What Is a Backlog?
Let me explain what a backlog really means in the world of accounting and finance. It's essentially a pile-up of work that hasn't been finished yet. You might see it in a company's sales orders that are waiting to be fulfilled or even in stacks of financial documents like loan applications that need processing.
If you're a shareholder in a public company, pay attention here: a backlog can directly affect the company's future earnings. It might mean the company is struggling to keep up with demand, which could be a red flag or a sign of booming sales.
Key Takeaways
- The term backlog describes unfinished work that accumulates over time.
- It can influence a company's future earnings by showing if demand outpaces supply.
- A backlog occurs when workload exceeds production capacity.
- Depending on the context, a backlog can be positive or negative for the business.
Understanding a Backlog
You need to understand that backlog often points to the workload surpassing what a firm or department can handle, especially in areas like construction or manufacturing. Think about it this way: if orders are coming in faster than you can produce, that's a backlog building up.
Now, does a backlog always spell trouble? Not necessarily. A growing backlog could mean sales are surging, which is great news. But on the flip side, it might highlight inefficiencies in your production process that you need to fix. A shrinking backlog could signal better efficiency or, worse, falling demand. Unexpected backlogs can throw off your forecasts and schedules, so manage them carefully.
This concept also applies to subscription-based companies, like SaaS providers. Here, the backlog isn't about inability to deliver—it's about future performance periods that haven't arrived yet, such as upcoming months in a contract.
Example of a Backlog
Let's look at a straightforward example to make this clear. Imagine you run a company that prints T-shirts with a capacity of 1,000 shirts per day. Normally, you get about 1,000 orders daily, so everything matches up.
But suppose you launch a hot new design that goes viral among college kids. Suddenly, orders jump to 2,000 per day, while your production stays at 1,000. That means your backlog grows by 1,000 shirts every day until you ramp up production to meet the demand. It's a classic case of demand outstripping capacity.
Real-World Examples
You've probably heard about Apple's iPhone X launch in October 2017. It was their 10th-anniversary edition, and pre-orders were through the roof. The initial demand created a backlog that delayed shipments to late November and even December. Critics pointed to poor sales forecasting by Apple, similar to issues with the Apple Watch in 2015.
Another example comes from the 2008 housing crisis. Lenders faced a massive backlog of foreclosures, with huge inventories of properties they needed to sell. Homes were foreclosing faster than they could process, leading to delays where borrowers stayed in homes for years without payments. The housing market didn't recover until these backlogs were cleared out.
Other articles for you
Inferior goods are products whose demand decreases as consumer incomes rise, leading people to opt for more expensive alternatives.
Blue sky laws are state-level regulations designed to protect investors from securities fraud by requiring registration and disclosure of offerings.
A volatility swap is a forward contract that allows trading on an asset's volatility without involving its price directly.
The enterprise multiple (EV/EBITDA) is a financial ratio that evaluates a company's value by incorporating debt and cash, making it useful for acquisitions and comparisons.
Long-term capital gains and losses from assets held over 12 months receive favorable tax treatment compared to short-term ones.
The bond market is a financial marketplace where governments and corporations issue and trade debt securities to raise capital.
Ex-post refers to actual historical returns analyzed after an event to predict future investment outcomes.
Full retirement age (FRA) is the age at which you can receive unreduced Social Security benefits, varying by birth year and affecting benefit amounts based on when you claim.
Prepaid expenses are advance payments for future goods or services recorded as assets on a company's balance sheet until the benefits are realized.
Systemic risk is the potential for a company-level event to trigger widespread instability or collapse in an industry or economy, as seen in the 2008 financial crisis.