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How to Factor Your Sales Backlog into Your Revenue Forecast
Published on Wednesday, March 9, 2022
What is a Sales Backlog?
A sales backlog is the number of sales that have been committed, but not yet invoiced or completed. Sales are commonly added to a backlog when the product a customer purchased is currently not in stock or encounters third-party issues, such as supply chain or shipping delays. A significant sales backlog is common for businesses in the early stages of growth or those experiencing a spike in demand for their product(s).
Companies typically organize a sales backlog by customer order details and the target date for order fulfillment. Such details will include but are not limited to customer contact information, product quantities, sale price, and delivery details. Once inputted together, these various data points create a sales backlog that can be further incorporated to predict future company revenue.
Now geared with a helpful sales backlog definition, keep reading to learn how to calculate backlog, how an organization’s sales backlog data affects revenue planning and forecasting, and the simple methods you can follow to factor sales backlog data into your revenue forecasting process.
How Does a Backlog Affect Your Forecasting?
A sales backlog has a significant impact on the quality of revenue forecasting. When managing your sales backlog, all additions or updates made to the backlog must be well documented and easily accessible. Frequent additions or updates to a sales backlog can indicate the early stages of significant business shifts or market changes that can impact revenue forecasting overall.
For instance, a company may encounter significant additions to its sales backlog over a set period. While this may seem like a cause for concern, an increasing sales backlog value can be the result of increased sales, which signifies a positive trend in company health. That being said, a high sales backlog value also indicates increasing customer demand and future financial stability, all of which should be used as factors in revenue forecasting.
However, a large sales backlog could also be a sign of trouble. From supply chain delays to poor market trends, numerous variables can negatively affect a company’s ability to deliver upon its sales performance. If a company also suddenly encounters a sales backlog decrease or increase, it’s best to quickly identify and address the issue to the best of your ability, as these negative elements significantly impact revenue forecasting.
How to Factor in Your Sales Backlog When Forecasting
With an understanding of the definition of backlog and the impacts it can have on revenue forecasting, you may be wondering how to factor sales backlog data into your company’s revenue forecasting processes. Well, you’ve come to the right place. Here are a few recommendations.
Determine a Measurement
When learning how to factor in your sales backlog when conducting revenue forecasting, it’s best to first determine a measurement type. Many companies use sales values to measure their backlog ratios. As an example, if an eCommerce business had a backlog of $50,000 worth of orders, that amount can be viewed as a positive figure that ensures $50,000 in future revenue.
Some operations may choose to measure their sales backlog based on company performance. Using daily measurements, companies can assess the health of orders within a sales backlog by comparing them to the previous week’s data. This technique is foundational towards understanding the performance of a company by measuring backlog performance efficiency relative to sales performance.
Whether a company decides to use sales value or day values as a way of measuring sales backlog performance rate, both data points can be factored into revenue forecasting.
Determine Sales Backlog Ratio
When conducting revenue forecasting, the ability to refer to your sales backlog is helpful to determine the amount of expected settled revenue versus backlogged orders. A sales backlog ratio is either shown in units or dollars depending on the specific needs of a company, and the sales backlog measurement chosen from the options above.
Typically, a sales backlog ratio is determined by dividing the number of backlogged orders by the number of sales in a given time. To create more concise ratio data regarding sales backlog, it’s recommended you establish a set amount of days or weeks to use for calculating the ratio. Here’s what a common sales backlog ratio calculation looks like:
Sales backlog = Amount of orders in backlog/Total amount of sales
As an example for the calculation, let’s say a company successfully made 64 sales in the previous week but had an 8 order backlog in the same period. This calculation should be written as:
Sales backlog = 8/64
Sales backlog = 0.125
The sales backlog ratio for this calculation would then be 0.125:1, which translates to mean that for every order this company receives, 0.125 orders are backlogged on average. The company should monitor this ratio weekly via the above calculation to understand ongoing performance.
If capacity remains the same while the ratio continues to increase, it’s a signal that backlogged orders are increasing. If the ratio decreases over the coming weeks, it’s a sign that order numbers are decreasing and it’s becoming easier to keep up with demand. While this may be positive for customers, it may signal decreases in sales and revenue that can overall impact future forecasting.
Determine Billing Time
One of the most challenging aspects of ensuring accuracy when conducting any sales or revenue forecasting is determining billing time. This can be easier said than done, as a variety of factors can impact when sales are billed and invoiced, including manufacturing and fulfillment delays.
While your billing time can’t be 100% set in stone, it’s best to refer to your company’s historic billing data to understand how long a typical client moves through the sales cycle. This creates a billing timeline that can be further used for the purposes of forecasting.
Sales backlogs are only as valuable to revenue forecasting as the effort you put into accurately maintaining them. A delay in inputting backlogged orders or updating the status of current orders can quickly skew the sales backlog ratio, providing stale information for company forecasting.
Fortunately, from managing your sales backlog to revenue forecasting, revVana’s got you covered. Our industry-leading revenue realization management solutions help streamline and automate these processes to ensure your data is fresh — not just for forecasting, but for total business clarity.
Frequently Asked Questions (FAQs)
Is backlog the same as revenue?
Revenue is the settled amount of profit generated from the sale of goods or services, whereas backlog is the number of orders that have been placed but have not been invoiced due to circumstances such as out-of-stock inventory.
What is the backlog conversion rate formula?
The commonly used maintenance backlog calculation formula is the Total Amount of Orders in Backlog (as of measurement day) divided by Total Amount of Sales.