Backlog

What is a Backlog?

A backlog is referred to as the pending work that has to be completed. However, this term has several uses in finance and Accounting. For instance, it might refer to the sales orders of a company that are waiting to be stacked or filled with financial paperwork, like loan applications to be processed and more.

Also, when a public company has backlogs, there can be a variety of implications for shareholders as backlog can have a direct impact on the future Earnings of a company.

For instance, when Apple introduced iPhone X as their 10th-anniversary edition, in October 2017; they received an overwhelming response. This resulted in weeks-long backlog as the phone was still on pre-orders.

It resulted in the fact that the company was forced to delay its shipments in December. Several customers criticized this backlog, which somehow impacted the sales of Apple iPhone X. Back in 2015, while debuting the Apple Watch, the company had faced something similar.

How Does it Work?

Putting it in simple words, this term refers to the existing workload that has exceeded the production capacity of a firm. Often, this term is used in a Manufacturing or construction company.

The existence of backlog can have both negative and positive impacts. While the increasing backlog indicates an increase in sales; on the other hand, it also suggests that the company is inefficient in fulfilling the demand.

Likewise, a decreasing backlog could be a sign of the company not having enough demand; however, it may also signify towards the enhancing production capacity.

Backlog Example

Let’s take a backlog example here. Imagine there is a company that sells shoes. The company has the capacity to manufacture 1000 pairs every day. Generally, this production level is accurate enough, considering the demand for its products.

Now, the company decides to come up with a new design of shoes that catches up quickly with young girls. Suddenly, the order level spikes to 2000 per day; however, the company can only produce 1000 a day. Since the company is receiving more orders, its backlog increased by 1000 every day until they increase their production capacity to fulfil the demand.