Key Takeaway: Start with the value of committed work still to be performed at a stated date. Schedule that work into realistic delivery periods, then build separate billing and collection forecasts. A timing delay should move value into later months, while a cancellation or scope change should appear explicitly in the backlog reconciliation.
This article is part of our guide to cash flow forecasting and financial planning.
A signed contract answers one question: what has the customer committed to buy under the agreement? It does not by itself tell you this month’s revenue, next month’s invoices, or the cash available for payroll. A useful backlog report connects those questions without treating them as the same measure.
Define what your backlog number includes
For the management model in this article, backlog means the value of committed work remaining to be performed at the reporting date. Write an inclusion policy covering enforceable commitments, cancellation terms, optional phases, reimbursable costs, approved changes, and recurring services. Apply that policy consistently when comparing periods.
A contract-to-date calculation starts with original committed value plus approved value changes, less cumulative performed value and cancellations. If your system already gives you remaining contract value, do not subtract completed work from it again. Check whether the software field is an original value, a revised total, or a remaining balance.
For example, a $300,000 contract with a $20,000 approved addition and $120,000 of performed value has $200,000 remaining, assuming no cancellation. Subtracting the $120,000 a second time from that $200,000 would incorrectly report only $80,000 of backlog.
Backlog is a defined management measure. Its inclusion rules and valuation may differ from the remaining-performance-obligation disclosures in financial statements. Reconcile material differences rather than claiming that every operational backlog number is an accounting-standard measure.
Separate a commitment from an opportunity
A signature or document title alone does not settle the substance. A letter of intent may leave price, approval, or purchase obligations unresolved. An optional renewal is different from an exercised commitment. Keep those items in a separately labeled pipeline or contingent-work schedule unless the relevant obligation is established under your policy.
ASC 606 evaluates contracts through enforceable rights and obligations. The FASB implementation Q&As on contract duration explain how termination rights and required compensation can affect the enforceable period. A nominal two-year service arrangement that can be canceled without compensation may therefore need a shorter committed horizon. Obtain contract-specific advice when that conclusion is unclear.
Keep delivery, revenue, billing, and cash distinct
Under ASC 606’s revenue model, revenue follows satisfaction of performance obligations, either over time when the relevant criteria are met or at a point in time. The contract signature and invoice date do not automatically establish that performance. A management delivery plan must be mapped to the company’s actual recognition policy before it becomes a forecast of accounting revenue.
| Measure | What to track | Common mistake |
|---|---|---|
| Pipeline | Potential purchases, proposed changes, and optional work. | Including every likely sale in committed backlog. |
| Backlog | Included commitment less performance already completed. | Assuming prepaid work has left the delivery schedule. |
| Forecast revenue | Expected recognition by period under the reporting policy. | Using the next invoice date as the recognition date for every contract. |
| Billings | Invoices under contractual payment terms. | Assuming billed amounts are already collected. |
| Collections | Expected receipt dates and amounts. | Counting a deposit already received as a future receipt again. |
A customer can pay an advance while the entire related task remains unperformed. Conversely, work may be performed before an invoice is permitted. Track both situations; a single “not billed yet” filter cannot produce a complete backlog report.
See “Architecture and Engineering Firms: Work-in-Progress Accounting Basics” for more on Architecture Engineering WIP Accounting.
Build an opening-to-closing reconciliation
For each reporting period, use this rollforward: opening backlog + new committed work + approved additions − approved reductions − performed value − cancellations = closing backlog. Do not subtract a scope reduction again as a cancellation. Record each event once under a defined category.
A hypothetical monthly rollforward might be $500,000 opening backlog, plus $120,000 of new commitments and $20,000 of approved additions, less $140,000 performed and $40,000 canceled. Closing backlog is $460,000. Explain the $40,000 cancellation rather than burying it in a changed confidence factor.
Include an as-of date, project owner, contract identifier, revised total value, performed value, remaining value, expected delivery dates, billing terms, collections, cost to complete, and exception notes. Retain a frozen copy of the prior forecast so the next review can identify which assumption changed.
