CAPEX vs. OPEX: An Overview
Businesses have a variety of expenses, from the rent they pay for their factories or offices to the cost of raw materials for their products, to the wages they pay their workers to the overall costs of growing their business. To simplify all of these costs, businesses organize them under different categories. Two of the most common are capital expenditures (CAPEX) and operating expenses (OPEX).
Capital expenditures (CAPEX) are major purchases a company makes that are designed to be used over the long term. Operating expenses (OPEX) are the day-to-day expenses a company incurs to keep its business operational.
- Capital expenditures (CAPEX) are a company's major, long-term expenses while operating expenses (OPEX) are a company's day-to-day expenses.
- Examples of CAPEX include physical assets, such as buildings, equipment, machinery, and vehicles.
- Examples of OPEX include employee salaries, rent, utilities, property taxes, and cost of goods sold (COGS).
- Capital expenditures cannot be deducted from income for tax purposes while operating expenses can be deducted from taxes.
Capital expenditures are purchases of significant goods or services that will be used to improve a company's performance in the future. Capital expenditures are typically for fixed assets like property, plant, and equipment (PP&E). For example, if an oil company buys a new drilling rig, the transaction would be a capital expenditure.
One of the defining features of capital expenditures is longevity; meaning the purchases benefit the company for longer than one tax year.
CAPEX represents the company's spending on physical assets. The following are common examples of capital expenditures:
- Manufacturing plants, equipment, and machinery
- Building improvements
- Vehicles and trucks
Each industry might have different types of capital expenditures. The purchased item might be for the expansion of the business, updating older equipment, or expanding the useful life of an existing fixed asset. Capital expenditures are listed on the balance sheet under the property, plant, and equipment section. CAPEX is also listed in the investing activities section of the cash flow statement.
Fixed assets are depreciated over time to spread out the cost of the asset over its useful life. Depreciation is helpful for capital expenditures because it allows the company to avoid a significant hit to its bottom line in the year the asset was purchased.
CAPEX can be externally financed, which is usually done through collateral or debt financing. Companies issue bonds, take out loans, or use other debt instruments to increase their capital investment. Shareholders who receive dividend payments pay close attention to CAPEX numbers, looking for a company that pays out income while continuing to improve prospects for future profit.
Operating expenses are the costs a company incurs for running its day-to-day operations. These expenses must be ordinary and customary costs for the industry in which the company operates. Companies report OPEX on their income statements and can deduct OPEX from their taxes for the year in which the expenses were incurred.
The following are common examples of operating expenses:
- Rent and utilities
- Wages and salaries
- Accounting and legal fees
- Overhead costs such as selling, general, and administrative expenses (SG&A)
- Property taxes
- Business travel
- Interest paid on debt
OPEX also consists of research and development (R&D) expenses and the cost of goods sold (COGS). Operating expenses are incurred through normal business operations. The goal of any company is to maximize output relative to OPEX. In this way, OPEX represents a core measurement of a company's efficiency over time.
Capital expenditures are major purchases that will be used beyond the current accounting period in which they're purchased. Operating expenses represent the day-to-day expenses designed to keep a company running. Because of their different attributes, each is handled in a separate manner.
OPEX are short-term expenses and are typically used up in the accounting period in which they were purchased. This means that they are paid weekly, monthly, or annually. CAPEX costs are paid upfront all at once. The returns on CAPEX take a longer time to realize, for example, machinery for a new project, whereas the returns of OPEX are much shorter, such as the work that an employee does on a daily basis to earn their wages.
If a company chooses to lease a piece of equipment instead of purchasing it as a capital expenditure, the lease cost would be classified as an operating expense.