What is Backlog in finance?
This is usually a list of work that needs to be completed. While this definition is a general one, in accounting and business, Backlog might mean that the company is yet to fill its sales order or that the stack of financial paperwork like applications for loan and many more are yet to be worked on.
However, in public companies, backlog means a different thing. This is because it holds significant implications for shareholders as it might mean had the company is unable to meet up with its demand or that the company could not meet up with its required financial earning.
In construction and manufacturing, the term backlog is used to describe a situation whereby the existing workload is more than the production capacity of a department or a firm. In general, the backlog could have a positive or negative implication.
A backdrop is positive when there is an increasing backlog on the demand for products. This could mean that there is increasing sales of products and increase profit-making. However, it could also mean inefficiency in the production process. Hence, a falling backlog on product demand might suggest a reduction in sales of production or production efficiency.
For example, a printing company specialized in printing T-shirts with a production capacity average. Let's assume that the production capacity of the company is 1,000 T-shirts per day, and the company has to meet up with its production demand as it's order is approximately 1,000 per day.
Then the company discovers a new printing pattern along the line and works with that rather than the original design. Probably a design that gets the attention of more people. As a result of the new interest, the 1000 daily production capacity would be increased to suit the new demand as well as meet the current demans. Which may result in printing 2000 T-shirts per day, however, the production capacity of the company still remains 1000. Because the current production capacity of the company is 1000, the company's backlog grows by 1000 per day.
Examples Of Backlog
In October 2017, during the 10th anniversary of the iPhone 7 when Apple debuted the iPhone X, the new phone demand created a long week backlog on pre-orders. As a result of this, Apple had to delay the shipment of the new order till late November and again in December for customers who pre-ordered during the launch of the product. A lot of persons criticized the delay and related this to a similar occurrence in their debut in 2015. This made many view the company as lacking in terms of meeting up with their demand, while others interpret this to mean that the product is very effective.
The backlog is often used to describe a company's sales order that is yet to be filled or a load of financial paperwork that is yet to be processed.
When a company has a backlog, it could attract a negative or positive interpretation from the shareholder. It could mean the company cannot meet up with its demand. It could also impact the company's future earnings. Whichever way, the presence of a backlog can either attract shareholders to the company or discourage shareholders from the company.