CapEx vs OpEx: What’s the difference?
Is it a CapEx request or an OpEx request? Budget holders from all departments are asked this. You can tear your hair out figuring what bucket a budget comes from. Why does it even matter? We are, after all, one organization? Proper financial reporting does matter and it’s important for us line of business folks to increase our finance IQs so we can 1. Properly prepare business cases when requesting budgets; 2. Ensure we are financially compliant.
In the simplest (ish) terms…
Capital Expenses, called CapEx, reflect expenses an organization incurs for future benefits. Capital Expenses are fixed assets like land, buildings, or machinery and they depreciate or are amortized over a number of years. On a company’s income statement, only the amortized amount is deducted from revenue for taxes.
Operating Expenses, called OpEx, reflect the day-to-day costs that a company incurs. These are your employee wages, office supplies, and leases. On an income statement, OpEx is fully deducted from revenue … meaning your business is taxed on revenues minus all Operating Expenses.
What bucket do IT investments fall into?
Both…
CapEx = On premise hardware technology like switches or phones (your company owns these)
OpEx = Software solutions, cloud applications, or rented hardware (your company rents, subscribes, or finances). Examples include: SFDC.com; Webex; Box.
Which is preferred?
Finance team:
Often the finance department will prefer OpEx. It reduces a company’s owed income tax, so they also may prefer leasing hardware instead of purchasing it outright. With purchasing, companies have to come up with the entire investment upfront (unless they choose to finance) and figure out the amortization schedule.
IT team:
As line of business managers (IT, Marketing, Sales), we know it can be challenging to secure budget. RFPs, quotes, business case justification… OpEx is generally approved easier as Capital investments require multiple layers of management approval. Cloud solutions provide a lower cost, pay-as-you-go model that lifts the burden of an upfront cash investment.
IT Management of Cloud solutions:
IT investments can be costly and time consuming. Cloud solutions are easier to deploy, adopt and upgrade. These solutions also easily scale as businesses grow. You may have a 50 person company today but if you’re growing at a rapid rate, the solution can grow with you (no need to rip and replace). And for businesses without an IT department, cloud-managed services do the work for you.
Options:
Cisco has a portfolio of cloud based networking, collaboration and security solutions perfectly suited for businesses of any size (including SMBs).
What are they? Visit Cisco.com/ca/smb
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Capital expenditures (CapEx) are the money a company spends on fixed assets. Things like the improvements of a building, a vehicle, equipment, and land. These one-time purchases stick with a company for more than a year, and show up on the balance sheet, while the cost depreciates over time. Finance teams and bookkeepers applaud these CapEx tax depreciations.
Operating expenses (OpEx) are used to run day-to-day operations. Things like printers and scanners, air conditioners and paper, electricity, and other supplies. These are pay-as-you-go items that show up on a on the company’s statement, and are deducted from income as they occur.
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