A dated three-project example
The following figures are hypothetical and are not client results or local benchmarks. The measurement date is September 30, 2026. Assume the performed values also match cumulative recognized revenue for these examples, and future performance meets the relevant recognition criteria as scheduled. Amounts below are in dollars.
| Project | Revised committed total | Performed to date | Remaining backlog |
|---|---|---|---|
| Harbor Buildout | $240,000 | $40,000 | $200,000 |
| Coastal Upgrade | $180,000 | $0 | $180,000 |
| Riverside Service | $96,000 | $16,000 | $80,000 |
| Total | $516,000 | $56,000 | $460,000 |
The original signed values are not all still available for future revenue. Harbor has already performed $40,000 and Riverside $16,000. Their remaining amounts, not their original totals, belong in the future-period allocation.
| Project | October 2026 | November | December | After December |
|---|---|---|---|---|
| Harbor Buildout | $40,000 | $40,000 | $40,000 | $80,000 |
| Coastal Upgrade | $0 | $60,000 | $60,000 | $60,000 |
| Riverside Service | $8,000 | $8,000 | $8,000 | $56,000 |
| Total forecast revenue | $48,000 | $108,000 | $108,000 | $196,000 |
The four period columns total $460,000 and reconcile to remaining backlog. The later-period column prevents work outside the immediate forecast window from disappearing. In the working schedule, continue to allocate that $196,000 to individual months rather than leaving it permanently undated.
Add billing and collections without changing delivery value
Assume Harbor had invoiced $60,000 and collected $40,000 by September 30, leaving $20,000 outstanding. It invoices $40,000 in each of October, November, and December. The opening $20,000 is collected in October, and each new invoice is collected the following month.
Assume Coastal has already invoiced and received a $90,000 advance, with its final $90,000 invoice due on January completion. Riverside has billed and collected all $16,000 of earlier work and bills and collects $8,000 in each subsequent service month. There are no credits, taxes, retainage, fees, or other payment adjustments in this illustration.
| Measure | October | November | December |
|---|---|---|---|
| Forecast revenue | $48,000 | $108,000 | $108,000 |
| New invoices | $48,000 | $48,000 | $48,000 |
| Expected collections | $28,000 | $48,000 | $48,000 |
Coastal’s advance remains relevant to the resources available to complete its work, but it is not an October receipt. The October cash forecast must start with actual available cash, including whatever portion of earlier receipts remains, rather than adding the $90,000 again.
Model delays without losing committed value
Consider a separate hypothetical project with $240,000 remaining and six equal months of delivery. Its current plan is $40,000 per month. A two-month delay moves those six delivery months later; it does not by itself reduce the contract to $192,000.
Suppose, for planning only, management assigns an 80% probability to the current start and 20% to a start two months later. Both scenarios deliver all $240,000. The expected timing is:
| Scenario | Each month, 1–2 | Each month, 3–6 | Each month, 7–8 | Eight-month total |
|---|---|---|---|---|
| Current start | $40,000 | $40,000 | $0 | $240,000 |
| Two-month delay | $0 | $40,000 | $40,000 | $240,000 |
| 80% / 20% weighted timing | $32,000 | $40,000 | $8,000 | $240,000 |
The weighted first six months total $224,000, with $16,000 in months seven and eight. Applying 80% to every month and stopping after six months would forecast $192,000 and leave $48,000 unexplained. That could represent a specifically modeled cancellation risk, but it does not describe this timing-only scenario.
These probabilities are explicit illustrative assumptions, not accounting entries or statistically validated estimates. Record why an actual project receives its probability, what evidence would change it, and which scenario management is using for staffing. Keep the full commitment reconciliation alongside the weighted forecast.
Align costs with the scenario
For that separate project, assume $24,000 of direct costs occur in each delivery month and all of those costs move with delivery. Total direct cost is $144,000; contribution before overhead and other excluded costs is $96,000, or 40% of revenue.
