CapEx vs OpEx explanation



CapEx versus OpEx. Capital Expenditures versus Operating Expenditures. There is a finance and accounting aspect to the terms CapEx and Opex, as well as a business model aspect. Let’s discuss both, and walk through some examples of how the terms CapEx and OpEx are used.

CapEx is Capital Expenditures. OpEx is Operating Expenditures. What these terms have in common is the word expenditures, you are spending money, but in different ways.

Capital Expenditures. As a working definition of CapEx, this is money spent by a business or organization to acquire or upgrade fixed assets, such as buildings, machines and equipment.

Operating Expenditures. If CapEx is the upfront investment to buy a fixed asset, then a working definition of OpEx is the ongoing spending to keep the fixed asset running.

For an expenditure to be considered as CapEx, you have to own an asset. There is a threshold level for expenditures to qualify as CapEx: there must be a useful life of more than one year, and the asset value must be more than a minimum amount. I have worked with a company where this minimum was $2500, and others where it was $7000. Please check with the finance department of your company on what your minimum level is.

How about that part of maintenance where you are improving the performance of a machine and increase its capacity? What about software developed for internal use? What about the development phase of R&D? You could argue in all three cases that future economic benefits are generated by these projects, and according to the matching principle in finance it would be appropriate to capitalize these costs, and subsequently depreciate or amortize these assets over their useful life. Each of these cases will have to be evaluated carefully against current US GAAP or IFRS rules (depending on where your company is listed), and you will have to meet very strict criteria to apply a CapEx treatment.

How does CapEx affect the financial statements? Let’s take a look at the balance sheet, the income statement and the cash flow statement, when we answer the question “does this expenditure qualify for CapEx (it meets the capitalization criteria) or it does not qualify as CapEx?”.

First of all, the CapEx spend is a cash outflow recorded in “Cash From Investing Activities”. On the balance sheet, it gets accounted for as an asset, in the Plant and Equipment category. Over the years of its useful life, the asset gets depreciated, and the depreciation charge hits the income statement or P&L in each of the years of the assets’ economic life. I will link to my video about deprecation if you are interested in learning how that works:

Do you go for the upfront CapEx investment to own servers for your datacenter, where you are unsure how much capacity you will actually need, or do you pay a monthly OpEx fee for an external cloud service where it’s pretty much “pay as you go” and “spend what you use”? I can’t give you a “one size fits all” answer to this question, it’s really something that an IT manager and a finance manager should analyze together. Risk and scale should be part of this conversation. The evaluation is a variation of the age-old “own versus use”, “buy versus rent”, “buy versus lease” discussion, which is more relevant than ever before in these days of ubiquitous digital devices and tools, disruption of mobility models through Uber and others, and disruption of the travel and leisure models through Airbnb.

This video discusses the impact of CapEx versus OpEx on the balance sheet, income statement, and cash flow statement, as well as ratios such as ROA. For more information on ROA and DuPont analysis, watch

Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

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24 Comments

  • The Finance Storyteller

    Enjoyed the video? Then please subscribe to my channel, and watch the videos on depreciation https://www.youtube.com/watch?v=6SY8s1_OEro and intangible assets https://www.youtube.com/watch?v=-TzaG-VD2GU

    July 13, 2020 - 4:27 am Reply
  • JJ Abragan

    Love the simple, straightforward explanation. The pace of the speaker is also just right. In other videos I've seen, the speaker either talks too fast or too slow.

    July 13, 2020 - 4:27 am Reply
  • Elena Zubiria

    simple , sencillo y claro ! gracias

    July 13, 2020 - 4:27 am Reply
  • CN MG

    brilliant video, it helped me a lot. subscribed.

    Using the same example as before, if the roof for the building is CapEx, window cleaning for that same building would be OpEx. If the purchase + installation of a lift is CapEx, the service and maintenance of that lift is OpEx.
    Buying a Car is CapEx; servicing, tax, MOT, insurance and petrol are OpEx.

