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.
What are the main differences between CAPEX and OPEX?
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.
How to use them to optimize the 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.
To find out which of the two options, CAPEX or OPEX, fits best in your company, it is necessary to calculate how much each of them will cost and, based on the amounts, decide which the best option is. It is important to remember that the cheapest is not always the best: what really should be taken into account is cost-benefit.
The method for analyzing the cost of each operation is the Total Cost of Ownership (TCO).
What is TCO and how to calculate it?
The total cost of ownership is a method to assess the direct and indirect costs of a particular product or service over time. It takes into account both the price of the good and its maintenance cost.
The CAPEX and OPEX indexes are calculated differently. Keep reading and learn more!
In the case of CAPEX, it is necessary to observe in the company’s balance sheet the variances that occurred during the period of one year, then apply the formula: CAPEX = variation in assets during the year – variation in liabilities during the year.
Let’s say that a company had R$ 2 million in assets in 2017 and R$ 3 million in 2018, for example. Thus, the variance was R$ 1 million. In the same way, liabilities in 2017 were R$ 500 thousand, and in 2018, R$ 600 thousand — variation of R$ 100 thousand.
Therefore, with the data presented, we have: CAPEX = R$ 1 million – 100 thousand = R$ 900 thousand.
The OPEX calculation is even easier: just sum up all the company’s operating costs in a certain period of time. Usually the period of 1 year is used. Based on these costs, it is possible to identify which model is more suitable for your company.
As we mentioned, it is important to remember that just a lower initial cost is not a good criterion of choice. It is important to think about the scale these prices will have over time and if the company has enough cash to maintain itself until the return on investment — should it be delayed.
CAPEX or OPEX: which one is more suitable for your company’s IT?
With the rise of technology, new products and services emerge every day in the IT sector. As digital transformation progresses, this renewal process tends to become faster and faster. One of its effects is that hardware and software become outdated in ever shorter time periods.
Taking this into account, CAPEX might be a bad option given that the investment in IT facilities requires a large amount of capital — and the return of this invested capital demands time.
As technology advances at a faster pace, it is possible that investing in new equipment and software is needed before the return on investment. In addition, the future of the company is taken into account when the company’s IT investments are planned.
Therefore, until it reaches this planned level — which can take time —, a good part of the resources acquired will be idle. In the current context of companies, in which updates are necessary in short periods of time, OPEX is a more interesting solution for the IT department.
Among its advantages we can mention:
- cost reduction: once the IT service is outsourced, the company does not have to pay for the purchase of equipment or the hiring of specialized staff. The service provider is responsible for these tasks;
- scalability and end of equipment idleness: it is possible to hire IT services, such as cloud storage, according to the needs of your company. This prevents equipment from becoming idle;
- tax deductibility: OPEX operations can be reported as expenses and, therefore, can be deducted in income tax.
Of course, each enterprise has its own particularities, but in general, OPEX is the solution that best suits a company’s IT department. Once you know the concepts of CAPEX and OPEX, you can decide which model is more suitable for each department of your company and, thus, increase your efficiency.
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