Backlog

Adjusting Journal Entry Definition

What is the backlog?

An order book is an accumulation of work that must be completed. The term “order book” has a number of uses in accounting and finance. This could include, for example, sales orders from a business awaiting processing or a stack of financial documents, such as loan requests, that need to be processed.

When a public company has an order book, there may be implications for shareholders because the order book can have an impact on the future profits of the company, because having an order book might suggest that the company is unable to meet the request.

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What arrears say about your business

Understanding the backlog

The term backlog is used to indicate the existing workload that exceeds the production capacity of a company or department, often used in construction or manufacturing. The presence of a backlog can have positive or negative implications. For example, a growing order backlog of products could indicate increased sales.

On the other hand, companies generally want to avoid having an order book as this could suggest increasing inefficiency in the production process. Similarly, a falling backlog could be a sign of a delay in demand, but could also mean an improvement in production efficiency. Naturally, unexpected delays can jeopardize production forecasts and schedules.

Special considerations

Consider a company that sells printed T-shirts. It has the capacity to print 1,000 T-shirts every day. Typically, this level of production is in line with the company’s demand for shirts, as it receives around 1,000 daily orders.

One month, the company unveils a new T-shirt design that is quickly gaining ground among students. As a result, it receives 2,000 orders per day, but its production capacity remains at 1,000 shirts per day. Because the company receives more orders each day than it has the capacity to fill, its order backlog increases by 1,000 shirts per day until it increases production to meet increased demand.

Examples of backlog

When Apple launched the iPhone X, a 10th anniversary edition of the iPhone, in October 2020, an overwhelming initial demand for the phone created preorders by several weeks. Apple was forced to delay deliveries until the end of November, then again in December for customers who pre-ordered the phone when it launched. Many have criticized the order book as an example of poor sales forecasts from Apple, which saw a similar situation occur when the company launched its Apple Watch product in 2020.

The 2008 housing crisis resulted in a backlog of foreclosures in which lenders had large inventories of residential property that they needed to sell and pick up the books. Because homes were foreclosed at a much faster rate than usual, lenders did not have the capacity to process all foreclosures in a timely manner. In many cases, these arrears of lenders have resulted in situations where borrowers in default have been able to stay at home for several years without making mortgage payments. The recovery of housing only really started when these arrears were mostly eliminated.

Key points to remember

  • The term “order book” can refer to customer orders from a business waiting to be filled or to a stack of financial documents, such as loan requests, that need to be processed.
  • When a public company has an order book, there may be implications for shareholders because the order book can have an impact on the future profits of the company, because having an order book might suggest that the company is unable to meet the request.
  • The presence of a backlog can have positive or negative implications.

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