed economic growth underscore the need for congressional action, Malde said. Since revenue backlog calculation is simply about revenue and does not consider invoicing, it can be significantly different from deferred revenue. A comprehensive understanding of the backlog sends the right messages about your financial management of the business.

What is Revenue Backlog?

While initial backlog growth is generally positive, steady revenue combined with customer fulfillment will increase your company’s value. The existence of a backlog may have either positive or negative consequences. For instance, growing product order backlogs may imply increasing sales. On the other hand, businesses usually want to prevent a backlog, because this could mean increasing inefficiency in the production process. When Apple debuted the iPhone X, a 10th anniversary edition of the iPhone, in October 2017, overwhelming initial demand for the phone created a weeks-long backlog on pre-orders. Apple was forced to delay shipments to late November and then again to December for customers pre-ordering the phone upon launch.

For example, it’s part of Lockheed Martin’s contract with Bulgaria (yes, Bulgaria has ordered F-16s) that it’s order will be queued behind all the others. There will also be clauses in the contract which say that other orders can jump the queue, and that Bulgaria can cancel it or negotiate a lower price if delivery takes too long. Stack Exchange network consists of 183 Q&A communities including Sta