The first in a series on seven keys to getting and keeping customers, managing costs and making money.

As a business advisor and former large Colorado home builder, I’ve learned that my hammer and financial statements serve the same purpose — both are simple tools for building something that lasts.

In this series on managing your business, I’ll explain how to make your financials as easy to use as anything in your tool belt. The first step is to take all your figures, ratios and reports and simplify them into just “7 Key Numbers.”

Believe it or not, these “7 Key Numbers” describe everything you will need to manage your business to profit.

They include:

1. Number of leads generated
2. Sales conversion rate
3. Rate of customer retention
4. Number of transactions per customer
5. Average price per transaction
6. Variable costs
7. Fixed costs

These seven keys manage what I call your complete “business funnel” and include revenue and expenses, marketing and sales, production and administration — everything needed to obtain and keep customers, manage costs and make money.

I’ll also explain how you can optimize each of these keys, but keep in mind that when I say “optimize,” what I mean is actually far less complicated than it sounds.

To get started, identify the current status of each key and then project where each of them should be. Then, as you progress, simply compare each key and determine which ones to increase and which to decrease.

Then, to “optimize,” just decide what needs to be done to achieve your goals.

In this framework, managing your business is nothing more complicated than comparing two numbers. This makes it easy to know what needs to be done.

Now, let’s get started.

Key #1: Your Number of Leads

While lowering costs is important, in this economy I believe you really need to focus on increasing your customer base. If you’re going to operate in the next economic cycle stronger than ever, your primary focus must be expanding your customer base, improving your cash flow and increasing your profit.

And it all begins with the first of your “7 Key Numbers,” the number of leads you generate.

The number of leads coming into your business funnel is determined by your marketing, advertising and sales efforts. Generating sufficient leads can be as expensive as advertising in newspapers, magazines and on television, or as simple and cost-reducing as calling former customers every three months and asking them for referrals.

The important thing is that you need to seek new leads before you need them.

The nature of our industry is that only a certain percentage of the leads you generate will actually turn into customers. So you need a steady stream of leads coming in to generate steady profits.

To increase your number of leads, you first need to determine what types of leads to pursue. That means profiling both your current customers and your ideal customers. Why both? Because they’re rarely the same and because you need to make sure you’re targeting the right customer base.

The last thing you want to do is waste time, energy and money chasing people who can’t afford your homes, don’t want them or don’t qualify for your services.

Once you know what target markets to pursue, you need to identify the most cost-effective ways to reach them. This could be through traditional advertising, online marketing or by going door-to-door. But because there are so many different marketing opportunities to consider, you should implement your lead generation strategies within a framework that enables you to measure their effectiveness on a dollar-to-dollar basis.

We call this GSAE: Goals, Strategies, Action Plans and Evaluation.

First, set your goal for your key number, your number of leads, and then identify three strategies to achieve it.

Create action plans for each strategy to guide your team to the results you want and then, once you’ve carried out your plans, evaluate each strategy’s effectiveness against the benchmarks you hoped to achieve.

By comparing the results, you’ll determine the effectiveness of each strategy and be able to decide if it should be repeated, modified or discarded.

When it comes to generating leads, you can’t just shoot in the dark. You need to know who you want and how to reach them — and you need a system for evaluating your efforts.

You’ve probably heard ad nauseam that it takes money to make money. But unless you’re spending money within a framework that can be measured, you won’t know if your spending you're money effectively — until it’s too late.

Next: Key #2 —Your sales conversion rate

Jeff Prager is the CEO of Backroom Management, based in Centennial, Colo., which provides the proprietary tools, systems and expertise that builders need to increase their profits. His “7 Key Numbers” system helps business owners determine their own seven key goals — and the paths to reach them — to make managing their business toward greater profits far simpler. For more information, visit Backroom Management at www.backroommanagement.com; or e-mail Prager, or call him at 303-221-0823.

How Does Your Business Measure Up?

“The Cost of Doing Business Study, 2010 Edition,” available through BuilderBooks.com, provides home builders with a rare glimpse at profitability, cost of sales and expenses from hundreds of home builders across the country.

Several categories — including volume, operation type and land vs. no land costs — are analyzed to help builders fine-tune comparisons between study results and their companies.

To view or purchase this publication online, click here, or call 800-223-2665.