Capex vs Opex: Differences, Importance and Examples
By Indeed Editorial Team
Updated 8 December 2022
Published 19 May 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Businesses cover a range of expenditures to stay operational. Capital expenditures (Capex) and operating expenses (Opex) are two expenditure categories that they use to organise their costs. Learning about the differences between Capex and Opex can help businesses allocate their budgets and costs. In this article, we define Capex vs Opex and each of their importance. We also discuss the main differences between Capex vs Opex and list some examples for each category.
Capex vs Opex
Knowing about Capex and Opex can help your business plan for future expenses. Typical costs that businesses have include salaries, raw materials for product and service offerings, taxes and utility bills. Capital expenditures (Capex) are big purchases that include equipment and physical assets that ensure a business' long-term operation and growth. Operational expenses (Opex) cover daily expenses such as utility bills and the amount of money spent on producing an organisation's product and service offerings. Here are the definitions of Capex and Opex:
What is Capex?
Capital expenditures (Capex) refer to money spent buying goods and services used to promote an organisation's growth and meet long-term business goals. They include fixed assets like machinery or buildings. An organisation considers a purchase under Capex if it contributes towards long-term benefits that last beyond one taxable year. For example, if a fashion company purchases 50 new sewing machines for one of its factories, the company states it as a capital expenditure. Capital expenditure varies among industries.
Companies can make purchases to expand their operations, increase their productivity or improve existing systems and equipment. Company accountants typically list this type of expenditure under the property, plant and equipment section. It's also recorded as a type of investing activity. If companies want to increase their capital expenditure, they can consider taking out loans or issuing bonds to increase their available cash. Company shareholders also take note of Capex figures when they get dividend payments. They keep track of companies that can issue payments while spending on assets that drive future profits.
What is Opex?
Operating expenses refer to a company's daily operational expenses, which can include salaries, business travel expenses and administrative costs. Companies keep records of their Opex on income statements. This is useful for them to deduct the expenses from the total payable tax for the year. Companies also consider research and development costs and the cost of goods sold under their operating expenses. The latter cost refers to the amount of money a company spends on hiring people and purchasing raw materials to produce its goods and services. It can also include the costs of producing marketing materials. Companies typically use their Opex as a measure of overall efficiency. They aim to optimise their output relative to it. Opex may differ when you move across industries. For example, companies in most industries usually consider purchasing a physical asset like a building as a capital expenditure, but such a purchase is considered an operating expense in the real estate industry.
Why are Capex and Opex important?
Capital expenditure and operating expenses determine how companies allocate their funds for sustained growth and revenue. Companies require accurate business forecasting to ensure that they split available funds between both types of expenses. It is also important for them to consider their ability to procure and pay back loans for capital expenditures. Both expenses are important to help companies decide on their current priorities. For example, if they want to increase productivity, they might consider investing in infrastructure under capital expenditure.
7 differences between Capex and Opex
Here are some interesting and important differences between capital expenditure and operating expenses:
During the accounting period, accountants don't consider capital expenditure as expenses, since the total utility period of assets purchased typically last beyond one taxable year. As such, accountants capitalise on Capex costs. In comparison, companies record operating expenses in the income statement during the same accounting period. This is because operating expenses account for daily business costs like utility bills and employee salaries that are paid on a weekly, monthly or yearly basis.
Companies depreciate capital expenditure for physical assets to distribute the costs over their utility period. This enables companies to spread their costs over a few years instead of reflecting a significant decrease in funds when they purchase assets. For intangible assets, companies amortise them over time to spread the costs out. In comparison, operating expenses are deducted from the company funds during the same accounting period that they were spent.
Capital expenditures require large amounts of funding. Since the costs are spread out over a few years, companies can take out loans from banks or financial institutions to buy assets. In comparison, operating expenses require significantly lesser funding and companies can use their existing funds to account for these expenses.
Capital expenditures typically require minimal procurement involvement. The procurement officer assists in the asset purchase process, but the most important step is the negotiation phase to lower costs, optimise output and increase profit margins. Companies may focus on getting competitive prices since capital expenditures are spread over time. In comparison, operational expenses require direct procurement involvement. Companies buy items to ensure the smooth running of business operations. They purchase these items regularly, and they also require minimal repair and maintenance costs. The number of money companies spends on operational items depends on the minimum stock levels they want to maintain.
Companies use their revenue to account for operating expenses. Since there's a direct deduction for Opex, it lowers the company's overall profits. This then leads to lower taxes. Capital expenditure can also help companies to save on taxes. This depends on the depreciation amount of purchased assets. For example, a company might consider buying a piece of equipment for $80,000 with an annual depreciation of $8,000 or renting it for $5,000 every year. In this case, it's more cost-effective for the company to purchase the machine since the utility period is likely to be more than a year.
Companies consider capital expenditure as huge investments to drive present and future company growth. When deciding to purchase an asset, companies account for its costs, depreciation value and estimated utility period. This enables them to determine if it's worth buying and calculate how much profit they can gain in the next few years. Although capital expenditure incurs higher upfront costs, the purchased assets can earn profits for the company for a longer period of time.
In comparison, operating expenses are immediate costs. The profit gained from operating expenses lasts for a shorter time. For example, monthly employee salaries account for individuals' work every month. The profits gained depend on their monthly productivity and may not ensure long-term growth.
To calculate a company's capital expenditure, companies require information on how much they've spent on properties, plants and equipment (PPE) in the present and previous taxable years. They also require information about the depreciation value of purchased assets for the current taxable year. The formula to calculate capital expenditure is:
Capex = PPE (for the current period) - PPE (for the year before) - depreciation (for the current period)
In comparison, there are two ways to calculate operating expenses. The first method is to calculate the sum of salaries, commissions, marketing materials, rents and utility bills. The second method is to take the overall revenue and deduct the operating income and cost of goods sold. The formulas to calculate operating expenses are:
Opex = salaries + sales commission + promotional and advertising expenses + rent + utilities or
Opex = revenue - operating income - the cost of goods sold
Examples of Capex vs Opex
Capital expenditures refer to money spent on fixed assets for long-term utility, growth and profit. They can be tangible like machinery or intangible assets like patents. They also include asset preparation and repair costs when assets require restoration to improve or alter their functions. Here are the examples of capital expenditures:
Operating expenses can be split into many categories that cover different types of taxes, utility bills and fees. Here are the examples of operating expenses:
maintenance and repair costs
marketing and advertising materials
office supplies and stationery
attorney and legal fees
travel and vehicle expenses
raw materials for goods and services production
interests for existing debt
Explore more articles
- What Is SPIN Selling? (With Definition and Strategy)
- What Is Construction Project Management? (Types and Stages)
- 7 Scrum Master Certifications That Can Help You Succeed
- What Is Dynamic Data Exchange? (Definition Plus Uses)
- What Is ReactJS (Plus How It Works and Why It's Important)
- 10 Important Strategies for Teachers in the Classroom
- Expository Writing: Definition, Types and How-to Guide
- 12 Types of Innovation Strategies (With Importance)
- What Are Early Adopters? (Explanation and Advantages)
- Parameter vs. Statistic: Key Differences (With FAQ)
- What Does a Mentor Do? (Plus Benefits of Mentorship)
- How to Demonstrate Willingness to Learn (With Definition)