Definition
A backorder is a business term referring to a customer order that cannot be filled at the current time because the required product is not in stock. The customer is given the option to wait until the product is available or to cancel the order. Companies often allow backorders as a way to guarantee sales and maintain customer loyalty, though it could potentially lead to customer satisfaction issues if not managed well.
Key Takeaways
- A backorder is a situation in business when the demand for a certain product exceeds its supply.
- This often happens when an item is highly popular or when there are problems with the supply chain leading to production issues.
- Backordering can cause dissatisfaction among customers due to the waiting time they have to endure before their product arrives, but it can also indicate high demand for a product.
Importance
Backorder is an important finance term as it refers to the order for a product or service that cannot be immediately filled or fulfilled at the moment due to unavailability.
This situation often arises when demand exceeds supply.
Knowing whether an item is on backorder is crucial for businesses because it directly affects their inventory management, sales forecasts, relationships with clients, and overall financial health.
If not managed effectively, excess backorders can lead to lost sales, disappointed customers and potentially damage a company’s reputation.
However, on a positive note, backorders can also reveal high demand products, helping businesses strategize their production and distribution plans better.
Explanation
Backorders serve a crucial role in financial management and inventory control, signalizing an opportunity for further sales despite temporary stock shortages. They are used extensively in various industries as a strategy to maintain customers’ orders even when a product is temporarily out of stock.
Companies use backorders to ensure they do not lose out on revenue simply because they are unable to immediately fulfill a customer’s order. Essentially, instead of cancelling the order or forcing the customer to wait until the product is back in stock to make a purchase, companies can allow the customer to proceed with their transaction, and then deliver the item when it becomes available.
A key purpose of the backorder system is to ensure an ongoing customer-company relationship. It comes in handy in meeting customer demand and satisfaction without interruptions, thus promoting loyalty and trust.
If managed well, backorders can serve to demonstrate a company’s commitment to its customers, ensuring their needs are met at the earliest possible opportunity. Additionally, it gives businesses a consistent sales flow during periods of low inventory and can be a useful indicator of demand for an item, helping guide forecasting and stocking decisions in the future.
Examples of Backorder
Restaurant Supply Shortage: A restaurant orders a large supply of a specific type of fish from their supplier, but the supplier does not currently have the quantity required in stock. Instead, the supplier fulfills what they can of the order and puts the rest on backorder. Once the supplier has the additional fish, they will then complete the remaining order.
Automotive Parts: A car repair shop requires a specific part to fix a customer’s vehicle. They order the part from a manufacturer that is currently out of the said part. This part is then put on backorder, and the repair shop has to wait until the part is available to complete the repair.
Electronics Retailer: A customer is interested in purchasing a popular new gaming console from an electronics store. The store has run out of the product due to high demand. The customer decides to backorder the product. The retailer will ship the console to the customer when it becomes available again.
Frequently Asked Questions about Backorder
What is a backorder?
A backorder is a situation where customers can order and purchase an item that is not currently available in stock. The retailer then fulfills the order when the item becomes available again.
How does a backorder work?
When a product is on backorder, the customer can order the product as usual. The retailer will usually provide an estimated delivery date based on when they expect to receive more stock. Once the stock arrives, the ordered item is shipped to the customer.
How is backorder different from pre-order?
Pre-orders are for new items that have not been released. Backorders involve ordering products that have been released but are currently out of stock. In both cases, customers are buying items before they’re available to be shipped.
What are the benefits of backordering?
The main benefit of backordering for customers is that it secures them a product that is in high demand and reassures them that they will receive the item once it becomes available. Retailers also benefit as they can gauge interest in their products and manage inventory more effectively.
Are there disadvantages to backorders?
One drawback for customers is the waiting period, which can be lengthy if the demand for the product is high. For businesses, backorders can lead to upset customers if delays occur or if the product becomes permanently unavailable.
Can you cancel a backorder?
Generally, customers are allowed to cancel backorders if the product has not yet been shipped. However, the specific policies for cancellations depend on the retailer’s terms and conditions.
Related Entrepreneurship Terms
- Inventory Management
- Lead Time
- Stock-out
- Supply Chain
- Purchase Order
Sources for More Information
- Investopedia: This website offers a comprehensive set of financial and investment definitions including Backorder. It is a trusted source of financial information.
- AccountingTools: A great site with deep explanations of accounting and finance concepts including Backorder.
- BusinessDictionary: This platform provides simple and understandable definitions of many different business terms.
- The Balance: This source provides expert-written articles explaining various finance, business, and investing topics.
