Capex vs Opex

Capex (or Capital Expenditure) is a business expense incurred to create future benefit i.e.
acquisition of assets that will have a useful life beyond the tax year. e.g. expenditure on
assets like building, machinery, equipment or upgrading existing facilities so thier value as an
asset increases.

On the other hand, those expenditures required for the day-to-day functioning of the
business, like wages, utilities, maintenance and repairs fall under the category of
Opex (operational expenditure). Opex is the money the business spends in order to
turn inventory into throughput. Operating expenses also include depreciation of
plants and machinery which are used in the production process.
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Capex

Opex

Definition:

Capital expenditures are expenditures

creating future benefits. A capital
expenditure is incurred when a business
spends money either to buy fixed assets
or to add to the value of an existing
asset with a useful life that extends
beyond the tax year.

OpEx (Operational expenditure) refers to

expenses incurred in the course of
ordinary business, such as sales,
general and administrative expenses
(and excluding cost of goods sold - or
COGS, taxes, depreciation and interest).

Also known as:

Capital Expenditure, Capital Expense

Operating Expense, Operating

Expenditure, Revenue Expenditure

Accounting treatment:

Cannot be fully deducted in the period

when they were incurred. Tangible
assets are depreciated and intangible
assets are amortized over time.

Operating expenses are fully deducted

in the accounting period during which
they were incurred.

In throughput
accounting:

Money spent on inventory falls under

capex.

The money spent turning inventory into

throughput is opex.

In real estate:

Costs incurred for buying the income

producing property.

Costs associated with the operation and

maintenance of an income producing
property.

Examples:

Buying machinery and other equipment,

acquiring intellectual property assets like
patents.

Wages, maintenance and repair of

machinery, utilities, rent, SG&A
expenses

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What is the Difference Between Capex and Opex?

Capital Expenditures (CAPEX) differs from Operating Expenses (OPEX) from how they
affect a business. CAPEX mainly refers to all the tangible and intangible assets of a company
that add shareholder value. OPEX are the expenses a company incurs to maintain and run
the capital assets generated through CAPEX.
CAPEX v. OPEX in Savings Calculations
CAPEX (Capital Expenditures) v. OPEX (Operating Expenditures).
Once you understand the difference between them, the next step is realizing the impact that
distinction has on negotiated savings recognition. Straight savings is usually calculated per
unit as 'old price' minus 'new price'. If you have in fact negotiated savings, the number will be
positive and represents the amount of savings per unit that you have negotiated. The same
formula works to capture cost increases, expect the number will be positive rather than
negative. Even if the cost increase has been mitigated by your sourcing process, increases
make me sad, so let's stick with savings for the rest of this example.
You get projected extended savings by multiplying that number times the volume to be
purchased. If you are looking to accurately reflect savings year over year you will also want
to take into account changes in (or projected changes in) the volume you buy. If your
company plans to buy 10% more/less of the good or service, reflect that in your savings
figure.
It is also common to use a percentage which would be calculated as 'old price' minus 'new
price'/'old price'. Keep in mind that all savings figures should be clearly marked as
PROJECTED savings unless you are tracking the difference in price against actual invoices.
Strike a balance between realism and optimism when you pick your estimate - and be
conservative if you think it will hold more credibility with your company's leadership.
Another solid recommendation is to meet with someone in your company's finance
department before you announce the results to the company. They will make you defend
your figures, which can be frustrating, but gives your numbers greater validity.
If you have taken my advice above and spoken to someone in finance/accounting about the
savings, they will want the savings to follow the same accounting rules as the good or
service being purchased. Here is where the distinction between CAPEX and OPEX comes
into play. There are exceptions to everything, but as a general rule, operating expenses are
for goods that will be purchased and consumed within a year. Hired services are always
operating expenses for that reason. Capital expenditures are larger purchases that will last
longer than a year. If you are calculating savings for a capital purchase, you would typically
recognize the savings over the same schedule used to depreciate the purchase. For
example, if you save $1M on a large construction project, you can't realize that entire
savings in the first year. I believe 30 years is the term often used for depreciating real estate
and the associated savings. That's kind of a bummer if you are a construction category
manager. 30 years is a long time. Chances are you won't work at the company long enough
to see all of those savings come in.
I made my bones in grocery retail, so here are some other examples of the difference
between CAPEX and OPEX sourcing projects:

Meat slicer: CAPEX. Gloves worn while using the slicer: OPEX.
Cash register: CAPEX. Register receipt tape: OPEX.
Elevator: CAPEX. Elevator maintenance services: OPEX