Definition of operating cost (OpEx) and capital cost (CapEx)
Definition of operating cost (OpEx) and capital cost (CapEx). When it comes to purchasing new equipment, capabilities, and software, IT professionals generally have two options: acquiring new capabilities and equipment as a capital expense (CapEx) and acquiring them as an operational expense (OpEx). As many companies move from traditional hardware and software ownership to service models, IT and finance must coordinate how best to categorize the respective costs.
According to Gartner, after a decline in IT spending in 2020, spending will increase significantly in 2021. Experts predict that worldwide IT spending will increase by 2.6 percent to a total of $3.9 trillion. In other words, IT costs for businesses are huge, and the way companies think about it may require a new look. Therefore, we will take a closer look at this issue in the next section.
What is Capital Expenditure (CapEx)?
Capital expenditures (CapEx) are the money a company spends on fixed assets, such as the purchase, maintenance, and improvement of buildings, vehicles, equipment, or land. You may also hear this referred to as PP&E, which stands for Property, Land, and Equipment. One-time purchases of these major physical goods or services benefit the organization for more than one year. In the world of information technology, examples of these important things are:
- IBM Power Systems
- Intel-based Windows Servers
- Other expensive items
- A variety of support items such as Universal Power Systems (UPS), line printers, air conditioners,
- scanners, and generators.
- Additional purchase costs
CapEx expenses have advantages and disadvantages from an accounting perspective. If the asset’s useful life lasts more than one year, which is typical, the cost is expensed using depreciation between 5 and 10 years after the date of purchase.
In particular, real estate can be depreciated for more than 20 years; Something that has fueled the development of commercial real estate for decades. Finance and accounting teams appreciate these CapEx tax amortizations.
On the other hand, the more money you spend on CapEx, the less free cash flow for the rest of the business, which can hamper short-term operations.
What are operational expenses (OpEx)? – Definition of operating cost (OpEx) and capital cost (CapEx)
Operating expenses (OpEx) are the funds that support your business on a day-to-day basis. OpEx items are generally purchased and consumed during the year. Examples of this type of cost are:
- Consumables such as printer cartridges, paper, electricity and other supplies
- Contractual items such as annual maintenance or service contracts, website hosting and web domain registration
OpEx purchases cover payment items that are shown on the organization’s profit and loss statement and deducted from revenue when incurred. When material goods or services are purchased as an OpEx item, the workflow is as follows:
- Expenses are allocated to the operating expenses budget.
- The cost is tracked in your profit and loss statement.
- Monthly equipment costs are tracked and deducted from net profit as incurred (rather than amortized over several years).
Management is often required to reduce OpEx costs without reducing the company’s ability to compete or produce. Unlike CapEx depreciation, OpEx is fully tax deductible in the year it is incurred.
Determine CapEx and OpEx
Although the definitions seem quite clear, there are many obscure topics. Many important IT goods—such as servers, generators, or UPS systems—can be purchased as capital or as an operating expense.
Considering the hassles of forecasting and change, remember that the benefit of considering CapEx/OpEx for IT spending is about changing spending money in favor of overall business needs. Regardless of the cost model you choose, visibility and control of your infrastructure—whether on-premises CapEx or OpEx in the public or private cloud—allows you to make decisions and positively impact the overall success of your business. .
Introducing the top responsibilities of a construction project manager