What is a 'Backlog'
A backlog is a buildup of work that needs to be completed. The term "backlog" has a number of uses in finance; it may refer to a company's sales orders waiting to be filled or a stack of financial paperwork that needs to be processed, such as loan applications. When a public company has a backlog, there can be implications for shareholders because the backlog may have an impact on the company's future earnings, as it is unable to meet demand.
BREAKING DOWN 'Backlog'A backlog is generally a situation that companies want to avoid. However, the presence of a backlog can have positive or negative implications. A rising backlog of product orders might indicate rising sales. On the other hand, it could suggest increasing inefficiency in the production process. Likewise, a falling backlog might be a portentous sign of lagging demand but may also signify improving production efficiency.
How a Backlog Works
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, give or take.
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.
Two Types of Backlog Examples
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.
Another example of a problematic backlog occurred in 2009 in England, when a high volume of college financial aid applications resulted in a backlog that prevented some aid determinations from being made in time for the start of the school year.