The sales backlog ratio compares the confirmed order backlog of a business to its sales. When measured on a trend line, the measurement clearly indicates changes that will likely translate into future variations in sales volume. For example, if the sales backlog ratio exhibits an ongoing trend of declines, this is a strong indicator that a business is rapidly working through its backlog without renewing the backlog, and so may begin to report sales reductions. The opposite trend of an increasing sales backlog does not necessarily translate into improved future sales, if a company has a bottleneck that prevents it from accelerating the rate at which it converts customer orders into sales.
The customer order information needed for this ratio cannot be entirely derived from a company's financial statements. Instead, it must be derived from internal reports that aggregate customer order information.
To calculate the sales backlog ratio, divide the total dollar value of booked customer orders by the net sales figure for the past quarter. Only quarterly sales are used, rather than sales for the past year, in order to more properly reflect a company's short-term revenue-generating capability. The formula is:
Total order backlog ÷ Quarterly sales
A different way of deriving the same information is to calculate for the number of days sales that can be derived from the existing order backlog. This figure is derived by dividing the average sales per day into the total backlog. The formula is:
Total order backlog ÷ (Quarterly sales / 90 Days)
As an example of the sales backlog ratio, Henderson Mills reports the following sales and backlog information:
|Rolling 3-month sales||$9,000,000||$9,500,000||$9,600,000|
|Sales backlog ratio||.55:1||.42:1||.36:1|
The table indicates that Henderson is increasing its sales by chewing through its order backlog, which the company has been unable to replace. The result is likely to be the complete elimination of the order backlog in the near future, after which sales can be expected to plummet, unless steps are taken to book more customer orders. Several ways to increase the backlog are to reduce prices, invest in more sales staff, or open up new sales regions.
The sales backlog ratio is of little use in the following situations:
- A retail environment, where there is no backlog
- A seasonal business, where the intent of the business model is to build order volume until the prime selling season, and then fulfill all orders
- A just-in-time "pull" model, where the intent is to fulfill orders as soon after receipt as possible