The final installment in a series on seven keys to managing your business and building profits.

Most business owners dread their fixed costs — the rent, utilities and other regular business expenses they have to pay each month.

By the time the first of the month arrives, they reckon they’re already in the hole for thousands of dollars and will be spending the rest of the month digging themselves out of it — and that’s before they tackle their payroll.

But that’s the wrong way to look at fixed costs.

Instead, business owners should regard their fixed costs as an investment in their business. By structuring these costs strategically — key #7 in this series on managing your business and building greater profits — they can watch their investment pay off in time and energy saved, and more money made.

Seven Keys Working Together

Unlike the other articles in this series, where I explored the techniques you can use to optimize each of the seven keys essential to managing your business, in this article I will focus on how they interact and can be adjusted to achieve optimal results.

Such an approach — which enables you to model the impact of decisions on your company — also can help guide the strategic investment of your fixed costs.

This can be accomplished through a simple mathematical relationship that can help you set a profit goal — and then determine how your business needs to perform to achieve that goal.

It’s a formula that can be demonstrated in an Excel table. All seven essential keys are numbered in the chart:

With your goals set, you can make the necessary adjustments to the other keys to achieve them.

In the table below, the goal is to achieve a profit of $30,000. However, between managing your business, paying the bills and generally stressing out from the pressure, you no longer have time to generate enough leads to achieve your profit target. You want to hire a new salesperson at $65,000 a year, but can you afford to and will you still be profitable?

As indicated in the table above, if you increase your fixed costs by $65,000 and hold your business performance equal, your new salesperson will have to generate an additional 652 extra leads — or roughly 40% more — in order to cover your costs and meet your profit goal. Clearly, this is possible, but it may not be a realistic goal.

Not the Whole Story

But you’re not just hiring your salesperson to increase your company’s leads, you expect them to boost your conversion rate and your customer retention rate, as well — which changes your overall business performance.

With the higher conversion rate factored in, as indicated in the table, your salesperson now only has to generate 1,370 leads. That’s 230 less than when you were generating them — while you also were managing your business, paying your bills and otherwise stressing out.

This insight into business operations can be extremely helpful when you are considering making changes.

By analyzing all seven keys together, you are able to determine that when you hire a new salesperson, you also can actually reduce your marketing expenditure by about 15% because you aere also able to reduce the number of new leads needed while still meeting your profit goal.

The modeling in this example was predicated on two variables, but there are many others you can consider for your particular situation.

For instance, if you decide that your new salesperson will increase capacity beyond your current production capabilities, then you could model hiring new field employees and model that scenario. Or, on the other hand, you could consider raising your prices, which would lower demand to a level you can fulfill. Of course, raising prices can also require an upgrade in materials and features, which would add to costs.

As you can see, the variables you could model are endless. That’s fine as long as you are constantly modeling and constantly refining your models. Your business can’t grow without investments in fixed costs.

The seven keys to managing your business we examined in this series encompass your entire business funnel — revenue and expenses, marketing and sales, production and administration — everything needed to obtain and keep customers, manage costs and make money. And it begins every time you get a new lead.

While each article has focused on a particular key, keep in mind that nothing in your business happens in isolation.

The decisions you make to boost sales impact your gross profit. The decisions you make for marketing impact production. And the decisions you make for fixed costs impact all of the above.

To read the previous articles in the series, visit:

• “Seven Keys to Managing Your Business and Increasing Profits”
• “Increase Your Profits by Systematically Improving Your Sales Conversion Rate”
• “Optimize Your Rate of Customer Retention, and Profit From Lifelong Customers”
• “Create a Lifetime Relationship With Your Customers”
• “Initiate a New Pricing Strategy and Build to Thrive, Not Merely to Survive” 
• “Save Time, Money, Energy by Managing All Your Variable Costs — Not Just Your Money” 

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 email 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.