The move Bucket List staring Jack Nicholson and Morgan Freeman is an engaging movie about setting goals (the buckets), realizing dreams (again the buckets) and overcoming fears. The “Bucket List” of this article is a bit different however, my bucket list is just as relevant to setting goals, realizing dreams and overcoming fears. The bucket list to which I refer pertains to the buckets created by the Chart of Accounts in a business.
Business owners that are intentional about their business desire information to help them make wise decisions. But, in order to obtain that information, the business owner must set up accounts (buckets) in which financial data can be captured. This is not something that can be left to chance. Rather, the identification of buckets (accounts) that will collect meaningful information must, for the most part, be well thought out and planned if the owner is to design key performance measures to guide his business. Granted, information for some performance measure are automatically available such as the information to compute the current ratio (current assets divided by current liabilities). Also, many programs provide options to compute revenue and expense items as a percent of total revenue. But, if the owner wants to be able to look at more granular aspects of his/her business, he/she must set up the buckets (accounts) so that desired relationships can be made and analyzed. Allow me to provide an example.
Suppose a manufacturer makes a widget which he sells to distributors, who in turn sell to retailers. Suppose he would like to know how much of the revenue for the widget actually contributes to the bottom line (net profit)? I suggest that in order to glean an answer this question, the owner needs to set up several accounts (buckets) that will enable collection of the desired financial data.
To answer the question of how much of the revenue from widget sales contributes to net profit, the owner needs to capture data relative to the cost of manufacturing the widgets (material, labor and a share of overhead). He also needs to know how much of the sale of the widget contributes to paying for sales / marketing and general / administrative expenses. So in this little example we need at least five buckets – 3 buckets for capturing the cost of manufacturing the Widget – material, labor and overhead; 1 bucket for allocating a portion of the revenue from each Widget sold to pay for Sales and Marketing expenses and 1 bucket for allocating a portion of the revenue from each Widget sold to pay for General and Administrative expenses. Anything left over after covering these costs contributes to net profit.
This simple example demonstrates that the owner must be intentional about setting up his bucket list (chart of accounts) if he desires to collect the data that will enable him to make important decisions about his business. Obviously, as the complexity of the business increases, the design of the bucket list becomes more complex as well.