Capex vs Opex

Difference Between Capex vs Opex

Capex is regarded as Capital Expenditure, while Opex is regarded as Operational Expenditure. We log a transaction when a business acquires assets that could be of benefit to the company not only in the current year but also in the long run. For example, machinery or a building that would stay in the firm for the long term for many future financial years. Capex is also referred to as Capital Expense. Operational Expenses are incurred by the company/ business to keep the daily business activities running smooth. They are nothing but the cost which a business bear to convert their inventory (raw materials) to a final product. For example, the electricity cost to run the machine and the labor cost to convert flour, sugar, etc. (raw materials) into a biscuit (final product). Even the depreciation of the Fixed Assets on a company’s balance sheet is considered an Operating Expense. Depreciation is the amount of wear and tear of the fixed asset which is accounted for in the current year. It is also beneficial to claim a tax deduction. Opex is also referred to as ‘Operating Expenditure’, ‘Revenue Expenditure’ or ‘Operating Expense’. Other examples of operating expenses can be rent, utilities, salaries (wages), SG&A (sales, general and administration cost), research and development, business travel.

Capex VS Opex Infographics

Below is the top 7 difference between Capex vs Opex.

Key Differences between Capex VS Opex

Capital Expenditure vs Operational Expenditure, both sound as terminologies of ‘Expenditures’ or ‘Expenses’. But when you run a business, it is essential to know the difference between the two on a concise level based on the following factors.

1. Cost

• Cost involves humongous pricing. This is because they are dedicated to the expenses incurred while buying fixed assets. These fixed assets are usually expensive and are to be used over a long period of time (more than 1 year). Therefore, although these expenditures are huge, they are used over the entire life of the organization.
• Alternatively, Opex is recurring costs. These are the costs that make sure that the company runs smoothly to ensure revenue. These expenses are paid for daily business activities.

2. Accounting

• When creating and maintaining financial statements, the cost incurred while purchasing a fixed asset is not incurred in the year they were purchased. Instead, these assets are depreciated over the life of the asset, which means that the cost of the fixed asset is spread over a period of years. Any asset with a physical substance is depreciation (Example: Machine, Land, Building). The assets which lack physical substance are called intangible assets (Example: Patents, Trademarks, Franchisees). These intangible assets are ‘amortized’ instead of being depreciated.
• Cost relating to the Opex are completely deducted from the gross profit. This is because the use of a product/ service has happened in the current financial year and shall be of benefit to the firm only in the current year. Therefore, neither these costs are spread across years, nor are they carry forward to the next financial year.

3. Profits

• Profits earned from capital expenditure come in a slow and gradual process. This is because the organization will operate the machine for multiple years. Even though these profits incurred are small and gradual, they end up being significantly huge after a lengthy period.
• The profits booked through operating expenses are reflected in a shorter period, unlike Capex, usually the current year. As a result, profits made can be of a huge amount, but they are earned only once, contrasting to the gradual earnings and benefits.

4. Financing

For both, the firm will have to source their financing to keep up their operations.

• Financing requires a huge sum of money; therefore, the company approaches financial lending institutions for loans. Lending institutions (like the bank) lend money, especially for capital expenditure, at special interest rates.
• To cater to their operational expenses, firms can use their retained earnings or net income from the previous years. Firms can also take up soft loans, which can be paid back in the short term, to cater to their operational expenditures. Firm owners can borrow from their family and friends to run their operating expenses smoothly.

Capex VS Opex Comparison Table

The following Head to Head comparison table between Capex VS Opex shall give you a better insight.

How can Capex vs Opex be helpful in different scenarios?

From a perspective of the income taxes, a firm shall prefer Opex over Capex. A business will opt to lease rather than buy a machine to be able to deduct a maximum amount for lease when calculating taxes. Thereby reducing the taxable amount and the income taxes charged. Moreover, the firm will incur a loss once you lease the item again. To facilitate these operational expenses, a company can put in its cash flow from operations.

An entrepreneur who wants to boost his firm’s profits and increase the book value can opt for a capital expenditure against his machine rather than leasing one. Capex will tend to depreciate the value of the machine over considerable time. Comparing the lease amount payable, the depreciation amount deducted will be lesser. Hence, boosting the profit. It is quite certain that the business might need financing from the bank to buy the machine.

Conclusion

Capital expenditures contribute majorly to the future. The life of these assets bought is of a long horizon, and hence they are depreciated over time. Operational expenditure is the day-to-day expenses incurred by the firm to keep the business operations going smooth.

Both contribute a large percentage of a company’s annual budget. When a firm is under cost-cutting, it is essential for them to strike a balance between Capex vs Opex. Firms make a separate budget for their Capex vs Opex to keep a check on their total expenditures.

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