During a recent session in beautiful Savannah, Georgia, a participant asked whether the company’s increasing backlog was a good or bad thing for the business. Rather than providing the normal answer to every financial question (it depends), I asked class participants what they thought.
- “It’s good because it ensures we have a steady work flow,” said one.
- “It’s bad because it shows we’re not serving customers efficiency,” said another.
- “It’s a positive because it indicates strong demand for our product.”
- “It’s a negative because it encourages competitors to enter our market.”
Like so many business issues, a large and growing backlog has both positive and negative implications for a company. One must “dig in” to the number to understand its effects on the business. Financial intelligence requires us to look at any indicator, like backlog, and ask questions to understand its significance.
The decisions a company makes about how to manage backlog, more than the backlog itself, tell us about the business. The best way to understand backlog, or any business trend’s, significance is asking questions and challenging common assumptions (i.e., more backlog is always good or bad), just like these participants did.