The weighted monthly direct costs become $19,200 in months one and two, $24,000 in months three through six, and $4,800 in months seven and eight. Weighted contribution is therefore $12,800, $16,000, and $3,200 per month in those respective groups. If staff payroll continues during a delay, model that committed cost separately instead of shifting it as though it were fully avoidable.
Do not label a remainder “gross margin” without explaining the cost base. The contribution above excludes overhead, financing, taxes, and any other costs not included in the $24,000. A different cost definition produces a different margin.
Use collections and payment obligations to forecast liquidity
Return to the three-project example. October forecast revenue is $48,000, but collections are only $28,000. Assume opening unrestricted cash is $70,000 and October cash payments are $32,000 for project costs, $10,000 for overhead, $3,000 for taxes, $4,000 of loan principal, and $8,000 for equipment.
Total payments are $57,000, so closing cash is $70,000 + $28,000 − $57,000 = $41,000. This cash schedule is not a profit calculation: loan principal and equipment purchases do not automatically become current operating expenses. Check payment dates within the month as well; an acceptable month-end balance can hide an earlier payroll shortage.
Add borrowing availability only when its terms, timing, and conditions support the assumption. Show customer concentration, overdue receivables, restricted balances, and deposits committed to future delivery. Revenue minus overhead alone cannot establish whether the business can meet its cash obligations.
This is covered in more depth in our related article, “Cash-Flow Forecasting for Professional-Service Firms.”
Turn monthly differences into decisions
- Confirm the commitment. Review new work, approved changes, cancellations, and optional phases.
- Update delivery capacity. Compare remaining hours by role with actual staff and supplier availability, including permit and customer dependencies.
- Refresh the three schedules. Update expected performance and recognition, billing, and collections separately.
- Reconcile actuals. Tie recorded revenue, invoices, and receipts to the books and explain the backlog rollforward. The full backlog total will not ordinarily appear as a ledger balance.
- Assign action. Name an owner and date for each missing approval, staffing conflict, billing hold, or collection issue.
Compare each prior forecast with actual results using the same definitions. Distinguish a late start from a cancellation, a change in price from a change in cost, and an invoice delay from customer nonpayment. Those causes call for different decisions and should not be collapsed into one unexplained variance.
We break down Break-Even Analysis separately in “Break-Even Analysis: Turning Fixed and Variable Costs Into Decisions.”
Prepare a focused accounting or advisory review
Bring the contract list, current delivery plan, change log, cost forecasts, invoices, receivables, deposits, and available-cash report. Identify the decision the forecast needs to support, such as a hire, financing request, or project start. Confirm the preparer, review frequency, and responsibilities in the engagement.
When discussing support with CPA Firm South Florida’s fractional CFO team, specify whether the work includes backlog modeling, cash forecasting, bookkeeping, or tax planning. These are distinct deliverables; do not assume a tax-preparation or bookkeeping engagement includes every advisory function.
If this raises questions about Budgeting Versus Forecasting, “Budgeting vs. Forecasting: Why Growing Businesses Need Both” addresses it directly.
Frequently asked questions
What is the basic backlog formula?
For the management report used here, closing backlog equals opening backlog plus new committed work and approved value changes, minus performed value and cancellations. Start from the full committed contract value for a contract-to-date calculation; do not subtract completed work again from a value already labeled remaining.
Can an advance invoice or customer deposit be part of backlog?
Yes. Backlog measures remaining performance under the report’s inclusion policy. Billing and collecting before performance do not mean that the work has been delivered.
Should a schedule delay reduce the contract backlog total?
A timing-only delay moves the remaining work to later periods. A cancellation, scope reduction, or other change to committed value can change the total and should be recorded separately.
Is an 80% confidence factor recognized accounting revenue?
No. A probability-weighted forecast is a planning scenario. Actual accounting revenue follows the applicable recognition policy and supporting facts, not an arbitrary confidence percentage.
What turns a backlog report into a cash forecast?
Add opening receivables, expected invoices and collections, deposits already received, project payments, overhead, taxes, financing, capital spending, and any restrictions on available cash. Revenue timing alone does not determine liquidity.