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Rely on your Sales Backlog when Planning and Forecasting

September 5, 2019
Budgeting
Forecasting
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Incorporate and maintain your ever-changing backlog in your plan and periodic forecasts

Customarily, a company’s backlog is a list of customer orders that need to be filled by a certain date.  At a minimum, it will have a customer name, product or service to be shipped or performed, the date it is requested by the customer and the quantities and sales prices.  Added together you have a snapshot of the company’s backlog when the report is generated.  Adding sales orders upon customer commitment through purchase orders increases the backlog.  Sales invoices, when shipped, decrease it.

An example backlog may look like this (only basic information shown):

CustomerOrder NoDateReq.ProductQtyPriceExtended

Jones52319/12/2019103-1220        12.50     250.00Calvin526510/11/2019105-6515        11.30     169.50Garrett527311/17/2019103-6510        11.30     113.00Durant52982/1/2020107-4012          9.25     111.00     643.50

Most companies I have worked with maintain a backlog as in the above example and refer to it frequently.  What is not always common, is using the backlog as an additional tool when preparing the revenue plan and various forecasts.  For example, when you prepare your revenue budget, the existing backlog can be a valuable piece of information to be incorporated into the budget.In fact, the backlog is the most accurate piece of the budgeted revenue because it is a result of firm customer orders, so use it whenever you can.  Also remember to re-evaluate and maintain the budgeted revenue (sales forecast) whenever the backlog changes.  This will become natural during re-forecasting (perhaps quarterly) or as part of a rolling-forecast process.To aid in visually understanding the backlog and properly entering it in the revenue forecast I like to add an aging worksheet to the backlog report, similar to the way we age accounts receivable and accounts payable.  This can be part of a backlog query you perform on the sales orders in the ERP database.  An extension to the previous example might look like this (only basic information shown):

Assuming we look at the backlog on August 31, 2019

CustomerOrder NoDate Req.ProductQtyPriceExtend.Next 30 daysNext 60 daysNext 90 daysOver 90 daysJones52319/12/2019103-1220       12.50     250.00     250.00Calvin526510/11/2019105-6515       11.30     169.50     169.50Garrett527311/17/2019103-6510       11.30     113.00     113.30Durant52982/1/2020107-4012          9.25     111.00     111.00     643.50     250.00     169.50     113.30     111.00

Now you can clearly see when these products are needed for customer delivery and when forecasted revenue and cost should be recognized.  The budget should reflect this.In order to maximize the accuracy and validity of the backlog report and its use in planning and forecasting, those who are in charge of entering and maintaining sales orders must be diligent in recording accurate customer due dates (when the product or service are to be delivered or performed), as well as quantities, prices, etc.When customers request changes (e.g., updated ship dates), these changes must be reflected in the backlog.  This will allow the revenue forecast to be updated, resulting in more accurate forecasted financial statements and sales reports.  These changes are primarily needed in order to plan production and purchasing, but the use of this in finance is also valuable.A sales backlog, traditionally reserved for operations use and production planning, has also an important place in finance and can become an essential and accurate component of the revenue and cost forecasts.  An intelligent FP&A software solution will allow incorporating this data into the plan, becoming part of the overall revenue and cost budget, and ultimately driving forward-looking financial statements and reports.Alan Hart, MBA, is Principal Consultant at Pacific Shine Group in Portland, Oregon, with responsibility for client business development and hands-on client project implementations. Prior to starting Pacific Shine Group, he worked in various executive accounting and finance positions with technology and growth companies. Notable is his 18 years in the hi-tech manufacturing industry where he served as Controller, Vice President of Finance and CFO of several privately as well as publicly held companies in the Hi-Tech industry, such as Hybrid Arts, Inc., Hamilton Bay Associates and Syncronys Software.  In his role in management consulting, Alan has worked in diverse industries and with a variety of clients, including fortune 1000 companies such as Boeing, Delta Airlines, Intel, Wyndham Worldwide and others, as well as many mid-market organizations such as Guitar Center, Ducommun AeroStructures, Cypress Semiconductor, TriQuint Semiconductor and others.Combining his skills and experience in engineering with deep understanding of technical accounting, he is able to assist small and medium-size manufacturing companies establish GAAP compliant accounting and reporting systems.

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