Every Business runs on Capex & Opex

If there are two financial terms that every business should be familiar with to run their organization successfully, then it is CAPEX & OPEX.

Right from understanding the terms, categories, differences, how they are accounted for, a few examples, and how they drive the business profitability, we are going to learn A-Z about Capex & Opex in this post.

What is Capex & Opex?

Category	Capex	Opex
Abbreviation	Capex stands for CAPITAL expenditure	OPEX stands for OPERATING expenses
Definition of Costs	Money is spent either to buy new FIXED assets and equipment or upgrade the existing physical assets as capital (CapEx).	Money that supports the day-day operations of the business is classified as Opex.
Classification	It is also called capital expenses or depreciated costs.	Operating expenses or Revenue Expenditure
Revenue generation	The fixed assets help directly in revenue generation	Operational costs help in running & maintaining the assets that generate the revenue.
Funding	You need the upright funding for capital expenditure	You don’t need upright funding as they are ongoing/recurring costs like pay as you use.
Recurring/One-time Purchase	Money spent should benefit the organization beyond one year. They are one-time purchases.	Money spent is on pay-as-you-go items like monthly office supplies and they are recurring and used within the same year.
Duration of spend	Capex costs are mostly long-term spending	Opex costs are short-term spending.
Real-Life Examples	Manufacturing plants Land and building improvements Computers and office equipment Furniture and fixtures Vehicles and trucks Non Tangible assets like Patents, Franchises & Trademarks.	Accounting, legal fees Advertising and marketing expenses Insurance Salaries and wages (except direct labor for production employees) Rent, Lease, and property taxes Travel expenses Maintenance and repairs SG&A costs Vehicle expenses Utilities
Layman terms	Money spent to buy the machine	Money spent to buy raw materials for the machine
Types of costs	It is broadly divided into two types – Maintenance Capital & Expansion Capital costs.	It is either one time Payment or monthly recurring costs
IT Examples	IT examples – All IT infrastructure costs which on-premises storage types including Servers, Routers and permanent software licenses.	It contracts items such as yearly service or maintenance agreements, website hosting, and web domain registrations. Cloud-based subscriptions are OPEX cost.
Accounting type	Capex costs are not an expense. It is part of the balance sheet and not the income statement.	Opex costs are accounted for as daily expenses under the profit & loss statement
Depreciation Time	Tangible assets are depreciated Nontangible assets are amortized	Depreciated in the same year of the accounting.
How it helps in Asset	Owning the hardware/ software is a big fixed asset to the business.	Moving the big capital cost to opex cost is beneficial as much of the work has been shifted to the cloud.
Uses	It tells and improves the earning capacity and helps to earn bank loans.	It tells how much costs you need to keep running the business.
Tax Beneficial	Capex costs accounted as depreciation costs over several years say 5 or 10 yrs. It cannot be deducted from the income for taxes.	Opex cost is taxable expenses depreciated within the same year and deducted from income as they occur and they are fully tax-deductible.
Disadvantages of spending more money	More money you spend on CapEx means less free cash flow for the rest of the business, which can hinder shorter-term operations.	More the operating costs will reduce the profit of the company, hence need tighter control of such costs.
Approval Process	Capex costs go through a rigorous purchase & approval process.	Opex costs has an easier approval process as long as it is budgeted in the operating expenses.
Profits	Slow and gradual	Earned in short term
Forecasting	Difficult to accurately forecast as it is based on specific needs.	Based on historical data, we can forecast/predict quite accurately.
Estimation	A huge amount is required at the front end.	Monthly running expenses which are mostly a linear trend

To add an additional note, in service-oriented companies, the wages of the developer’s cost who are involved in the direct production of the software are accounted for as capital costs as they are doing a project for another company.

The cost of the leadership team and the managers will be accounted for as OPEX costs as they are not associated with the portfolio.

The accounting of the CAPEX and OPEX cost depends on the purchase type, assets, expenses, duration, and usability.

It really helped me to learn a lot about capital and OPEX expenses by drafting this post.