What is CapEx vs. OpEx?
Capital Expenditures (CapEx) are significant, long-term investments a company makes in physical assets. Think of these as major one-time purchases that will provide value for many years. Examples include buying a building, purchasing a fleet of vehicles, or acquiring heavy machinery.
On the financial statements, CapEx is not fully deducted from revenue in the year it’s spent. Instead, the cost is spread out over the asset’s useful life through a process called depreciation.
For example, a company that buys a 100,000-euro car cannot add 100,000 euros in expenses in the same year. Instead, it must spread out the whole sum over 5 years (20,000 euros in year one, another 20,000 in year two etc.).
This means the company pays more in taxes in the first year, but less in the subsequent years.
Operational Expenditures (OpEx), on the other hand, are the day-to-day costs of running a business. These are ongoing expenses required to keep the lights on and the operations smooth. Examples include employee salaries, rent, utilities, marketing costs, and maintenance fees. OpEx is fully tax-deductible in the accounting period it is incurred.
For example, a company that spends 100,000 euros a year on electricity can add the whole sum in expenses for that year, reducing its taxes much more than if the expense was categorized as CapEx.
Should a business choose CapEx or OpEx?
The decision to shift from CapEx to OpEx is almost always a business decision, not an accounting decision.
CapEx is used to purchase tangible assets such as computers, servers, cars, buildings etc.
Companies own these assets and because of that they can do whatever they want with them.
CapEx also tends to be more cost-advantageous in the long term if businesses use the assets constantly and at their full capabilities.
By comparison, OpEx are small periodic expenses used to purchase various types of business services such as cloud hosting services, freelance services, rental services etc.
The biggest advantage of OpEx, besides the short-term tax benefits, is that OpEx expenses are flexible and can be canceled, increased or replaced whenever a business wants to.
Overall, CapEx offers more control and long-term cost savings but sacrifices short-term flexibility. CapEx also forces businesses to make expensive bets on assets they may or may not use to their full capability.
OpEx has the opposite advantages and problems. It allows businesses to take more short-term risks and experimentation, but can be expensive in the long run.
The greatest advantages of shifting CapEx to OpEx
As mentioned previously, the main advantage of OpEx is that it allows businesses to be flexible, to experiment and to take on short-term risk without investing too much starting capital.
Preserve Cash and Improve Liquidity: OpEx models avoid large upfront costs, freeing up cash for other critical business areas like innovation, marketing, or hiring. They can also just keep the capital on hand for bad times, or while hunting for business opportunities.
Flexibility and Scalability: In the short term, renting or subscribing is much more cost flexible than owning.
An OpEx model allows a company to add or remove resources (such vehicles, laptops, advertising costs, software usage credits etc.) very quickly and in response to market changes.
For example, during a cashflow crisis, companies that favor OpEx can very quickly cut operating expenses, while companies that favor CapEx will be stuck with various assets that depreciate, but don’t produce any revenue.
Improve Company Financials and Capital Productivity: Lower CapEx can lead to higher return on assets (ROA) and a healthier-looking balance sheet, which can be attractive to investors and lenders.
Not only that, but OpEx can improve the life and productivity of existing capital assets by moving intense processes over to OpEx instead.
For example, a shipping company might rent a separate vehicle for routes where they must transport heavy loads but on poor quality roads.
An IT company might use cloud-based servers and services (OpEx) for resource-intensive tasks like rendering high-resolution videos, instead of running these tasks on their on-premise servers (CapEx).
In both situations, OpEx protects the company’s assets from long term degradation.
Access the Latest Technology: Subscribing to services (like Device-as-a-Service) ensures a company always has access to the latest versions and technology without the constant need for expensive upgrades.
For example, a company a Device-as-a-Service provider makes it cost advantageous for a company to replace its entire laptop fleet every 2 years, since they only have to spend a fraction of the full price of the device in the first month.
With CapEx, companies are financially stuck with old technology (such as laptops, servers, etc.) until they break or reach the end of their life cycle.
This can be problematic towards the end of the device life cycle, since they tend to not perform as well as when they were new, or they won’t have key features found in newer models.
Methods of Shifting CapEx to OpEx
With all that being said above, here are the best methods for a company to shift its spending more from CapEx to OpEx, and take advant*age of all its benefits.
