When it comes to your company’s budgeting, tax planning, and cash flow management, both CapEx (capital expenditure) and OpEx (operating expenditure) play big roles. You’ll want to wrap your head around them to improve your business’s financial health and see exactly how they impact different areas of your cash flow and profit margins.
What is capital expenditure?
Capital expenditure is the funds your business uses to buy or upgrade (or just maintain) physical assets like property, equipment, and technology. They are considered your long-term investments – in other words, fixed assets – as they have lasting value and contribute to the growth of your business.
Bear in mind that capital expenditures aren’t ongoing operational costs, but rather they are one-time or infrequent expenses meant to improve your operational capacity.
Since capital expenses are for the long term, they can be capitalised on your balance sheet and then depreciated over time. It’s a way to help your business spread out the cost over the useful life of the asset rather than being hit with a single huge cost during one accounting period.
What are operating expenses?
Operating expenses, on the other hand, are the day-to-day costs required to keep a business running. Operational expenses are ongoing and are necessary for normal business operations, including rent, utilities, office supplies, employee salaries and more. Most operational expenditures are fully tax-deductible in the year they are incurred, which can lower your company’s taxable income for that period.
Unlike CapEx, which is considered an investment in the business’s growth, an operating expense represents the costs of maintaining your current operations. OpEx is recorded on the profit and loss statement (also known as the income statement) as part of your company’s financial statements for the year, and it’s deducted in full in the same period it’s incurred.
How do fixed assets factor in?
Fixed assets are long-term tangible assets like buildings, machinery, and equipment. They are bought as capital expenses because they should deliver benefits over several years. Fixed assets are recorded on the balance sheet and depreciated over time.
Be aware that while all fixed assets are tangible, not all tangible items are classified as fixed, particularly if they’re not retained for long-term use.
What are the most common types of CapEx vs OpEx?
Your small business will have its own unique CapEx and OpEx needs based on the industry you operate in, your current growth stage, as well as your strategic goals. Here are some of the most common types of expenses in both categories:
Common types of CapEx
- Property and real estate
- Machinery and equipment
- Vehicles
- IT infrastructure
- Intangible assets (patents, trademarks and licences can sometimes be considered CapEx if they have long-term benefits)
Common types of OpEx
- Rent and utilities
- Salaries and wages
- Marketing and advertising
- Office supplies
- Maintenance and repairs
How capital expenditures and operating expenditures relate to your cash flow statement
Both CapEx and OpEx will impact your business’s cash flow statement, but they are reflected in different sections.
CapEx activities, for example, appear in the investing activities section of the cash flow statement – they represent cash outflows that reduce cash reserves, but because these are investments in the long-term growth of your business, they can ultimately contribute to revenue generation in future. OpEx, however, shows up in the operating activities section. They immediately reduce net cash flow because they are regular, recurring costs necessary to maintain your day-to-day operations.
Knowing the ins and outs of CapEx vs. OpEx can help you better manage your resources. High levels of CapEx, for example, can imply that your company is heavily investing in growth, while high levels of OpEx could be a warning sign of increasing costs. So, make sure you track these expenditures separately to allocate your resources as best as possible.
The bottom line? CapEx investments are about your business’s future, whereas OpEx is more about the here and now—supporting the smooth operation of your daily business activities. Strategically managing both types of expenses can help improve your cash flow management and see you grow sustainably for years to come.
