In information technology, there are a variety of costs and expenses business leaders and IT directors have to pay in order to digitally transform their business. Whether these costs are a one-time expense or recurring, technology spending can often be challenging to predict or maintain. So what is the best way to keep track of all of them?
Businesses have a variety of expenses, from the rent or leases they pay for their factories or offices to the cost of raw materials for their products, from 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 more popular categories used are CapEx vs OpEx. Capital expenditures (CapEx) are major purchases that a company makes, which are used long-term over an extended period of time. Operating expenses (OpEx) are the day-to-day expenses that a company incurs on a recurring basis to keep its business running.
Let’s look at both categories in more detail.
Capital Expenditures (CapEx) Explained
CapEx refers to the money a company spends on fixed assets like the purchase, maintenance, and improvement of buildings, technology, vehicles, equipment, or land. Capital expenditures on fixed assets can include purchasing a piece of equipment or building a new factory. Companies make this type of financial outlay to increase the scope of their operations or add some future economic benefit to the operation.
One-time purchases of these major physical goods or services are intended to benefit the organization for more than one year. In the IT world, examples of these major items include:
- Systems, servers and computers.
- Other high-end technology.
- A variety of supporting, premise-based items such as phone systems, line printers, or even air conditioners, scanners and generators.
- Additional procurement costs.
With many major purchases comes much responsibility and accountability (especially at tax time). From an accounting standpoint, it’s important to record or capitalize payments made for goods or services on a company’s balance sheet (CapEx) instead of expensing the items on an income statement (OpEx). Always remember, if an item has a useful life of less than one year, it must be expensed on the income statement (OpEx), rather than capitalized on a balance sheet (CapEx).
Operating Expenses (OpEx) Explained
Operating expenses are the funds that support your day-to-day business. These types of expenses are necessary and unavoidable for most businesses. OpEx items are generally used up within the year they are purchased. It is typically the goal of many companies to successfully reduce operating expenses in order to gain a competitive advantage and increase yearly earnings. However, a reduction in OpEx purchases can also compromise the integrity and quality of business operations.
Finding the right balance can be difficult but can yield significant rewards. Some OpEx costs include:
- Consumables such as printer cartridges, paper, electricity and other supplies.
- Contract items such as yearly service or maintenance agreements (IT services or technology consulting), website hosting, web domain registrations, etc.
OpEx purchases cover pay-as-you-go items that show up on an organization’s profit and loss statement, which are deducted from income as they occur. IT directors are often tasked with managing OpEx spending without blunting the firm’s ability to compete or produce. Unlike the depreciation of CapEx, OpEx purchases are fully tax-deductible in the year they are made.
CapEx vs OpEx: Determining What’s Best for Your Business
IT spending is a big business. According to a 2021 Gartner forecast, worldwide IT spending was projected to total $4.5 trillion in 2022, a sizable increase of 5.5 percent from 2021. In lieu of these figures, the way companies think about IT spending may deserve more in-depth consideration. Knowing how and when to determine CapEx vs OpEx isn’t always a cake walk. Though the definitions for each seem clear-cut, there are plenty of gray areas.
Many IT material goods like servers, generators or phone systems can be purchased either as a capital item or as an operating expense item. For example:
- CapEx: You can pay cash and own the item or equipment outright.
- OpEx: You can lease the item or sign a hosting contract with an IT services provider that offers access to the equipment as a service for a monthly fee.
Having the choice between CapEx vs OpEx for acquiring new IT capabilities isn’t a novel development. These options have been with us in various shapes and forms for a long time. So, what’s different today? The cloud. With new cloud hosting capabilities, using OpEx procurement to obtain enterprise-grade IT equipment and services is easier than it’s ever been.
Why Changes in IT Spending Prefer OpEx to Grow and Scale
As information technology is imperative for any business operating today, two major changes have affected both hardware and software:
- Today, hardware is frequently and significantly less expensive to purchase than ever before.
- While there may be a need for highly specialized (costly) machines in certain areas or departments, many employees can now perform daily functions on basic, low-cost computers (Chromebooks) since so much work has shifted to the cloud.
So, what does this mean for OpEx in terms of company growth? In the cloud era, companies who used to avoid significant operational expenses may be embracing them, particularly for these benefits:
- More cost-effective and scalable.
- Enterprise-grade capabilities at SMB price.
- Less red tape.
- Improved flexibility and security.
With CapEx, estimating future capacity needs for static hardware or software can be tricky and complicated. Thankfully, the internet, cloud hosting and as-a-service options have made software more nimble and hardware a lot more cost-effective, favoring OpEx as the preferred cost category. Instead of purchasing expensive licenses to own and alter software in a CapEx model, companies can shift towards as-a-service options, including SaaS, IaaS, PaaS, DRaaS, AIaaS, and even IT as a service.
As-a-service or cloud options contribute greatly to IT spending by reducing company costs on manual installation, upgrades and maintenance fees. Under the OpEx procurement model, businesses can:
- Run via an internet connection.
- Pay per user, per month.
- Pay only for services needed.
- Reap inherent benefits and cost savings.
With low monthly costs, budget approval of OpEx procurement can be a lot speedier, reducing the time needed to achieve business goals. The monthly payment model of software as a service (SaaS) and related services can help streamline cash flow gradually, with no long-term commitment.
Is OpEx Ultimately the Better Choice?
Choosing the best way to manage IT budget spending for your business is no easy task. And when deciding between CapEx vs OpEx, there’s always a third, alternative option: Consulting the experts. At ATC, we understand your need to eliminate barriers and simplify procedures to help your business scale and grow. Due to its scalable nature, cloud solutions provide the flexibility required to optimize your workloads. The cloud fuels growth and powers other digital transformation tools like artificial intelligence (AI), big data and machine learning (ML).
ATC works with the leading cloud service providers to get your applications up and running faster, with improved manageability and less maintenance, enabling IT to be more agile and scalable. When there is no margin for error, contact us for the best way to reduce IT costs and find what’s right to help grow and scale your business.
