Capex vs Opex

Diffen › Business › Accounting

Capex, or capital expenditure, is a business expense incurred to create future benefit (i.e., acquisition of assets that will have a useful life beyond the tax year). For example, a business might buy new assets, like buildings, machinery, or equipment, or it might upgrade existing facilities so their value as an asset increases.

On the other hand, those expenditures required for the day-to-day functioning of the business, like wages, utilities, maintenance, and repairs, fall under the category of Opex, or operational expenditure. Opex is the money the business spends in order to turn inventory into throughput. Operating expenses also include depreciation of plants and machinery which are used in the production process.

Comparison chart

Capex versus Opex comparison chart
	Capex	Opex
Definition	Capital expenditures are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing asset with a useful life that extends beyond the tax year.	OpEx (Operational expenditure) refers to expenses incurred in the course of ordinary business, such as sales, general and administrative expenses (and excluding cost of goods sold - or COGS, taxes, depreciation and interest).
Also known as	Capital Expenditure, Capital Expense	Operating Expense, Operating Expenditure, Revenue Expenditure
Accounting treatment	Cannot be fully deducted in the period when they were incurred. Tangible assets are depreciated and intangible assets are amortized over time.	Operating expenses are fully deducted in the accounting period during which they were incurred.
In throughput accounting	Money spent on inventory falls under capex.	The money spent turning inventory into throughput is opex.
Examples	Buying machinery and other equipment, acquiring intellectual property assets like patents.	Wages, maintenance and repair of machinery, utilities, rent, SG&A expenses
In real estate	Costs incurred for buying the income producing property.	Costs associated with the operation and maintenance of an income producing property.
Procurement Involvement	Purchasing rarely takes the lead, but only assist in the procurement of the item. The negotiation process also takes much longer.	Everyday items bought on a regular basis and minimum stock levels kept. It also does not incur any maitenance cost or repair

Examples

Capital expenditures include acquiring fixed assets (tangible, e.g. machinery or intangible e.g. patents), fixing problems with an asset, preparing an asset to be used in business, restoring property so that value is added, or adapting it to a new or different use.

Operating expenditures include license fees, maintenance and repairs, advertising, office expenses, supplies, attorney fees and legal fees, utilities such as telephone, insurance, property management, property taxes, travel and vehicle expenses, leasing commissions, salary and wages, raw materials.

Accounting for Capex and Opex

The crux of the matter lies in the way these expenditures are accounted for in an income statement.

Since capital expenses acquire assets that have a useful life beyond the tax year, these expenses cannot be fully deducted in the year in which they are incurred. Instead, they are capitalized and either amortized or depreciated over the life of the asset. Intangible assets like intellectual property (e.g. patents) are amortized and tangible assets like equipment are depreciated over their lifespan.

Operating expenditure, on the other hand, can be fully deducted. "Deducted" means subtracted from the revenue when calculating the profit/loss of the business. Most companies are taxed on the profit that they make; so what expenses you deduct impacts your tax bill.

What is preferred: Capex or Opex?

From an income tax perspectives, businesses typically prefer OpEx to CapEx. For example, rather than buy laptops and computers outright for $800 apiece, a business may prefer to lease it from a vendor for $300 apiece for 3 years. This is because buying equipment is a capital expense. So even though the company pays $800 upfront for the equipment, it can only deduct about $250 as an expense in that year.

On the other hand, the entire amount of $300 paid to the vendor for leasing is operating expense because it was incurred as part of the day-to-day business operations. The company can, therefore, rightfully deduct the cash it spent that year.

The advantage of being able to deduct expenses is that it reduces income tax, which is levied on net income. Another advantage is the time value of money i.e. if your cost of capital is 5% then saving $100 in taxes this year is better than saving $104 in taxes next year.

However, tax may not be the only consideration. If a public company wants to boost its earnings and book value, it may opt to make a capital expense and only deduct a small portion of it as an expense. This will result in a higher value of assets on its balance sheet as well as a higher net income that it can report to investors.

Videos

Operating expenses are sometimes also called Revenue Expenditure. Here are two videos comparing capital and operational expenses.

Capex and Cash Flow

Investors often look not only at the revenue and net income of a company, but also at the cash flow. The reported profit, or net income, can be "manipulated" via accounting techniques and hence the idiom "Income is opinion but cash is fact." Operating expenses directly reduce the Operating Cash Flow (OCF) of the company. Capex does not figure in the calculation of OCF but capital expenditures reduce the Free Cash Flow (FCF) of the company. Some investors treat FCF as a "litmus test" and do not invest in companies that are losing money, i.e. have a negative FCF.

Amazon is an example of a company with very high capital expenses. The following chart, by Benedict Evans, shows the growth in OCF, capex and FCF for Amazon since 2003.