Backlog consists of revenue that is committed by the customer in advance of their service and is not yet invoiced. While your business has a commitment from the customer to pay, an invoice hasn’t been sent to the customer and the products or services haven’t been delivered.
Example based on an annual subscription that is billed quarterly:
- On January 1, you sell a customer and their subscription immediately starts. They commit to a 1-year contract for $12,000 to be paid quarterly. You immediately invoice them $3,000 for the first quarter. As of January 1, your backlog is $9,000. On April 1, you invoice the customer $3,000 for the second quarter. Your backlog then decreases to $6,000.