Capital expenditures (CAPEX) are major purchases by a company that are designed to be used over the long-term. Operational expenditures are the day-to-day expenses a company incurs to keep their business operational.
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. 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.
Examples of capital expenditures:
- Plant, equipment, and machinery
- Building improvements
- Vehicles and trucks
Each industry might have different types of CAPEX 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 section property, plant and equipment. 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 their bottom line in the year the asset 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 expenditures are the costs a company incurs for running their day-to-day operation.
Examples of OPEX:
- Rent and utilities
- Wages and salaries
- Overhead costs such as sales, general, & administrative expenses (SG&A)
- Property taxes
- Business travel
OPEX also consists of research and development and cost of goods sold. Operational expenditures 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.
If a company chooses to lease a piece of equipment instead of purchasing it as a capital expenditure, the lease cost would likely be classified as an operational expenditure.
The Bottom Line
Capital expenditures are major purchases that will be used beyond the current accounting period in which they're purchased. Operational expenditures represent the day-to-day expenses designed to keep a company running. OPEX are short-term expenses and are typically used up in the accounting period in which they were purchased.