Want to forecast the growth and profitability of your business? A good place to start is by looking at your backlog.
A backlog can be the key to success for your business: it’s related to everything from hiring and scaling to bank financing and market valuation.
But what does backlog mean in business? Why do you need one and how big should it be? What are the Pros and Cons? And how should you manage a backlog? Let’s dive into everything you need to know.
First, let’s define backlog vs pipeline: A backlog is a list of signed, committed projects for your service contracting business. Contracts are signed, but the work hasn’t begun. Sometimes, people use “pipeline” interchangeably with “backlog” to refer to any work that hasn’t been started, but more often than not, pipeline refers to your sales pipeline which is projects that have not actually been accepted yet. Projects in your sales pipeline may seem like a sure thing, but having a signed contract is key. A signed contract is generally something you can even take to a bank for financing. If it isn’t accepted and signed, it’s far less predictable than those in your backlog. — those sales might not go through.
If you’re wondering how to calculate backlog, usually, backlogs are measured in time and/or financial metrics: How far out are these projects planned, and how much money will they bring in?
Having a backlog can be a boon for a business because it means you’re not just staying afloat by jumping at any opportunity for work — you’re planning ahead, you’ve got a healthy stream of work, and you can put yourself in a better economic position by making it easier to predict cash flow.
This last piece is particularly important if you’re looking for loans or lines of credit. You’ll have to present solid documentation about your cash flow and demonstrate that your business has long-term profitability. And when you have predictable cash flow, you can be more selective about the new projects you sign — never accepting less-than-ideal projects just to keep the lights on.
Having a healthy backlog can also give you scheduling flexibility. For example, if you have a customer project that is scheduled to start next week and they call and tell you they have to postpone the project, you can turn to your backlog to fill that newly opened slot and re-schedule the delayed project to a different slot.
Having no backlog, meanwhile, might be a red flag to potential customers; they’ll question your credibility if you have nothing going on and can immediately jump into every new project (the best contractors tend to have a wait list).
A backlog is also a useful tool for identifying areas where you might need to increase resources or capacity based on what you’ve got lined up and how complex each project is. With a healthy backlog you can confidently hire new team members with full knowledge that you will be able to keep them productive and employed..
When it comes to a backlog, it’s all about balance. While it’s a great thing to have a backlog, one big downside is that if that backlog is too big — and you don’t scale up before those projects start — you could be left without adequate resources to handle them.
This kind of poor planning will likely lead to pushed deadlines and last-minute change orders, which means unhappy customers, stressed-out team members, and the potential of losing future business.
A huge backlog can also result in increased costs: The value of material and labor can change significantly over the course of months or a year, and if your backlog is lengthy, the proposed costs may no longer be accurate when you actually begin work. Sometimes, you can include a clause about this in your contract, but if you don’t, you’ll be on the hook for any increased costs — so you might not end up profiting from the project at all.
Additionally, your backlog can affect your sales pipeline; some customers in your pipeline may walk away if they want to get started sooner than you can offer services. Not everyone can wait 10 months to have their driveway repaired, for example.
When it comes managing a backlog, balance is the name of the game — as well as knowing the limits of your business. The right backlog size depends on your specific trade, the size of your business, whether it’s the slow or busy season, plans you have to scale, and more.
But no matter what you decide is the perfect backlog for your company, there are a few crucial tips for anyone managing a backlog.
Maintaining a backlog can make or break the growth and longevity of your business. And depending on its size, there are both pros and cons. The right backlog for your company depends on a few different factors, but it should be proportional to what your business can reasonably handle. When it comes to managing your backlog, it’s important to keep track of it, do frequent reviews, be mindful of your workforce, and speed up the payment process.
Estimate Rocket can help. Our estimating and invoicing software, project management software, CRM and more are one single source of truth for your business, offering an all-in-one solution for contractors across a wide range of trades.