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Running a business

Backorder: Definition and How to Minimise

By QuickBooks Australia

Published on July 4, 2023

Backordering relates to inventory management and the supply chain for your business.

What Is a Backorder?

A backorder is a customer order that you as a business owner can’t fulfil immediately because the goods or services the customer wants to buy are not available. This is also known as the company’s backlog.

There can be various reasons why a product isn’t available depending on your business context. The product may not be available because it isn’t in your current inventory. It could be that your manufacturing plant is still in the process of making the product. There may be supply chain issues meaning a delay in the delivery of products.

Generally speaking, though, large backorders could indicate that your product supply is not sufficient to satisfy customer demand. In contrast, a manageable backorder with little delay can suggest a healthy business as there is high demand for your products or services. However, if your company has a large backorder with long waiting times, this suggests problems with inventory. You may lose customers as a result.

Understanding Backorders

If you have a long list of backorders, this will affect the time it takes a customer to receive their ordered item. That’s because backorders reflect your customers’ orders that you can’t fulfil at any given time. The longer that list, the bigger the problem for you as the business owner. You must be able to clear that list when your stock becomes available.

However, it is not necessarily bad to operate on backorder as a company. It’s important to remember that you can still do business and operate even if you don’t have the inventory available at the time.

Keeping products on backorder can serve to boost demand, keep a loyal customer base, and raise the value of your product. Yet, if the backorder becomes too large, this points to a flaw in inventory management as long waiting times cause disruption and a bad reputation for your company.

To take a simple example, if you are taking 1000 orders of a product per month, but you can only supply 500 products a month, then your backorder list will quickly become unmanageable.If you don’t change anything, you put yourself in a situation where customers are unhappy with your service.

The Sony PlayStation 5 is an excellent example of this. Initially, back ordering helped to raise the profile of the new console. The idea of a short supply suggested an urgency that served to increase demand for the console as many gamers wanted to get their hands on one. However, Sony ran into supply chain issues that still leaves many customers disappointed, not knowing when they can get their hands on a console.

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Advantages and Disadvantages of Backorders

As mentioned, the idea of backorders is often negative. However, there can be positives to operating with backorders.

Backordered goods reflect popularity and are a sure-fire sign that your product is in demand and difficult to get. Managed well, this can add to the status of your product. Also, keeping a large stock supply requires space, which costs money. Maintaining a small stock supply and relying on backordering occasionally can be a great way to save on costs that you can pass on to the consumer.

A negative view is that backordering indicates problems. Backordering reflects poor inventory management as you can’t keep track of stock. Additionally, if customers notice long waiting times, and they can get a product elsewhere, you may lose business. Finally, managing backorders requires an extra layer of logistics for your business as you need to process pre-orders, manage communication with clients, and monitor the whole situation.

Keeping Track of Backorders

You must account for backorders as you keep track of your company finances.

QuickBooks offers inventory management software that offers you a real-time holistic view of your inventory. This lets you automatically merge your inventory management with your cash flow management processes to efficiently track income and expenses.

Minimising Backorders With QuickBooks

With QuickBooks inventory management system, you can add inventory products, keep track of what sells, quickly restock your inventory, manage your supplier orders, and utilise the reports function to check the status of your inventory. This includes setting up low stock alerts to let you know when it's time to reorder stock.

This way, you can anticipate any inventory shortages and act accordingly to prevent any issues. Knowing how much you have available at any given time is vital to any future planning.

As a general rule, as a small business owner, you want to avoid backorders because you don’t usually have the loyalty base of Apple or Nike to rely on. These bigger brands have built brand equity meaning that customers are often willing to wait for products.

That being said, with QuickBooks software, small businesses can make informed decisions about permitting backordering on certain items while preventing the situation from getting out of hand.

It’s important to understand that inventory control or warehouse management software does not tell you the right amount of inventory to stock. It also doesn’t tell you expressly to minimise backorders.

Instead, QuickBooks inventory management is about giving you the tools to keep track of what you have and manage it as you wish.

FAQs

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Backorder: Definition and How to Minimise

What Is a Backorder?

Understanding Backorders

Grow Your Business with QuickBooks

Advantages and Disadvantages of Backorders

Keeping Track of Backorders

Minimising Backorders With QuickBooks

FAQs

Related Articles

Looking for something else?

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