Understanding Backlogs: Meaning, Effects, and Real-World Cases

What Is a Backlog?

A backlog is a buildup of work that needs to be completed. It can have a number of uses in accounting and finance. It can refer to a company's sales orders waiting to be filled or a stack of financial paperwork, such as loan applications, that needs to be processed.

A large backlog can have significant consequences for the shareholders in a public company. A backlog could indicate that the company has insufficient operating capacity; conversely, it could also indicate that its products have exceptionally high demand.

Analyzing the Impact of Backlogs

 A backlog indicates when a workload exceeds a firm's production capacity, common in construction or manufacturing.

A backlog can be positive or negative. More product orders might signal rising sales, but companies usually avoid backlogs as they may indicate inefficiency. A declining backlog might mean lagging demand or improved efficiency. Unexpected backlogs can disrupt forecasts and schedules. Naturally, unexpected backlogs can compromise forecasts and production schedules.

Backlogs may also apply to companies that develop products/services on a subscription basis, such as SaaS (software-as-a-service) providers. A backlog, in this case, is not due to the company being unable to meet demand but because the time for performance or provision of the service (i.e., future months of the subscription or contract) has not yet been reached.

Illustrative Case Study: Managing T-shirt Order Backlogs

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

One month, the company unveils a new T-shirt design that quickly catches on among college students. Suddenly, it is receiving 2,000 orders per day, but its production capacity remains at 1,000 shirts per day. Because the company is receiving more orders each day than it has the capacity to fill, its backlog grows by 1,000 shirts per day until it raises production to meet the increased demand.

Practical Examples of Backlogs in Major Industries

When Apple (AAPL) launched the iPhone X in October 2017, high demand caused a weeks-long pre-order backlog. This forced Apple to delay shipments from November to December. Many criticized the company for poor sales forecasting, similar to the Apple Watch launch in 2015.

The 2008 housing crisis resulted in a backlog of foreclosures in which lenders had large inventories of residential properties they needed to sell and get off the books. With homes going into foreclosure at a much faster rate than usual, lenders did not have the capacity to process all the foreclosures in a timely manner.

In many cases, these lender backlogs resulted in situations where delinquent borrowers were able to remain in their homes for several years without making any mortgage payments. The housing recovery did not begin in earnest until such backlogs were mostly cleared.