Reviewed by Annapoorna | Updated on Sep 28, 2020

What is Backlog?

A backlog refers to a buildup of work that must be completed. The term "backlog" has several uses in accounting and finance. It may vary according to the circumstance. For instance, a company's sales orders waiting to be fulfilled or a stack of financial paperwork, such as loan applications, that needs to be processed.

There may be consequences for shareholders when a limited public company has a backlog. It is because the backlog could affect the potential earnings of the business. Accordingly, a backlog may suggest that the company is unable to satisfy demand.

Backlog Explained

A present workload that surpasses current production capacity is a backlog. Its existence can have either a positive or a negative effect, depending upon the specific situation.

The word backlog is used to denote the current workload that exceeds a company or department's production capacity, often used in construction or fabrication.

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.

Similarly, a dropping backlog can be a portentous sign of lagging demand but may also mean increasing efficiency in production. Unforeseen backlogs will compromise predictions and production schedules.

Illustration on Backlog

Assume that a company is selling umbrellas in a polka dot pattern. It has the capability of manufacturing 10,000 polka dot umbrellas every day. 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.

One month, the company launches a new umbrella rainbow design that catches on quickly among the urban women. In a sudden turn of events, it starts receiving 20,000 orders a day. However, its manufacturing capacity is still appearing to be 10,000 umbrellas a day.

Since the company receives more orders every day than it can fill, the backlog increases by 10,000 umbrellas a day before it boosts production to satisfy the increased demand.

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