Achieving excellence in financial management is certainly not an easy task. After all, how can you master all of the concepts involved? Is it possible to acquire all of this knowledge and apply it to your daily work?
CAPEX and OPEX are examples of two acronyms that can make all the difference in this sense. To get a deeper understanding of them, their attributes and how to use them in your company, continue reading this text!
CAPEX and OPEX: What are they?
The acronym CAPEX is derived from the expression “capital expenditure” and thus it is related to expenses and investments associated with physical goods. In other words, it’s all the goods purchased by a company.
OPEX, on the other hand, signifies “operational expenditure.” Thus it is related to all the costs related to operations and services.
In general terms, buying a car for a company would be classified as a CAPEX. A one-off expense for transport services, on the other hand, would be classified as an OPEX.
Carefully distinguishing between them is a good way to define and analyze KPIs for your business, since this offers a deeper vision of the company’s expenses, which will help your firm’s financial control.
CAPEX and OPEX: What are the main differences?
In general, most of the annual costs for a corporation are operational expenses. Thus reducing OPEX should be one of management’s objectives, as long as this doesn’t compromise the quality of the products and/or services that it offers.
One point that should be emphasized is the difference between the way these two types of expenses are taxed. Since the life of a CAPEX generally extends beyond a fiscal year, you have to use amortization and depreciation to redistribute this cost. In contrast, operational expenses can be deducted from your taxes during the tax year that they take place.
Mastering these two concepts is fundamental to a company’s strategic planning, since the option of investing in a physical good can compromise a business’s cashflow. Operational costs, on the other hand, can become excessive in the medium term without offering any financial return.
CAPEX and OPEX: How should you use them to optimize your business?
You need to consider, first of all, your company’s working capital situation. A limitation in terms of this may oblige your company to opt for an OPEX, given that it represents a smaller initial investment and is also tax deductible.
However, the question isn’t that simple, and that’s why you should analyze your past and future demands. Investing more in OPEX is something that appears good at the moment, but this doesn’t mean that a CAPEX is a bad idea.
The ideal is to compare them to determine which option has greater potential to improve your business’s numbers without compromising its quality. This will optimize your decision making.