Move to Renting or Operating Leases
Renting is the most common form of transferring costs to OpEx. Instead of outright buying something, a company opts to rent it instead.
Nowadays, almost everything a company requires can be rented. This includes manufacturing equipment, vehicles, etc.
Similar to renting is an operating lease, through which a company acquires the right to use an asset for a certain period, but without transferring ownership.
With an operating lease, the company makes periodic payments that are expensed as OpEx, and the asset remains on the lessor’s balance sheet. This is frequently used for items like aircraft, heavy machinery, and office equipment. ️
Both methods are quite similar, the main differences being that rentals are usually short term (month-to-month), while an operating lease is more long term (typically one year or more).
Another difference is that the lessor (the party who owns the equipment) generally takes on almost all the risk and management associated with using the equipment: wear and tear, insurance, certification, etc.
Use Device-as-a-Service for Office Hardware
Instead of purchasing laptops, printers, and servers outright, companies can use a Device-as-a-Service (DaaS) model, such as our own at INKI.
In exchange for a predictable monthly fee, a DaaS provider rents to its clients various devices, such as laptops, smartphones, monitors etc.
On top of this, a DaaS provider also manages that hardware in the name of its clients. This means warranties, repairs, insurance etc., are all managed by the DaaS provider.
This subscription includes the devices, support, maintenance, and regular upgrades, turning a large capital expense into a simple operating expense.
Outsource Various Business Processes
Outsourcing non-core functions is another way to convert CapEx into OpEx.
For IT companies, the most common way to outsource expenses is to avoid buying in-house servers and hiring IT staff.
Instead, they shift all their computing needs to cloud computing services like Amazon Web Services (AWS) or Microsoft Azure, paying a monthly fee based on usage (OpEx).
For product-based companies, outsourcing manufacturing to a contract manufacturer avoids the massive capital investment required to build and equip a factory.
The same logic applies to transportation companies, who can acquire the vehicle fleet under an operational lease, etc.
Sale-and-Leaseback Transactions
A sale-and-leaseback is a financial transaction where a company sells an asset it already owns—such as its corporate headquarters or a data center—and then immediately leases it back from the new owner.
This strategy unlocks the capital tied up in the asset, providing a significant cash infusion. The company continues to use the asset as before, but the ownership cost is replaced by regular lease payments, which are classified as OpEx.
We at INKI do these sorts of operations quite frequently, where we buy out a company’s entire device fleet, and then rent it out again to the same company at a preferential price, while taking on all device management duties.
Use a Managed Service Provider
Managed Services will generally shift a companies finances from the “buy-and-own” model (CapEx) to a “pay-as-you-go” subscription model (OpEx).
Instead of purchasing an asset, you are paying a Managed Service Provider (MSP) a recurring fee to deliver a specific outcome or service. The MSP owns, maintains, and manages the underlying assets required to deliver that service.
To see how an MSP can help shift CapEx to OpEx, let’s imagine a company that wants to improve its cybersecurity.
With CapEx: A company purchases expensive firewall hardware, intrusion detection systems, and security software. They must also hire or train staff to manage and monitor these systems.
With MSPs and OpEx: The company partners with a Managed Service Provider (MSP) specialized in cybersecurity.
This MSP provides the client company with a solution that includes everything the client needs: firewall management, 24/7 threat monitoring, incident response and specialized human expertise.
For all this, the company pays the MSP a deductible monthly fee that is categorized as OpEx.
Franchising Agreements
A company can expand its business through franchising.
Instead of opening and funding new corporate-owned locations (a CapEx-heavy strategy), the company licenses its brand and business model to independent franchisees.
The franchisee incurs the capital costs of setting up the new location, while the franchisor earns recurring royalty and fee payments, which are classified as revenue derived from OpEx-related activities.
This allows for rapid expansion with minimal capital investment from the parent company.
Research and Development (R&D) Expense Recognition
While some R&D costs must be capitalized, companies can legally structure their R&D spending to maximize the portion that’s expensed as OpEx.
By carefully defining the stages of a project and documenting the lack of “technological feasibility” for a longer period, a company can classify more of its early-stage R&D costs as operating expenses before it’s required to capitalize them.
This requires strict adherence to accounting standards and thorough documentation.
