What is Backlog in Project Accounting?

In the fast-paced world of today, wasted time is lost profit specifically if we talk about corporate world. Inside a rapidly moving business world, every minute counts. With limitless tasks and tight deadlines, it’s not just inconvenient to lag but it can also damage a company’s hard-earned profits. Delays not just eat money but also take the opportunities far from reach. Backlog accounting plays an essential role in not just mitigating these delays but also correcting the mistakes that companies make unintentionally. It is about reviewing and rectifying financial data that is oftentimes overlooked or documented inaccurately during regular accounting periods. To keep the right track of financial development of a project, backlog accounting is mandatory, which makes it one of the key factors of project accounting. In this blogpost we aim to offer you a thorough understanding of backlog in project accounting, its significance, how it’s calculated and its impact on businesses.

What is Backlog in Project Accounting?

In project accounting, backlogs represent the total worth of a contracted work that has not been yet completed or paid. It shows the profit a company is expecting to earn from that specific project and has been committed through contracts or purchase orders but unable to deliver or execute it due to lack of resources, time or skills. In other words, one can define backlog as a difference between the total value of contracted project and the revenue already gained from that project. It indicates the future revenues and workload, so the business can efficiently plan for resources, manage cash flows and predict financial performance. It is used in both long term and short-term contracts and includes multiyear projects that expand for several financial years making backlog management a mandatory part of long-term business planning. Backlog is generally calculated through the following formula:

Backlog = Total Contract Value – Revenue Recognized to Date

Such as if a company has a contract of worth SAR 10 million and has already fulfilled SAR 4 million as revenue, then the backlog would be SAR 6 million. However, as simple as it might seem, this formula can be complex if multiple projects, payment deadlines, change in orders and retentions are included. Hence, companies should make sure to use accurate tracking methodologies aligned with project milestones.

Types of Backlogs

1.     Sales Backlog

They are the orders that are confirmed or contracts that are yet to be fulfilled. It offers an overview of future sales and is essential for the forecasting of sales. For example, a construction firm that has signed a contract to construct 10 buildings but is only working on three of them, the remaining seven would be considered as sales backlog.

2.     Revenue Backlog

Non-invoiced profits earned by completing a project are revenue backlogs. This is mainly used to recognize revenues and offer an analysis of cashflow. It also ensures that the work done is as per commitment, and help is smoother billing cycles.

3.     Work Backlogs

The incomplete tasks are work backlogs. These are the tasks that are waiting in the pipelines to be delivered. This is specifically relevant in IT and software development projects where work is broken into short, focused phases.

4.     Contract Backlog

Total amount of signed and approved deals that have not been fully delivered yet; it is generally important for companies working with government bodies where formalizing a contract is critical.

5.     Service Backlog

These are common in services and maintenance-oriented companies, this defines the services promised to clients but not yet rendered. An HVAC firm such as may have an annual maintenance contract that expands throughout the year.

Importance of Backlog in Project Accounting

1.     Revenue Forecasting

Backlog offers a great advantage in forecasting future revenue, if handled correctly, it assists companies in understanding their potential of earning in future. This allows the companies to plan for their budgets, investments and growth possibilities keeping the previous performance in mind.

2.     Resource Allocation

Backlogs facilitate the project managers to distribute the resources like manpower, equipment and capital in the right places where it is needed the most. Such as if a company predicts a rise in workload due to the existing backlogs they can already start hiring and training new staff to avoid any obstacles in future.

3.     Cashflow Management

Backlog analysis helps in determining the cash inflows, hence eases the process of managing the working capital. Having a clear understanding of when a backlog may convert into cash minimizes the liquidity risks.

4.     Investor Confidence

Having a structured backlog shows the strong demand and rewarding future income, which acts as a magnet for investors and stakeholders. Many companies listed on Tadawul Exchange also show their backlog data to gain more investors.

5.     Operational Efficiency

Keeping a track of backlogs make sures that projects are completed efficiently on time without any unnecessary delay, underlining the inefficiencies and bottlenecks. This may result in better and timely delivery of projects.

Challenges in Managing Backlog

• Inaccurate or outdated project data which may mislead the tracking of true backlog resulting in poor forecasting and decision making
• The changing scope of projects makes it hard to determine the accuracy of backlog, it is one of the common stumbling blocks in mainly technology or construction projects.
• The delay in projects leads to difficulty in converting backlogs into expected revenue. This also disrupts financial planning and investors’ trust.
• Complying with IFRS and ZATCA regulations can be demanding in backlog accounting and non-compliance causes fines and penalties
• Non-payments or delay in payments or legal disputes with clients leads to backlogs that may never convert into measurable revenue

Backlog Management Best Practices

For businesses operating in Saudi Arabia, backlog management is not just an optional need but a mandatory act to maximize internal performance while minimizing risks, staying compliant and building trust among investors. Some of the best practices that helps companies in accurate backlog management includes:

• Keep the backlog records regularly updated and aligned with data of revenue generation and progress reports. These reports must be improved monthly or quarterly depending on project needs and scale.
• Use the advanced technological systems like ERP and project management tools to align financial data with the project deadlines. This gives real time visibility of data and minimizes the manual errors.
• Evaluate the risks that are linked to each backlog item, since not all backlogs revenue may be determined if the project faces hurdles like funding problems, client disputes and regulatory barriers.
• Ensure that all the departments interconnect, like finance, operations and sales team to maintain effective communication and get a transparent picture of each backlog.
• Track the Key performance metrices like backlog turnover ratio, completion rate and predict accuracy to evaluate proficiency, set goals for backlog conversion rates and monitor deviations.
• Segment each backlog according to project type, geography, client and duration, this gives a better thorough insight and risk mitigation possibilities.
• Backlog accounting demands expert insight, precision, and up-to-date compliance with evolving standards and if internal teams are not competent enough it’s better to hire a consultant.

The Role of SS&CO in Resolving Backlog Project Accounting Challenges

SS&CO KSA assist business in decoding the complexities of backlog accounting to simple customized solutions that offer them long term growth benefits. From deploying the top-notch ERP systems to aligning projects with local and global accounting standards, we do it all by conducting comprehensive backlog audits and elevating the process of revenue recognition. SS&CO facilities companies in gaining transparency and control over their future profits. No matter if you are managing multi-billion-riyal infrastructure ventures or a mid-sized firm, we bring you unmatched expertise to predict, manage and convert backlogs into rewarding financial outcomes. With our custom-made industry specific guidance, we not just assure compliance with ZATCA regulations but also boost the investor’s confidence with stronger operational planning. Hire us today and let us ease your backlog management in project accounting.