What are the biggest money mistakes that small business commonly make? originally appeared on Quora - the knowledge sharing network where compelling questions are answered by people with unique insights.

Answer by Brett Fox, Former CEO at Touchstone Semiconductor, GM at Micrel, EIR at Crosslink Capital, on Quora:

I was in a meeting in the large conference room in our office. Carl and Tim (not their real names), two of the co-founders of the company, were pitching me on the necessity of spending over $300,000 on an inventory management system.

The pitch was a typical "rabbit out of the hat" pitch. Carl and Tim went through the various options we had. They rejected using Oracle's multimillion dollar system (too expensive), and they rejected using a combination of Quickbooks and Excel (too buggy).

This left us with only one solution in their way of thinking: The $300,000 inventory management system. There was just one slight problem:

We hadn't shipped anything yet! We were eight months away from launching our first product!

We didn't need to spend the money. Quickbooks and Excel would do. So we saved $300,000 just by using common sense. In fact, we wouldn't need a more complex system for years.

You have a choice as a small company: Are you going to spend frivolously on things you don't need, or are you going to be appropriately frugal?

Being appropriately frugal means saving money on things you can save money on. For example:

  1. Buy all your office furniture used or get it for free. We got our first set of 20 cubicles for $500. The next set we got for free. They didn't match, but who cares.
  2. Buy all your test equipment used. We bought everything in our lab second hand. The equipment was perfectly fine, and we saved a bundle of money.
  3. Fly coach. This is an obvious one, but I'm still surprised at how many people don't do this.

There are many more you can do, but setting the tone of frugality is contagious. The rest of the automatically starts thinking of ways to save money when you lead by example.

On the flip side, spend money where you need to spend the money. Each situation is different, so we spent on:

  1. Hiring the best engineers we could. High quality engineers in our industry (high performance analog ICs) are a scarce commodity. We spent what we needed to spend in order to hire A players.
  2. Having the appropriate software and tools for the engineers. Releasing a hardware product costs a reasonable amount of money, so the more first-time successes the better. We never scrimped on the verification tools our engineers needed.
  3. Healthcare. We wanted our benefits to match up with our larger competitors. This was a big selling point for new employees.
  4. Marketing. Our business model was predicated on having 1000's of customers buying from us, so we spent what we needed to spend. At the same time, we negotiated great deals with the various trade publications in our industry.

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Published on: Aug 4, 2016