    July 13, 2020 - 4:27 am Reply
  • Rolando Borriceli

    Capex contain also acquisitions

    July 13, 2020 - 4:27 am Reply
  • MOAA

    How couldn’t I discover this channel earlier, dead simple and easy to understand accounting concepts.

    July 13, 2020 - 4:27 am Reply
  • H

    lekker bezig

    July 13, 2020 - 4:27 am Reply
  • I Bara

    Get a wife : Capex. Vs Get a hooker: Opex

    July 13, 2020 - 4:27 am Reply
  • Brian Wynne

    01 was here

    July 13, 2020 - 4:27 am Reply
  • Max Godfrey

    Thanks for the shoutout

    July 13, 2020 - 4:27 am Reply
  • Faisal Aljurayyed

    thanks a million your videos are Capex i hope you keep investing <3

    July 13, 2020 - 4:27 am Reply
  • Rajamanickam J

    brilliant

    July 13, 2020 - 4:27 am Reply
  • James Perry

    Love the graphics. Thanks for the very useful explanation.

    July 13, 2020 - 4:27 am Reply
  • NICOLAS SUAREZ

    very well explained. thank you so much for sharing

    July 13, 2020 - 4:27 am Reply
  • Sapura MOHAMAD ARIS

    Good Explanation and easy to understand for non finance people

    July 13, 2020 - 4:27 am Reply
  • mansour almansouri

    thank you

    July 13, 2020 - 4:27 am Reply
  • Anna

    I love the videos, very short and easy understand explanation, which you can check while listening to the negotiating partner and not understanding what he is talking about!

    July 13, 2020 - 4:27 am Reply
  • Suresh kashyap

    This is awesome! Keep this videos coming!
    Clearly explaining the difference between Capex and Opex which is a hot topic at the moment.

    July 13, 2020 - 4:27 am Reply
  • Alex Soltani

    Solid review. Brief and very helpful!!!!

    July 13, 2020 - 4:27 am Reply
  • Kenneth Beard

    Some easy examples for people to identify with are purchasing a house or a car. Buying them initially is Capex (price of house or mortgage loan and the price of the car) but running them (house maintenance, utilities etc for the home or fuel, maintenance, repairs for the car) is Opex. Except that in most countries individuals are not allowed to treat this like a company for tax purposes.

    July 13, 2020 - 4:27 am Reply
  • koo hamed

    very good but u speak fast

    July 13, 2020 - 4:27 am Reply
  • Luisger

    Great Video! very well explained. thank you so much for sharing your knowledge. I was wondering a few question I'd love you help me. Great Video! very well explained. thank you so much for sharing your knowledge. I was wondering a few question I'd love you help me.

    Scenario. Company move to the cloud, but payment is not monthly or pay as you go. The payment is 3 year commitment,
    where you pay up-from every year. example: 300k total investment. at the committment’s signature you pay first year, 1 year later you the next… till the last years where renew the contract or not.

    Questions. What's the impact, financialy and economically, when you invest in cloud, but the payment is a 3 years agrement?.
    In this scenario, is it still considered opex (or 100%opex)?

    How does it impact in your balance sheet? because as soon as you, eathier finance this or pay with yuors own funds, it has an impact in your liabilities but there is no assett to be finance.

    How does impact on your income statement and your cash flow statement?

    Most cloud companies offer their cloud services on this hybrids escenario, offering better prices under this old licence method, where you have to to figure out what’s better. Lower price/discounts or financial/economic flexiblity (and more)?

    Thank you in advance

    July 13, 2020 - 4:27 am Reply
  • Emotionally.Yours

    A retailer buys finished product and sales the same material to consumer. In this case spending for finished goods is CAPEX or OPEX????

    July 13, 2020 - 4:27 am Reply
  • divyam saxena

    Nicely explained.. Please take some real company examples to explain…

    July 13, 2020 - 4:27 am Reply

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