Backlog Definition, Implications, and Real-World Examples
An accumulation of unfinished work is called a backlog. The word “backlog” is used in various contexts in accounting and finance. It might describe a company’s sales orders that are awaiting fulfillment or a backlog of financial documents that must be handled, such as loan applications.
A backlog may affect future earnings for a publicly traded company, implying that it is not meeting demand, which might have ramifications for shareholders.
Recognizing a Backlog
In building and industry, “backlog” refers to the workload that currently surpasses a company’s or department’s production capability.
There are advantages and disadvantages to having a backlog. For instance, a growing backlog of product orders might be a sign of increasing sales. However, since a backlog may indicate growing manufacturing process inefficiencies, businesses often want to prevent having one. Similarly, while a declining backlog might indicate declining demand, it could also indicate increasing manufacturing efficiency. Of course, unforeseen backlogs can throw production plans and predictions into a loop.
Businesses that provide subscription-based goods and services, like SaaS (software as a service) providers, may also be subject to backlogs. In this scenario, a backlog results from the company’s inability to satisfy demand and the time for service performance or provision (i.e., further months of the subscription or contract) not being reached.
Backlog Example
Take a look at a business that offers printed t-shirts. It can print one thousand T-shirts per day. With about 1,000 orders a day, the company’s production level is usually roughly on par with the demand for its shirts.
A new T-shirt design that the firm releases every month soon becomes popular among college students. Its ability to produce 1,000 shirts daily has not changed, even though it now gets 2,000 requests daily. The company’s backlog rises by 1,000 shirts per day until it increases production to match the rising demand since it gets more orders daily than it can handle.
Examples from the Real World
A weeks-long backlog of pre-orders resulted from the tremendous initial demand for Apple’s (AAPL) 10-anniversary iPhone X version when it was released in October 2017. Due to consumer pre-orders, Apple had to postpone delivery of the phone until late November and then again until December. Many criticized the backlog, citing Apple’s poor sales forecasting. The company experienced a similar scenario in 2015 when it launched the Apple Watch device.
Lenders had a substantial inventory of residential properties they wanted to sell and remove off their books due to the 2008 housing crisis, which created a backlog of foreclosures. Lenders could not handle all of the foreclosures promptly because properties were going into foreclosure faster than typical.
Due to these lender backlogs, delinquent borrowers were frequently permitted to stay in their houses for several years without making any mortgage payments. Not until these backlogs were mostly resolved did the housing recovery start to pick up steam.
Conclusion
- Unfinished work accumulated over time is called a “backlog.”.
- A backlog might indicate that a corporation cannot satisfy demand, which could affect future earnings.
- A backlog is an existing burden that currently exceeds the capability for output.
- A backlog may or may not have sound effects, depending on the particular circumstances.
