CapEx vs. OpEx: What's the Difference?
For any business, it is vital to keep track of cash flow, expenses, and accounting in order to stay running. Two of the most important elements of business operations are capital expenditures (CapEx) and operational expenditures (OpEx), also known as operational expenses.
Here we examine the main differences between capital expenditures and operational expenditures, including their respective approval workflows. We also discuss how workflow automation can impact these two core areas of enterprise management.
Put simply, capital expenditures are payments made for long-term fixed assets, while operational expenditures are made for day-to-day expenses. Beyond these broad definitions, there are some key distinctions.
Capital expenditures are used to purchase assets that have a useful life of one year or more, such as the following:
In addition to expenditures for purchasing these long-term assets, capital expenditures also include funds for upgrading or extending the life of an asset. Accordingly, software upgrades and property renovations would also come under CapEx.
Operational expenditures are the costs the company incurs for running its day-to-day operations. These are the ordinary and customary costs for the company’s industry. Examples include the following:
Note that operational expenditures are often referred to as operational expenses or operating expenses. Using the strict accounting definitions, the term “expenditures” refers to long-term spending, such as CapEx, while “expenses” refers to spending for day-to-day activities, such as OpEx. Nonetheless, the terms are often used interchangeably for OpEx.
CapEx and OpEx are treated differently for accounting purposes. Operational expenditures are fully deducted in the accounting period they are incurred. Capital expenditures, on the other hand, are not fully deducted in that accounting period, but instead deducted over several years based on depreciation or amortization.
In addition, these expenditures are recorded in different types of financial reports. Operational expenditures are generally reported on the company’s income statement. Capital expenditures are generally reported on the balance sheet, as well as the profit and loss statement.
CapEx Approval Workflows
Capital expenditures pose several unique challenges for a business. Because of these challenges, the CapEx process tends to require a fairly intricate system of requests and approvals.
Capital expenses tend to require a large initial outlay of money or capital. They also are often financed by debt, which requires that the company keep a close watch on CapEx debt levels and debt servicing costs.
These expenditures also require a decisionmaker to foresee the long-term needs of the company. This injects a high level of uncertainty into the process since the organization also needs to account for potential losses. Capital expenditures are often difficult to reverse without incurring large losses. After all, items such as real estate, machinery, and vehicles cannot be easily returned or discarded.
So it makes sense that capital expenditures go through a lengthy request-and-approval process. When a CapEx request is made, the requester must document the need and the expected outcome. If any supporting documentation is necessary, such as bids or photos, it must accompany the request.
CapEx approvals often go through several layers of management, due to the high-stakes nature of these expenditures. Requests with certain criteria, such as a dollar threshold, may need these higher-level approvals. For example, any CapEx request above a certain amount, such as $50,000, may need to be routed to the CFO.
The CapEx approvers also need to be able to take the company budget and future spending into account. If they need additional information and documentation, they must be able to notify the requester accordingly.
For any business, keeping a handle on operational expenditures is critical for the bottom line. This is because, unlike capital expenditures, operational expenditures cannot be delayed or postponed - they are necessary for daily operations. Most other options for controlling immediate bottom-line results will not be as effective.
A company may instead try to increase revenues by increasing the price of the company’s products or services. However, customers may not be willing to pay more. The company could also opt for cheaper labor or materials, effectively lowering the cost of goods sold (COGS). But this could negatively impact the quality of the company’s products. This leaves minimizing operating expenditures as the best bet for increasing net profits.
OpEx approval workflows tend to be similar to CapEx workflows. The main difference is that they begin with purchase requests, which ultimately lead to purchase orders. Since operational expenditures tend to be lower-value with more immediate urgency, they do not tend to have as lengthy of a review-and-approval process as capital expenditures. However, the OpEx approval workflow must move quickly if it is to keep up with the company’s daily activities and needs.
Both CapEx and OpEx workflows can benefit by moving away from manual processes and toward automation. Manual processes rely on spreadsheets, emails, paper forms, and faxes, all of which are prone to errors and delays. An automated system, on the other hand, can minimize errors and speed workflows along.
CapEx and OpEx automation platforms can ensure the following takes place:
If you want your CapEx and OpEx workflows to move with maximum efficiency, consider the benefits of an automation solution. And for the sake of simplicity and company-wide integration, seek out an automation platform that can handle both capital and operational expenditures.
To see how quickly you can begin automating your finance processes, request a demonstration or trial of Integrify.
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