What Is ‘backlog’ And Why Does It Matter?

In financial terms, backlog can refer to several factors. It can pertain to a company’s workload buildup, whether financial paperwork must be completed, a backlog in sales order fulfillment, or production capacity. Sectors that commonly deal with backlog include manufacturing, software development, and construction.  

Global Pandemic Backlog 

The COVID-19 pandemic led to many backlog concerns because of shutdowns, postponements, and cancellations. This impacted the construction industry especially hard. However, many sectors have had to deal with the implications of truck driver shortages, clogged ports, increasing container costs, slower deliveries, and rising commodity prices for gas and steel. Educational services and food services have also had to face backlog issues. In mid-2021, the backlog of core capital goods orders rose to $230 billion. These impacts are still lingering in 2022, and while supply chain conditions are slowly improving, the issues are not expected to be resolved globally this year. Germany is currently seeing its worst industrial order backlog in over 40 years.  

Is Backlog Good or Bad? 

Backlog is an essential issue in the M&A due diligence process. When specific responsibilities have not been tended to promptly, it can directly impact a company’s value. This is because it can affect earnings, projections, and the business’s ability to perform.  

A backlog could mean that a business may be unable to meet demand or that operations are inefficient. It can even encourage competition to enter the market. For a public company, it can have negative implications for shareholders. A large order backlog is usually linked to a long delivery process. This means that you have a lot of work in the pipeline, which means your capital is tied to all that unfinished production. 

But a backlog isn’t necessarily always a bad thing. If a company has a backlog of product orders, it can simply mean that sales and demand are up. A low backlog could signal improved efficiencies. At the same time, a low backlog can also mean a drop in demand.  

Sometimes, there is an existing backlog simply because all of the terms of a contract have not yet been reached. With so many intricacies, it is important to carefully understand the reasons for any backlog to achieve accuracy in the due diligence and valuation processes.  

How to Manage Backlog 

There are specific measures you can take to manage your company’s backlog best: 

• Pay attention to the market conditions 
• Prioritize and be decisive 
• Make sure your customer and vendor relationships are healthy 
• Look into diversification 
• Maintain professional connections to get in on bidding processes early 
• Continually reassess processes  
• Use backlog management software  
• Know when to say ‘no’ 

If you are negotiating the sale of your company, another way to deal with the backlog is to outline clear communication with the buyer. This means defining the terms you will be using upfront. The last thing you want is your revenues to be undervalued just because discussions become confusing. The buyer and the seller should have a shared understanding when looking at revenue metrics, forecasts, quotas, pipeline management, and invoicing. Also, showing that you have a solid knowledge of backlog in your business sends the right message to a buyer regarding managing your finances. An M&A advisory firm can help you define precise terminology for you and the buyer in the due diligence process. Assessing the backlog correctly can result in significantly better valuations, maximizing the money you walk away with following a merger or acquisition.  

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