What it means
For non-finance managers, understanding backorders is vital because they sit at the intersection of sales demand and supply chain management. When a customer places an order for an item that is out of stock, that order goes into a backorder status.
This means the revenue is secured, but the actual cash flow and product delivery are delayed until fresh inventory arrives from suppliers. From a financial perspective, backorders represent unfulfilled demand.
On one hand, high backorder volumes can be positive, signalling strong customer demand and high popularity for your products. On the other hand, if backorders linger for too long, customers may cancel their purchases and turn to competitors, leading to lost revenue and damaged brand reputation.
Managing this balance requires close coordination between the sales team, who want to generate orders, and the inventory team, who manage stock levels. In daily operations, tracking backorders helps businesses forecast future revenue and plan purchasing needs.
Because the payment may have already been collected or will be collected upon delivery, accounting treatment varies depending on when you recognise revenue. Generally, revenue is only recorded when the goods are actually shipped to the customer, not when the order is initially placed.
Monitoring backorder trends also protects working capital. If you consistently have too many backorders, it might mean your reorder points are set too low or your suppliers are unreliable.
Conversely, having zero backorders might mean you are holding too much expensive stock in your warehouse, tying up cash that could be used elsewhere in the business.
In practice
Real-world examples.
Example
An artisan furniture maker lists a bespoke dining table online. Demand surges, and twenty customers purchase it before wood supplies run out, creating twenty backorders fulfilled next month.
Example
A boutique clothing brand launches a winter coat. Initial stock sells out in hours, resulting in fifty backorders while the factory rushes a new batch of fabric to complete production.
Example
A small software and hardware firm sells a popular smart thermostat. Due to microchip shortages, forty customers wait in backorder status for three weeks until shipment arrives.
Think of it
“A backorder is like putting your name on a waiting list at a popular restaurant. The kitchen is out of soup right now, but the chef is making a fresh pot, and your table is guaranteed to get a bowl as soon as it is ready.
Formula
Calculation
Backorders = Total Customer Orders Received - Total Customer Orders Fulfilled
Example: If your shop receives 150 product orders in a week, but you only have enough physical stock in your warehouse to ship 120 of them, your backorder count for that week is 30 units (150 - 120 = 30).Case study
Seen in the real world.
GreenSprout, a small gardening equipment supplier, launched a new automated composter. Anticipating moderate interest, they stocked one hundred units in their warehouse. However, a feature in a major gardening magazine caused an unexpected surge in demand, and three hundred customers placed orders within forty-eight hours. GreenSprout immediately sold out their initial inventory, leaving two hundred orders in backorder status.
Managing this situation required careful communication. GreenSprout emailed all backordered customers, explaining the supply delay and offering free shipping for the wait. Only five percent of customers cancelled their orders. To fulfil the remaining one hundred and ninety backorders, GreenSprout rushed a secondary production run with their manufacturer, incurring a small extra freight fee.
Financially, GreenSprout held onto the customer payments, which temporarily boosted their cash flow. However, because revenue could not be officially recognised until dispatch, these funds sat as a liability on the balance sheet as unearned revenue. Once the new inventory arrived two weeks later, all backorders shipped, and GreenSprout successfully converted that delayed demand into realized revenue without permanent customer loss.
Watch out
Common mistakes.
- Treating backorders as actual revenue before the goods are shipped and delivered.
- Ignoring customer communication, which leads to high cancellation rates.
- Failing to adjust future inventory purchase orders based on recurring backorder trends.
Questions
People also ask.
Is a backorder the same thing as being out of stock?
Not quite. Being out of stock means you have nothing left to sell right now. A backorder means you are out of stock, but you have accepted the customer's order and promised to fulfil it once new inventory arrives.
When should my business recognise revenue from a backorder?
Standard accounting rules state that revenue should be recognised when the goods are shipped or delivered to the customer, not when the customer initially places the backorder.
Are high backorders always a bad sign?
No. While high backorders can frustrate customers if they wait too long, they often indicate high product demand and strong market interest, provided you can fulfil them quickly.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related