Rent, inventory, equipment, and much more all fall under the umbrella of OpEx, but how is OpEx that different from CapEx? Tom Merritt explains five ways they differ.
CapEx budgets are great–especially when your budget manager comes to you at the end of the year and asks you to spend it before it runs out. But, it’s not great when it’s not enough for a big project. Like, for example, security upgrades. Maybe you should be putting that project into an operational expenditure (OpEx) budget instead of capital expenditures (CapEx). Here are five things to know about OpEx v. CapEx.
- Isn’t OpEx for things like rent? Well, yes, but it can also include things like inventory, equipment, and research. In a world of more and more “things as a service,” some things you might have thought of as CapEx may make more sense as OpEx.
- OpEx has different tax implications. In the US for instance, OpEx costs are fully deductible in the year the expenses are made, as long as it relates to the core business. CapEx has to be written off over time, which may tie up cash flow.
- OpEx means giving up some control. If you lease the equipment, your contract decides who handles what services and responsibilities, but you are involving a vendor to some extent. If you use CapEx and buy it, it’s all your responsibility–for good or ill.
- Using OpEx can make for faster installs and more flexibility. OpEx often needs less time for approval than big capital expenditures. When you own it, you don’t get a free upgrade. A service may agree to upgrade your equipment on a regular schedule.
- Some projects may bring benefits faster as OpEx than CapEx. It’s tied to build or buy, in a way. Take company networking–sometimes equipment, and even security upgrades, are put off because of cost. Hiring a company to provide networking infrastructure could get you better, more secure services faster and would be considered OpEx not CapEx.
It’s not that one is better than the other, it’s that IT equipment now could be considered either. You have to make some accurate forecasts and look at where you need your company’s cash to flow and make the right call for you.