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 capital expenses and other types of expenses. Below 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, this 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
Get 30-day trial!

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
Get 30-day trial!

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 needs 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.

What Do Most Businesses Choose Between the Two?

Now you can answer this: What is CapEx and OpEx. But which one of the two
would you prefer? From the income tax perspective, most entrepreneurs
prefer OpEx to CapEx. A case in point is when a business opts to lease rather
than buy equipment to be able to deduct its full cash expense for leasing when
computing its taxes for that accounting year. The benefit of having the ability
to deduct expenses is the fact that it minimizes the income tax that is charged
on your net income. Besides, you will only incur an operational cost once you
lease the item again.
Get our PDF Case Study to learn how Hertz has leveraged Comindware Tracker to create a
modern CapEx approval application, which replaced complex Excel files and dramatically
reduced the capital expenditure approval cycle time, decreased operational expenses and
minimized financial risks.

Get Case Study!

When a Business Can Opt for CapEx

A business that wants to boost its profits and book value can opt to incur a
capital expense by purchasing a new machine rather than leasing one. It will
have to deduct a small portion of it as an expense in that accounting year. In
such a case, the business’ balance sheet would indicate a higher value of
assets and net income. It also means that it would save very little on tax.

Capital expenditures entail huge investments in goods that are placed on the
balance sheet and are then depreciated over the life of the asset. On the other
hand, operating expenditures appear on the profit and loss A/C. They relate to
costs incurred on a continuous basis. If you are in an organization that
anticipates quick growth or technological changes, OpEx should suit you best.
Instead of purchasing a capital good and then getting stuck with it, you will be
better of leasing one. Once you pay your leasing fee, there will be no further
financial obligation on your part. But if you cannot avoid CapEx, and have no
limited access to capital investments (sounds like a CapEx controller dream),
you should go for it and make sure that you have a CapEx project
management professional on a full-time basis. Now you have the answer to
this, what is CapEx and OpEx, and it is upon you to decide which one to go
with.

CapEx Management in the Wake of COVID-19

It is evident that the pandemic-fueled crisis has significantly impeded many
businesses’ ability to invest and execute capital projects. So, Chief Financial
Officers and company leaders need to quickly reset their CapEx portfolios in
order to make sure that every investment is worth the effort and money and
helps business with staying afloat. To do so, it becomes even more important
to optimize CapEx portfolio on a constant basis and make sure that each
CapEx request goes through a rigorous evaluation and approval process
quickly. This approach sets up a blueprint for long-term and effective CapEx
portfolio optimization and ensures that executives catch advantage of new
growth opportunities, while safeguarding business from the financial drain.

When diving deeper into CapEx management during a crisis, it might be

useful to consider using a ready-to-use CapEx approval workflow template for
quick start and making sure that your investments are safeguarded when
CapEx approval cycles are short.

This template is delivered at as part of Comindware COVID-19 Recovery

Kit designed to automate daily routine quickly, collaborate effectively, track
work progress and bring out the best in remote work. The Kit includes the
following ready-to
use workflow templates: