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CAPEX vs OPEX : what's the difference ?| Simplicity Consultancy - YouTube
Channel: Simplicity Consultancy
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in the world of business two common
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acronyms can be difficult to understand
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one is capex and the other opex
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what do these terms mean and what is
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their difference
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in this video we'll give you a clear
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understanding of both concepts so you
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know when to use them in your future
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conversations with colleagues or clients
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have you come across the terms capex and
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opex and thought which is which both are
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expenses that are concerned with the
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money that is paid out of your company
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but in very distinct ways is it time to
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get rid of the fog once and for all
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here's a primer on capex versus opex
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including an explanation of what they
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are their advantages and disadvantages
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and whether or not you should use them
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what is capex
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capital expenditure also known as capex
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is the term used to describe the money
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your firm spends to create future
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advantages
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if you buy a new building or equipment
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for example this is known as capital
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expenditure
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why because your firm must pay these
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costs upfront to reap future profits
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that is while they may not immediately
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improve your earning they are still
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required for future production and
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income
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capex can include the renovation and
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upgrades to established assets in
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addition to covering expenditures for a
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new warehouse or manufacturing facility
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so what does capex have to do with your
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company's budget
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in a nutshell we may say that it
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reflects how much a corporation is
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investing in its future because business
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analysts are so interested in major
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corporations capital expenditure plans
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this is precisely why they're so
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important
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capex like all other types of spending
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in any economy can vary considerably
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from year to year
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as a result capital expenditures must be
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considered over time
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the amount of capital investment
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required varies by industry
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some industries such as oil and gas
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require a significant amount of money
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whereas others such as retail do not
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when compared to the capital expenditure
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of rivals capex is also easier to
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comprehend
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capex examples
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office buildings as well as the expenses
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that extend the building's life
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office equipment such as computers
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photocopiers and office furniture
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vehicles patents trademarks copyrights
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what is opex
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opex stands for operational expenditure
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which refers to expenditure a business
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makes in its regular operations
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wages utilities and rent are examples of
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operational costs that do not provide
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future benefits
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rather they are now a must-have
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building maintenance and general repairs
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are included in operating costs if no
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improvements or additions are made that
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affects the assets performance or
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lifespan
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it is crucial to consider opex which
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accurately reflects the expenses of
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running a business because no future
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benefits are obtained
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if the opex is too high a firm may
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quickly go bankrupt
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unlike capex which can be offset by
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future profits suffering debt to pay for
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opex is always an issue since it never
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goes away
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when it comes to opex the numbers are
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more comparable and they're easier to
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grasp when compared with capex
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opex examples
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rent and utility costs costs of goods
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sold
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wages and salaries
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capex and opex accounting
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a major distinction between these two
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types of expenses is how they are
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accounted for on your income statement
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these costs can't be fully deducted in
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the year they're incurred because capex
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is purchasing assets that have a useful
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existence beyond the tax year instead
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they're capitalized and amortized or
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depreciated over the assets life span
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according to their nature
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intangible assets such as know-how are
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amortized whereas tangible assets are
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depreciated according to the useful life
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of each item
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however operating costs are deductible
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this implies that operation expenses may
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be subtracted from revenue when
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calculating the company's profit loss
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most firms are taxed on their profits
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therefore any expenditures you take off
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the top influence your tax liability
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capex vs opex
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in terms of income tax opex is generally
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preferred to capex as a result rather
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than purchasing equipment outright
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businesses will lease it from a vendor
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because buying hardware is considered
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capex all of the money paid up front
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can't be deducted
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the cost paid to a vendor for leasing
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equipment is classed as opex since it is
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an operational cost allowing for a full
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deduction
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deducting expenses lowers taxable income
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which is calculated after net earnings
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are removed it is also beneficial when
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it comes to the time value of money
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currently accessible money is worth more
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than future cash because of its earning
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potential
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however if a firm wants to improve its
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earnings and book value it may choose to
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incur a capital expense while only
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deducting a little amount of it from the
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income statement
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this will result in a higher net income
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that can be shown to investors as well
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as a greater asset value on the balance
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sheet
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managing your capital expenditures
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the upfront cost of capital assets are
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significant but the benefits come over
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many years
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this makes assessing and measuring the
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value of capital assets difficult
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here are some factors to consider before
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making any high cost investment
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budgeting
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before you invest in a plant property or
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equipment you must first establish the
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maximum amount you can spend
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the asset scope and funding availability
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must be
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determined profitability
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while businesses invest in technology
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and equipment to increase productivity
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and efficiency the ultimate goal is
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always profitability these gains are
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generally made by an increase in sales
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or a decrease in operating expenses
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businesses should think about the
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long-term benefits of purchasing capital
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assets when making their decision
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intangible returns
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there are a few intangible benefits
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associated with capital expenditure
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after a firm buys a new music system its
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morale will most certainly improve
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also the company's goodwill and
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financial health will be improving by
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owning assets
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such non-financial benefits must also be
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considered by the company
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