What is a 'Back Order'

A back order is a customer order that has not been fulfilled. A back order generally indicates that customer demand for a product or service exceeds a company's capacity to supply it.

Total back orders, also known as backlog, may be expressed in terms of units or dollar amount.


Sometimes when a company makes an order for a good, a company or store may have run out of stock in its inventory. A company who has run out of the demanded product but has re-ordered the goods would promise its customers that it would ship the goods when they become available. A customer who is willing to wait for some time until the company has restocked the merchandise, would have to place a back order. A back order only exists if customers are willing to wait for the order.

A company may have back orders if they run out of the stock in their stores, in which case, it can just place a new order to restock its shelves. A company may also have to take back orders if its suppliers have run out of the resources and raw materials necessary to manufacture the demanded goods. In this case, the company will have to wait until the manufacturing company or supplier has gotten the resources to commence production. Using this example, the supplier would have a back order from its retailers who would also have back orders from their final customers.

A company that utilizes the just-in-time (JIT) inventory management approach will usually have back orders, since it will only order and receive inventory for products as they are demanded. Companies would also have an increase in back orders during the holiday period or when they have a product that is trendy or in high demand.

Companies have to walk a fine line in managing their back orders. While consistently high levels of back orders indicate healthy demand for a company's product or service, there is also a risk that customers will cancel their orders if the waiting period for delivery is too long. This is less of a risk for innovative products with strong brand recognition in areas such as technology.

Analysts would usually monitor how well a company manages its inventory by measuring its back orders. A company with too many back orders may force its customers into the folds of competitors. This could lead to a loss of market share, lower revenue, and a smaller than anticipated bottom line for the company. Including the intangible costs associated with lost clients and sales, a company with a large back order may also face an increase in tangible costs, such as shipping costs. In order to make good on its promise to deliver at a certain time, the company may have to pay extra to receive the goods on time, and to deliver to clients. In addition, the company may also have to pay its employees overtime to ensure that its back orders are taken care of as the goods demanded come in.

Backorder costs are important for companies to track, as the relationship between holding costs of inventory and back order costs will determine whether a company should over- or under-produce. If the carrying cost of inventory is less than back order costs (this is true in most cases), the company should over-produce and keep an inventory.

  1. End of Day Order

    An end of day order is a buy or sell order requested by an investor ...
  2. Firm Order

    A firm order may be referred to as an order for a trade from ...
  3. Immediate Or Cancel Order - IOC

    An order to buy or sell a security that if not immediately filled, ...
  4. Day Order

    An order to buy or sell a security that automatically expires ...
  5. Bracketed Buy Order

    Bracketed buy order refers to a buy order that has a sell limit ...
  6. Order Driven Market

    An order driven market is where buyers and sellers display their ...
Related Articles
  1. Trading

    Understanding order execution

    Find out the various ways in which a broker can fill an order, which can affect costs.
  2. Trading

    Stop-Loss or Stop-Limit Order: Which Order to Use?

    While both can provide protection for traders, stop-loss orders guarantee execution, while stop-limit orders guarantee price.
  3. Investing

    When Using a Money Order Makes Sense

    Money orders are usually the least expensive way to send "cleared" funds to pay a bill (or traffic ticket). Here's how they work and what to watch out for.
  4. Investing

    Narrow Your Range With Stop-Limit Orders

    With stop-limit orders, buyers protect themselves from prices too high for their tastes.
  5. Trading

    What's The Difference Between A Stop And A Limit Order?

    Find out what separates these two market orders and what they can do for you.
  1. The difference between a market order and limit order

    Market orders execute a trade to buy or sell immediately at the best available price. A limit order only trades when the ... Read Answer >>
  2. How is the economic order quantity model used in inventory management?

    Understand what types of costs make up total inventory costs, and learn how the economic order quantity model is used to ... Read Answer >>
  3. Why do limit orders cost more than market orders?

    Learn the difference between a market order and a limit order, and why a trader placing a limit order pays higher fees than ... Read Answer >>
  4. What is the difference between a buy limit and a stop order?

    Learn the difference between buy limit orders and stop orders, including stop loss orders, and understand the risks of the ... Read Answer >>
  5. What are the main problems with a JIT (just in time) production strategy?

    Learn about the just in time (JIT) production strategy and how the precise coordination and timing it requires can end up ... Read Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center