CAPEX (Capital Investments) and OPEX (Operating Investments), surely if you work in the financial or accounting department, these terms sound familiar to you, although you may have heard of capital expenses and operating expenses.
Whether they are considered expenses or investments -we always prefer the second term because they will generate a profit. The truth is that both CAPEX and OPEX are closely related to the business world. But currently, a global transformation is taking place in the IT infrastructure witnessing a shift from Capex to Opex shift through cloud computing.
But why? What do they have to do with Cloud Computing? Does moving from CapEx to Cloud OpEx bring benefits to companies?
This article will answer all the questions to provide you with some useful insights into the topic, and explain why Cloud OpEx beats CapEx inflation. But let’s first understand what CapEx and OpEx are and, which option to choose!
CapEx vs. OpEx: Which Option to Choose When Investing in IT?
Carrying out financial management in the company in an outstanding way is not an easy task and one of the most complicated is managing expenses. Knowing when an expense is more profitable for the company is essential when making decisions, which can affect both profits and indebtedness, even its operational actions.
If we transfer these spending and investment decisions to the IT department of a company, we can see how decisions that are difficult to define are often made. For example, if we propose a company that needs to change its server due to obsolescence, we are faced with two decisions.
Buy a new server with higher performance, which would mean an increase in the company’s assets, but with the great loss of value suffered by computer assets. And we would have a second option, which is to go to an infrastructure as a service (IaaS) company and hire a virtual server for an annual payment, with which we will only spend an annual amount on services and will not touch the company’s assets. So, we are faced with a decision between capital expenditure or operating expenditure, which is known as CapEx and OpEx.
What is CapEx?
The financing that companies use to acquire physical assets (new or upgrade existing ones) is known as capital expenditures or CapEx. They are usually divided into two types:
- Expansion expenses: those that invest in new assets that expand those available to the company.
- Maintenance expenses: those destined to improve or extend the useful life of the assets that are already owned.
These capital expenses are not counted as expenses immediately but are amortized over a period of time, offering various advantages to companies (tax, accounting, etc.).
Some examples of CapEx investments are the purchase of real estate (premises, offices, etc.) or the acquisition of vehicles (transport or commercial).
What is OpEx?
Operating or operating expenses are known as Opex, and are expenses that are made on an ongoing basis and are related to the company’s operations. We can define OpEx as the fluctuating expenses that a company makes.
Some examples of these types of expenses are expenses for facilities, rent, or staff training.
How to Invest in IT: Which is the Best Option, CapEx or OpEx?
To choose properly, it is necessary to take into account the economic result of the company and its consequences, such as cash flow, operating, financial and opportunity costs, in addition to contractual links, fiscal economy, and the life cycle of the projects.
It is also necessary to analyze the capital structure and understand the aspects related to the immobilization of capital, business risk, the tax situation, and the relationship with suppliers and resources.
For this reason, choosing between CapEx and OpEx will always require an internal analysis to identify the resources invested in technology and understand the expenses that both capital and operations have on the company.
Today, in the IT sector, investments tend to be OpEx rather than CapEx. This is so due to the rapid changes in technologies, which make both software tools and hardware infrastructures obsolete in a very short time. Therefore, it is more interesting to rent these services (which generate an operating expense, OpEx), than to buy them (which generates a capital expense, CapEx).
This can be explained by an example: we have businesses limited by markets, and private creditors, in relation to capital expenditures. In these situations, the best option is for investments to be directed to activities that generate income, that is, initiatives that reduce Capex and boost Opex.
To apply these concepts, it is best to see a practical example: Own or on-site hardware, such as switches or telephones, or the purchase of servers for your own data center is CapE. However, software, cloud applications, or rented hardware are OpEx.
The hardware requires that you pay in advance and estimate the useful life of the equipment to determine its amortization. However, in OpEx you pay for what you use. This eases the burden of an initial cash investment.
Yet another example: buying servers for your own data center is CapEx. However, if you use an external cloud service for a monthly fee, it is OpEx.
With pay-per-use Cloud solutions you can reduce investment in technology by transforming it into a variable cost, that is, reduce fixed technological CapEx by converting them into variable OpEx.
The democratization of communications, with greater bandwidth at increasingly competitive prices and the possibility of having pay-per-use cloud solutions, facilitate access to the best management, collaboration, and Business Intelligence solutions for any company.
Thus, moving to Cloud reduces technical tasks, allowing companies to start the digitization process, focusing on their business and their customers, improving their competitiveness and the productivity of their employees.
Cloud Investments through OpEx!
Making an investment by a company in infrastructure and cloud resources today tends to be done through OpEx because:
- Investment in infrastructure is very large
- Defining the needs of the IT infrastructure is difficult to predict.
- Investments in IaaS are scalable, being able to increase resources as needed in a very short time (even with just a few keyboard clicks).
When companies take their infrastructure to the cloud, the time and space resources required for hardware and software are reduced, automating many processes that allow them to be more efficient.
Indeed in the IT market today, opting for the leasing of services (OpEx) has many more advantages and adds much more value to the business than the purchase of products (CapEx.)
Organizations have not yet taken this digitization seriously which hampers the productivity of people and business competitiveness. Currently, we are looking for comfort and agility in our daily work and, in this sense, the Cloud OpEx is the right solution!