Our philosophy on spending money
It’s important to consider how much of your revenue you should be spending, what to be spending your money on, and how to best prioritize what expenses should before others.
February 7, 2022
Often in business, people talk a lot (or only) about the money they make and not about the money they spend to run their business. And it’s important to consider how much of your revenue you should be spending, what to be spending your money on, and how to best prioritize what expenses should before others.
Note: You can listen to this as a podcast episode on Above Board right here.
How we define “profitable”
Unlike many other indie software companies, here at Fathom, Jack and I define “profitable” as the point where you can cover your expenses, taxes and salaries without going into the red each month.
Not everyone factors in salary into profitability, but it’s essential for us since Fathom has been our full-time job for a while now, and full-time jobs always come with actual wages. So we believe that a business isn’t genuinely profitable until it’s paying everyone who works for it a livable wage.
How Fathom deals with and prioritizes our expenses
We spend more money than others in our market because we value having the world’s fastest analytics about the money they make and not about the money they spend to run their business. And it’s important to consider how much of your revenue you should be spending, what to be spending your money on, and how to best prioritize what expenses should before others.) with the most resilient infrastructure. Fathom is a premium product, and with that comes a promise to our customers to ensure premium quality. And that costs money, much more than running a lesser quality product on lesser infrastructure.
In the beginning, Fathom wasn’t making a whole lot of money. We had to be very conscious of infrastructure spending since we knew we wanted the best managed services. So we had to tread very carefully to keep upgrading when we could and never over-spend. Managed services are expensive because the best experts work to keep your infrastructure online, and we wanted to focus on delivering features to our customers, not on maintaining servers.
With premium infrastructure, you can’t ever go backwards. So we had to account for even if things got leaner, never compromising on ensuring our customers had fast and reliable analytics.
And luckily, now we can afford the infrastructure we’ve always dreamed of and not go into debt to have it. That doesn’t mean we aren’t always working to improve things; it just means we’ve reached the place where we don’t have to get creative with how we spend on the managed services we need to keep Fathom running well.
Our philosophy on spending
There are really two leading schools of thought for spending in a business:
- You can spend more than you have because if all goes well, you’ll recoup that and more later.
- You can spend slowly and incrementally, based only on what you’ve got and on very conservative projections.
The former means you can move much faster since you’re not very limited by what you can spend. And if it goes according to plan, it can pay off. But of course, it’s risky, and you’ll quickly be in trouble if you have a few lean months or growth sputters out. This mindset can, of course, be mitigated by taking external funding to cover this “hopeful spending” to stretch out how long you can wait until your revenue catches up with expenses.
The latter, and how Fathom does things, is a much, much slower road. Our forecasting is based on a worst-case scenario for our revenue growth, and we use the actual past average dollar increase, month over month, since June 2020, which is always lower than our real growth by a huge amount.
So we never assume exponential growth, even though that’s likely (as that’s what happened since we started Fathom). But in doing so and being conservative, we cover our bases with very little stress. Funnily enough, our forecasts are worst-case, but our actual is best-case, and that’s the way we like it.
We’ll likely never see growth as low as our projections. But when we spend, we spend based on the assumption that even if things go poorly, we’ll still have enough to cover essentials like contractors, salaries, and infrastructure. So this way is painfully slow sometimes but carries far less risk.
In addition to the above, we never spend all of our money. We always ensure we have money saved that carries over to the next month (our “war chest,” even though we’re pacificists). We are fortunate enough not to live paycheck to paycheck in our personal lives, and we choose to run our business this way as well—that means we use money that comes in now to pay future bills.
Not everyone can be in the same position
We were lucky/privileged to start Fathom and work on it before it generated enough revenue to pay our salaries (because we both were doing other projects that generated enough income for us to spend some of our time on Fathom at the start).
Not everyone is in this position, and we aren’t saying that how we’ve done things is the “right” or “only” way to do them. This is the way we’ve run our own business, and we’re sharing this in case you find it intriguing or helpful.
Some folks will need funding to get their business off the ground or get it to a place where it’s actually profitable (including salaries). But even in this case, it’s still good to be mindful of spending and find investors whose expectations for spending line up with your own.
Even outside of taking funding, it’s essential to have these conversations around spending and how you want your business to spend with any cofounders since you have to be on the same page.
Everyone has a different appetite for risk and varying ideas around what they consider enough.
The “Company of One” guy almost didn’t follow his own advice
To be fully transparent, I (Paul) wasn’t always on board with the slow and incremental growth for Fathom, even though I wrote a whole book on this mindset. In the beginning, I offered to invest personally into Fathom to help us grow a bit faster (mostly to hire another developer).
But if we had done that, Fathom would have been in debt, as we’d have needed to pay me back for the personal investment, and it would have added stress and worry to “what if we don’t grow as fast as we’ve previously grown.”
Hindsight is always easy, but by doing things the way we’ve done them (not taking investment from me), we’re now several years into Fathom, we’ve got no debt and are profitable every month. Spending only what you can afford lines up with how most bootstrappers operate. If you have funding, you can afford much more (since you took external capital), so you can afford to spend more to move quickly.
The one significant benefit of only spending what you have is that you’re always profitable. And profitable businesses seldom go out of business.
Fathom is growing in expenses and revenue… but also in people too!
The most common misconception about my “Company of One” book is that my thesis was: never to grow bigger than one person (a misconception held by people who haven’t read the book). This is obviously completely untrue and misses the mark of the actual thesis: question growth and consider enough. By questioning growth, sometimes it absolutely makes sense to grow.
At the moment, both Jack and I feel that we’re still in the growing phase of the business. Fathom still needs more features to feel like it’s where we want it to be (stay tuned this year, it’s going to be a big one for product features). And to get there, Jack and I need help. We’ve already got a Privacy Officer, as compliance with privacy laws remains a top priority. And this year, we’ve started retainers for an engineer who handles our EU infrastructure, an additional (and amazing) content writer and an (equally amazing) SEO expert.
The big news in this area is that we’ve hired our first full-time software engineer! We’re very (ridiculously) excited. And, this new hire very much ties into our mindset around spending.
One of the first questions he asked was about the longevity of the position since we are technically a “startup.” And, because of our very conservative forecasting, we’re in a place of confidence to reply that we’re able to meet and then exceed our spending (for things like his salary) each month with our MRR.
For everyone we bring on board, freelancer or salary, we feel responsible for having the funds to pay them (as we should). We don’t ever want to hire, then hope they help us generate enough to cover their costs, and then just cross our fingers. Instead, we wait longer than most to bring new people into Fathom because we want to be absolutely sure that we afford their rates each month, even if our growth slowed down (which luckily it hasn’t).