CAPITAL EXPENDITURE VERSUS OPERATING EXPENDITURE
Within financial management, two main terms are used to classify cash flow: capital expenditure (CAPEX) and operational expenditure (OPEX).
Capital expenditure, or CAPEX, is financing used by companies to secure physical assets or upgrade current assets. CAPEX generally takes two forms; maintenance expenditure, in which a company purchases assets that extend the useful life of existing assets, and expansion expenditure, in which a company purchases new assets in an effort to grow the business.
It is important to understand that money spent on repairing or performing on-going, normal upkeep of assets is not considered CAPEX and should be accounted for on the financial statement for the period in which it is spent.
Unlike other investments such as research & development and marketing, capital expenditure is not immediately put down as a cost. Instead, property, plant and equipment acquired using capital expenditure are usually written off over time through the use of depreciation.
The amount of capital expenditure a company is likely to have depends on the industry it is in. Some of the most capital-intensive industries that have the highest levels of capital expenditure include oil exploration and production, telecoms, manufacturing and utilities.
The other term widely used in cash flow, operating expenditure or OPEX, consists of the recurring costs of a product, system or company. It can also include employee costs and facility expenses such as rent.
Simply put, capital expenditures tend to be major investments in goods, which show up on the balance sheet and are depreciated over the life of the asset, typically 3 years, whereas operating expenditure shows up on the profit and loss account and relates to expenses incurred on an ongoing basis.
CAPEX VS. OPEX
Importantly for many organisations, operating expenses are better suited for organisations anticipating rapid growth or changes in technology requirements. To use a straightforward example: “Once you have purchased a capital good, for example a car, you’re stuck with it. And even if you’re no longer excited about owning it, the finance company still expects a monthly payment. By contrast, if you rent a car, you are committed to it only as long as you want to use it – and once you’ve paid for that use, you have no further financial obligation.”
The decision to select OPEX over CAPEX (or vice versa) as a way of recognising technology spending should be based on a better understanding of the role of capital expenditure within your company. Many organisations are limited in the amount of capital expenditure they are able to access. As capital investment is limited, organisations usually want to direct their investment towards revenue-generating activities. This is why many organisations prefer to lease rather than purchase – they don’t want to tie up precious capital.
It’s easy to understand why any initiative that promises to reduce capital investment and transform it into smoother operational expenditure would be extremely attractive to the executive office. Operating expenses allow your company to:
- Cultivate a short-term spending mentality which speeds up the budgeting process;
- Create new investment opportunities across business seen as it is not tied up in large upfront expenditures;
- Spread the cash flow;
- Pay only for the capacity that is currently needed and scale as requirements change.
Energyst specialises in rental solutions for power generation and temperature control. As a member of the Caterpillar family, we are part of a large network of CAT dealers. Our engineers would be happy to sit down with you and assess your requirements.
In case rental is not the best solution for your specific situation, we will connect you with one of our CAT partners that can inform you about purchased energy solutions. To find out more about how Energyst can help your business, contact us.