Question

Q1) According to our textbook [1], what is the difference between capital expenditures and operating expenses? Why is this important to the IT manager?

Answer 1

If you want to run a successful business, there are financial terms you should familiarize yourself. For instance, you should understand the difference between CapEx and OpEx before you dive into strategic investments and CapEx project management.

What is CapEx and OpEx?

CapEx refers to a Capital expenditure while OpEx refers to an Operational expenditure. Capital expenditure is incurred when a business acquires assets that could be beneficial beyond the current tax year. For instance, it might buy brand new equipment or buildings. Also, it could upgrade an existing asset to boost its value beyond the current tax year. CapEx is also known as a Capital expense.

Operational expenditure consists of those expenses that a business incurs to run smoothly every single day. They are the costs that a business incurs while in the process of turning its inventory into an end product. Hence, depreciation of fixed assets that are used in the production process is considered OpEx expenditure. OpEx is also known as an operating expenditure, revenue expenditure or an operating expense.

Understanding CapEx vs OpEx difference is crucial for any business struggling to optimally utilise finance by making sure that the correct mode is used for various types of expenses. Blow you will find a complete guide to Capex vs Opex, explaining the benefits and disadvantages of both, and how to manage them effectively.

How CapEx and OpEx are Treated in Accounting

CapEx – Capital expenditures are not fully deducted in the accounting period they were incurred. In other words, they are not fully subtracted from the revenue when computing the profits or losses a business has made. However, intangible assets are amortized over their lifespan while the tangible ones are depreciated over their life cycle. All monies spent to get new inventory, including machinery or intellectual property, are grouped under CapEx spendings.

OpEx – Operating expenses are fully deducted in the accounting period they were incurred. All funds spent when converting inventory into throughput falls under OpEx. This includes employee wages, repair and maintenance of equipment, rental fees, and utility bills and so on. If a business invests in real estate, these spending is approved as CapEx budget and the expense is grouped under CapEx. However, all the costs incurred when managing such an income generating building falls under OpEx.

CapEx Summary

• Purchase of fixed assets.
• Preparation of the purchased asset so it can be appropriate for business use.
• Fixing of asset’s problems,
• Restoration of an asset’s value through upgrading
• Adapting a machine to a different use

Operating Expenditures Summary

• License fees
• Advertising costs
• Legal and attorney fees
• Telephone and power overheads
• Insurance fees
• Property management costs
• Property taxation expenses
• Vehicle fuel and repair costs
• Leasing commissions
• Salary and wages
• Raw materials and supplies
• Office overheads

IT Spending – CapEx or OpEx?

Traditionally technology investments most often were considered for capital expenditures over OpEx, because CFOs could take advantage of amortization these expenses over an extended period of time. Nowadays, more and more companies switch IT investment from CapEx to OpEx and they have a reasonable argument for this switch – moving company IT infrastructure to the cloud. Once this moving happens, additional CapEx benefits fall as far as the company no longer need static investments for the hardware, software and resources. Services and options are purchased as needed, costs are fluctuating and OpEx works better for such expenses type and supports necessary scalability.