CapEx vs. OpEx: A comparison
Every day, companies are faced with the task of using the available capital efficiently. The goal is always to increase turnover through investments while remaining financially flexible. The change from a CapEx to an OpEx-focused corporate approach offers numerous advantages for this.
What are CapEx and OpEx?
The total expenditure of a company results from the Capital Expenditures and Operational Expenditures. The two types of expenditure differ essentially in 2 points,
- the different payment methods and
- the difference in taxation.
CapEx - Capital Expenditures
Capital expenditures include all longer-term investments in the assets of a company. The goal of capital expenditure is to increase production and productivity in order to increase sales and profits. Which assets these are in detail can differ depending on the company and the industry. Typical capital expenditures are investments in machinery, buildings and initial equipment such as office furniture. In addition, capital expenditures include maintenance and repairs.
Capital expenditures are mostly one-off payments made in advance. As an investment in fixed assets, capital expenditures increase the asset side of the balance sheet. The assets are used and depreciated over a period of several years.
Capital expenditure is also important for investors when valuing a company. A healthy CapEx ratio (ratio of capital expenditure to sales revenue) can be understood as a positive sign of growth. How high an appropriate CapEx ratio is cannot be answered in a blanket manner, but must be done in the context of a peer group comparison between companies in the same industry.
OpEx - Operational Expenditures
Operational Expenditures, appropriately translated as operating expenses, include all expenses that are necessary to enable and continuously ensure a functioning operational business. What constitutes operational expenses also varies from company to company. Typically, operational expenses include the costs of raw materials and supplies, personnel costs, energy costs and costs for sales and administration.
Operating expenses are recurring expenses that are usually paid monthly or annually. They are attributed to the accounting period in which the costs were incurred and are accounted for in full in that period.
What are the advantages of shifting from CapEx to OpEx?
The shift from investing in assets for revenue growth to operating expenses is done through a change in accounting logic.
Renting is a typical example. Instead of purchasing and incurring one-time high expenses, the respective assets are rented for a monthly rate. Such an asset-light approach can already be observed in many companies. Within the scope of our client projects, we can confirm this trend and are increasingly receiving enquiries resulting from a strategy shift towards asset-light.
Download: From CapEx to OpEx
One area that has seen a major shift from CapEx to OpEx in recent years is corporate IT departments. The emergence of "as a service" and cloud services has led across the board to even strategically important assets being rented rather than procured in-house. Software licences as well as hardware such as server capacities, network infrastructure and laptops are provided by external service providers and paid for on a monthly basis or according to the capacities used.
But the shift from buying to renting can now be seen in almost all industries. This is because converting CapEx to OpEx can offer some advantages in many cases, both in the short and long term.
Advantages: Minimisation of the financing risk
A conversion of CapEx into OpEx leads to a reduction in capital expenditure. If no capital expenditure is incurred, the investment risk decreases. Especially in the case of uncertain business development, a shift towards Operational Expenditures contributes to risk minimisation in the company.
In the course of reduced capital expenditure, there is also a reduction in working capital. If no assets are held that are not needed at times or are not fully utilised, capital is not tied up unnecessarily. Instead, the company has more liquid funds and the free capital can be used profitably elsewhere. Last but not least, lower investment costs reduce barriers to entry. Business start-ups are simplified, since a high investment requirement, for example for the initial equipping of office space, is not necessary.
There is no long-term commitment beyond the term of the contract. If contractually agreed with the external service provider, OpEx can usually be quickly adapted to current needs and are thus more calculable. Fluctuating demand, process or preference changes can be responded to flexibly with little or no additional costs. Since the external service provider is responsible for the technical equipment, it is always possible to work with state-of-the-art technology.
Cloud providers are one example. The operator takes care of regular upgrades of the technology used, and there are no additional costs for the customer. Especially in times of ever shorter product life cycles, high costs can be saved in this way. The same applies to cases of damage. Since it is the property of the service provider, these are also regulated and borne by him.
Free technology upgrades when renting with Lendis
Advantage: Tax treatment
Operational expenses are recognised in the corresponding accounting period in which they are incurred. In this period, they reduce profit in full as costs. Investments in assets (CapEx) are not costs from both a business and a tax perspective. Instead, there is a balance sheet asset swap from current assets to fixed assets. Only through the use of the asset and the resulting loss in value do costs arise. The costs can be claimed for tax purposes in the form of depreciation in the respective period and reduce the profit accordingly.
How Lendis helps to turn Capital into Operational Expenditures
Lendis is a professional office equipment rental company. With our rental model, companies can reduce their capital expenditure and flexibly rent office furnishings and technical equipment. Our comprehensive range makes it possible to rent the complete office equipment from a single source. This considerably reduces the effort involved in procurement. At the same time, the accounting effort is also reduced, as all operating expenses for the equipment are bundled into one item.
As a full-service partner, Lendis takes care of most of the services associated with office equipment, such as delivery and assembly of office furniture or the pre-installation of software on electronic devices. For laptops, smartphones and tablets, customers receive automatic equipment upgrades if the contract is continued after the initial rental period has expired. More than 800 customers are already benefiting from the advantages of flexible rental compared to purchase. If you would like to know more, please contact us at any time.