A backorder refers to an order that cannot be fulfilled at the current time because there are not enough available products.

What Is Backorder?

An order placed for a product not currently available in the inventory is called a backorder. There are two primary causes of a backorder:

  • The product is high in demand

  • The company is having some supply or inventory issues.

A backorder occurs when the company has problems with its supply chain or does not have enough storage capacity and if the product is in demand.

Another way to describe backorders would be placing an order for a product that is currently out of stock but is still being produced by the company. They indicate a healthy business where the production outweighs the supply.

Any company dealing in backorders must have an excellent inventory management system and work diligently to deliver the products. Effective communication is crucial between the supply management, inventory management and the production line to ensure the successful processing of such orders.

How Do Backorders Work?

A backorder is placed when a company sells out all items of a specific product available in the inventory, but customers still demand it. The sales manager records the request, contacts the inventory management, and informs the customer of the date of receipt. The inventory manager puts the order into production. Customers are kept updated on the progress of their orders. The size and nature of the order decide the time required for the final delivery. Backorders also provide insight into the inventory management of a company. A company has a strong management team if the orders are processed diligently.

Accounting for backorders is different from standard in-stock orders. The sale of such an order is recorded as a backorder (or receivable) rather than a completed order. The sales status changes when the manufacturer delivers the products and the payment is made. This is a safety net for companies; if the customer cancels the order, the accounts are not disturbed, and the sale is recorded as balanced in the books.

How Do Backorders Affect a Business?

Backorders can sometimes get risky if you fail to tend to your customer’s demands. Companies who know how to manage and take care of their backorders have been noted to have more customers in comparison to those that fail to fulfill these orders. Most importantly, it saves storage costs. The amount saved from storage is utilized in providing lower rates than competitors on quality products. 

Backorders often indicate the product’s popularity as customers are lining up to buy it. The disadvantage is they may look for alternative products to avoid waiting.