To summarize, the backlog accounting and maintenance of financial records play an equally important role as other organizational requirements. Several companies offer the backlog accounting services, to help you ease out the tasks of finances. Additionally, it is important to consider all the aspects to ensure complete consumer satisfaction and meeting their demands.
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Backlog Accounting Services
A backlog refers to the orders or documents that are pending, and need to be completed. This is where the need for backlog accounting comes in. The backlogs are a representation of the revenue that is available for the company but is unearned due to some reasons. This can either be due to work overload or an increase in orders, which is beyond the efficiency of the company, or due to improper financial management. The financial report example helps in understanding the reason for backlog and making improvisations for the same.
Several reasons for the increase in backlog include:
- Opening up a new sales region.
- Increase in the investment of sales staff.
- Reduction in the prices of products.
What is the need for financial management?
For every business, the management and organization are quintessential. The bottom line of all the management and operations is revenue generation. This emphasizes the importance of financial management and backlog accounting for SMEs as well as well-established businesses. Many companies overlook the need for financial management, which is an integral part of the business. If not managed properly, it leads to a backlog in the financial statement or accounting. The regular assessment of backlogs is important to avoid depreciation in the business.
How does backlog work and what is the need to eliminate it?
For any company, big or small, the backlog leads to issues in revenue generation and operations. This can have an impact on the future earnings of the company. The backlog accounting and managing of financial statement example is a way to prevent any harm to the company. However, the backlog is like the two sides of a coin. It has both positive and negative implications, which include:
- On a positive note, it signifies the increase in demand and rising sales of the products.
- While on the other hand, it signifies the inefficiency in the management and production process of the company.
Whatsoever the case is, it is important to avoid backlogs as these can lead to compromising company schedules and sales. It is a good idea to take the backlogs as a part of constructive criticism for the company, and overcome it by using efficient techniques.
Depreciation and considerations in backlog accounting
Depreciation means the loss in the value of an asset. The continuous backlog leads to depreciation which further leads to a decrease in revenue from the backlog property or products. The changes in the economy and customer demand are some of the reasons for depreciation. It is important to record and adjust the depreciation.
Backlog accounting plays an important role in the industries catering to manufacturing and production processes.
Some considerations to make for backlog accounting include:
- Extra inventory leads to a loss in revenue.
- Little backlog causes a decrease in demands from the customers.
Frequently Asked Questions (FAQs)
Consider that your company manufactures a commodity ‘X’. It has the capacity to manufacture 2,000-3,000 products in a day. However, due to an uprise and liking of the product, the sales increase suddenly up to about 4,000 each day. It becomes difficult to cater to and produce this number each day. This causes a backlog of 1,000 products every day until the production increases.
This is where the role of backlog accounting comes in the picture. It is important to analyze the backlog of products and meet the demands. The financial statements example does not completely cater to calculate the sales backlog ratio. It is important to have an internal financial report example assessment to calculate it.
A real-life example of the backlog happened with Apple. In 2017, during the launch of iPhone-X in October, the brand was overflowed with pre-bookings of the phone. The overwhelming demand led to week-long delays and backlogs. Some people who pre-booked the phone got it in December leading to disappointment among the customers. This caused poor sales and forecasting for the brand.
An important aspect of backlog accounting and monitoring is the calculation of the backlog sales ratio. It helps to understand the viability of product sales and how it can expand or work in the future to meet the demands. It is important to understand the financial statements example and financial report example before calculating the ratio. There are various methods to calculate the sales backlog ratio. These include:
- Divide the total backlogged orders with total sales.
- Compare the average daily sales with the backlog. The formula for this ratio is: [total backlog/(annual sales/360)].
- You can also calculate by dividing the total dollar value of backlog with the quarterly net sales. The formula is [Total order backlog/quarterly sales] or [Total order backlog/ (quarterly sales/90)].
You do not require to calculate the sales ratio and have backlog accounting in the following situations:
- Retail environment, as there is no possibility of backlogs.
- Seasonal business, as the rise in sales, is just for a limited time period.
- Just-in-time models, as under these the orders are fulfilled soon after the receipt.
Many times the companies fail at maintaining the proper financial records and accounts for their company leading to a significant loss. This usually happens with the small businesses, as they focus more on growth and management, rather than working towards backlog management. However, it is a vital step to have backlog accounting services to avoid any issues with accounting. The person managing the accounts for a company can tally them at regular intervals, either quarterly, half-yearly or annually.
The financial reports example that is generated for any company include:
- Cash flow statements
- Balance sheets which help in understanding the financial position
- Profit and loss account for regular monitoring and improvisations
- Payable and receivable ageing lists
- The reports on sales performance and expenses, along with the comparative reports
- The analysis of the financial ratio
- Backlog accounting
- Financial safety measures
Why Meru Accounting?
We at Meru Accounting cater to all your financial requirements. We help you maintain the documents to avoid missing out on dates or facing a backlog. With our team of experts, we critically analyze the backlog ratio and work for its improvement. We provide you with all the above-mentioned services.
