CAPEX Vs. OPEXDifferences You Need to Know Between the Two!

Written By:
Lisa Borga

Businesses manage a number of expenses, and these can be broken down into two primary categories capital expenses (CAPEX) and operating expenses (OPEX).

CAPEX generally includes large one-time expenditures such as purchasing new production machinery, a new building, or property.

OPEX, on the other hand, represents the daily expenses of running a business, such as paying employees and paying rent.

Planning for both CAPEX and OPEX can play a major role in operating and growing a business.

However, the distinction between the two is not always clear-cut.

Capital Expense (CAPEX)

CAPEX includes expenses related to purchasing a major new asset or enhancing an existing one in order to improve the company’s performance.

Most commonly, these capital expenditures are for fixed assets such as new machinery, upgrades to facilities, or purchasing a property.

The most defining characteristic of CAPEX is the longevity of the investment, which means that it will offer benefits for greater than a single tax year.

Depending on the specific business and industry, the specific types of capital expenditures and their purpose may vary considerably.

In many cases, CAPEX may be used to expand a business’s operations, replace aging fixed assets, or upgrade existing assets.

Common examples of CAPEX include:

• New office space, manufacturing facilities, or machinery
• Major improvements to facilities
• New company vehicles
• Computers

CAPEX will be listed on the cash flow statement in the investing activities section and on the balance sheet in the section for property, plant, and equipment.

Generally, these assets will be depreciated over a significant period of time which will spread out their costs, avoiding charging a significant expense in a single accounting period.

Due to the large expense capital expenditures typically entail, they will often be externally financed.

Companies may choose to use either debt financing or issue bonds in order to finance these investments.

CAPEX plays a crucial role in a company’s future growth potential, and as a result, shareholders and potential investors look closely at how a company is balancing paying dividends with CAPEX.

Operating Expense (OPEX)

OPEX includes the daily expenses that a business incurs in order to continue business operations.

Generally, these are recurring expenses that represent the ordinary costs for a company operating in a given industry.

These are generally unavoidable expenses that can only be reduced.

OPEX is reported on a firm’s income statement, and most notably, the full expense may be written off in the period in which it is incurred.

Most expenses listed on a company’s income statement are regarded as OPEX.

Common examples include:

• Employee payroll
• Travel costs
• Maintenance and repairs
• Overhead costs
• Rent and property taxes
• Marketing
• Utilities

A significant part of OPEX often includes costs of goods sold as well as expenses related to research and development activities.

OPEX generally represents the primary cost driver for a company.

Thus, it is essential to understand and measure them in order to measure a company’s efficiency.

How to Account for CAPEX and OPEX

CAPEX are generally unable to be fully deducted in the year in which they are incurred.

What this means is that though they generally entail a large upfront payment, they will not be fully deducted from revenue in the year in which they are incurred, which will lead to higher profits.

Instead, tangible assets will be depreciated over their useful lifespan, and intangible assets will be amortized.

This means the costs associated with CAPEX will generally be recognized over several years or accounting periods.

OPEX will generally be fully deductible in the year in which they are incurred.

This means they will be deducted from revenue and reduce profits in the year they are incurred.

Daily expenses such as wages, rent, and utilities are grouped in OPEX.

However, it is important to remember that though major purchases such as new production machinery may be CAPEX, the regular maintenance and upkeep activities they may regularly entail will be OPEX.

Key Differences

• CAPEX are large purchases that will produce benefits for multiple accounting periods, whereas OPEX are daily expenses incurred in order to continue operations.
• OPEX are generally recurring costs that will need to be paid relatively frequently, whereas CAPEX will generally be paid for upfront.
• CAPEX produces long-term returns that may not be realized for a relatively long period of time. In contrast, the returns from OPEX are generally realized quickly, such as retaining the benefits of utilities.
• Most large equipment purchases are CAPEX; however, if the equipment is leased, the recurring cost would instead be classified as OPEX.

The Importance of CapEx and OpEx

It is essential to understand both capital expenses and operating expenses to be able to effectively run a business.

Capital expenses are necessary in order for a company to maintain their facilities and equipment as well as upgrade them or replace them.

It’s important for business owners and managers to understand their operating expenses so that they can find places to cut costs and improve their business’s efficiency.

Calculating Capital Expenses

Business owners or managers can use the information on the financial statements of their company to determine what its capital expenses are.

If they want to compute the capital expenses for the current year, they should obtain the company’s financial statements from the last two years.

1. After this, they should find the total fixed assets from the previous year and subtract this from the total fixed assets for the current year. Then subtract any intangible assets from this amount because they only are considered when determining capital expenditures. Additionally, any assets that a company received as part of the acquisitions for the reporting period should not be included.
2. Next, the accumulated depreciation for the previous year should be subtracted from the accumulated depreciation for the current year. This will give the total amount of depreciation for the current year.
3. Now, add this depreciation to the change in fixed assets calculated in step one. This will give the total capital expenditures for the current year.

The following formula can be used to calculate capital expenditures. You will need the company’s balance sheet and income statement to use the equation.

Capital expenditures = PP&E (current period) – PP&E (prior period) + depreciation (current period)

PP&E = property, plant, and equipment

Calculating Operating Expenses

Operating expenses are simply calculated by adding up the daily expenses of the business.

Key Takeaways

• CAPEX includes significant expenditures for long term investments and fixed assets, whereas OPEX includes daily expenses needed for maintaining ongoing operations
• Common examples of CAPEX are production machinery, buildings, and vehicles.
• Common examples of OPEX include employee pay, cost of goods sold, and marketing costs.