CapEx vs. OpEx: What’s the Difference?

CapEx vs. OPEX: An Overview

Capital expenditures (CapEx) are major purchases a company makes that are designed to be used over the long term. Operating expenses (OpEx) are the day-to-day expenses a company incurs to keep its business operational.

Understanding CapEx vs. OpEx

Businesses have a variety of expenses, from the rent they pay for their factories or offices to the cost of raw materials for their products, to 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 most common are capital expenditures and operating expenditures.

The difference between these two expenditures lies primarily in the accounting treatment of each. For business in the United States, generally accepted accounting principles (GAAP) often dictate how an expenditure is treated on a company’s financial statements. Therefore, a company must understand the long-term financial implications of how their reporting will be impacted and how external parties may view their company’s health as a result.

There is a inherent difference in the way management may approach these two expenditures as well. CapEx is often more expensive and labor intensive and often requires greater patience to reap rewards. OpEx is often cheaper and more flexible to incur. For many reasons, it is important to understand each type of expenditure and how a company may strategically approach either.

Capital Expenditures (CapEx)

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 (PP&E). 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.

CapEx represents the company’s spending on physical assets. The following are common examples of capital expenditures:

• Manufacturing plants, equipment, and machinery
• Building improvements
• Computers
• Vehicles and trucks

Each industry might have different types of capital 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 property, plant, and equipment section. 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 its bottom line in the year the asset was 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 (OpEx)

Operating expenses are the costs a company incurs for running its day-to-day operations. These expenses must be ordinary and customary costs for the industry in which the company operates. Companies report OpEx on their income statements and can deduct OpEx from their taxes for the year in which the expenses were incurred.

The following are common examples of operating expenses:

OpEx also consists of research and development (R&D) expenses and the cost of goods sold (COGS). Operating expenses 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.

CapEx vs. OpEx

If a company makes a purchase, that purchase must be classified as an operating expense or a capital expense. Sometimes this matters, while other times it may not. Here are the similarities and differences between the two types of expenditures.

Key Similarities

Both capital expenditures and operating expenditures represent outlays of the company. Both are usually acquired in exchange for cash and may go through a similar purchasing process. This includes solicitation of a bid, contracting, legal review, orchestration of financial payment, and receipt of the purchase.

Both CapEx and OpEx reduce a company’s net income, though they do so in different ways. OpEx is expensed immediately, while CapEx is depreciated.

Companies can also plan for both types of expenses similarly. Though they may be tracked separately internally, each type of cost may have its own budget, forecast, long-term plan, and financial manager to oversee the planning and reporting of each.

Key Differences

Capital expenditures are major purchases that will be used beyond the current accounting period in which they’re purchased. Operating expenses represent the day-to-day expenses designed to keep a company running. Because of their different attributes, each is handled in a separate manner.

OpEx are short-term expenses and are typically used up in the accounting period in which they were purchased. This means OpEx is more often paid for in the period it is acquired. CapEx may also be paid for in the period it is acquired, but it may also be incurred over a period of time if the CapEx is related to a development project. For example, the building of a new warehouse may result in 1,000 transactions over a six month period, all of which are collectively considered CapEx.

CapEx and OpEx are reported differently, as CapEx resides on the balance sheet and OpEx resides on the income statement. This is due to the difference in their accounting treatment. In addition, the method of translating the expenditure as an expense is different. CapEx is often associated with depreciation and accumulated depreciation accounts, while OpEx is not.

The Bottom Line

CapEx and OpEx represent types of costs a company can incur. If there’s short-term value to the cost, it’s usually treated as OpEx. If there’s long-term value, it’s usually CapEx. Each type of cost is reported differently, strategically approached differently by management, and have varying degrees of financial implications to a company.