Defining an Operating Expenditures (OpEx) versus Capital Expenditures (CapEx)
We know what you’re thinking – this is the website of an IT Provider, not an Accounting Firm… so why are we bringing forward some accounting terminology? At Oxygen, we believe that technology is a business tool, and it is important for discussions about technology to include various business and accounting terms. If you are unfamiliar with the difference of OpEx vs CapEx and why this is important, here is a quick overview:
Operating Expenditures (OpEx)
An Operating Expenditure is anything that is either a smaller purchase (ie: a single $1,000 laptop) or represents a service with a short-term life span. For example, paying $1,000 per month for Microsoft 365 Licensing subscriptions are considered an Operating Expenditure because the expense has a short term use – only one month. Leasing equipment is usually considered an Operating Expenditure as well, because you are making ongoing payments and, theoretically, if you stopped making the payments, you would lose access to the service / equipment.
Capital Expenditures (CapEx)
A Capital Expenditure simply refers to a large purchase that happens all at once. For example, purchasing new server and networking equipment and cutting a cheque for $50,000 would be considered a Capital Expenditure. Capital Expenditures have a long-term use – say 36 or 60 months – and are often ‘amortized’ (sorry, another accounting term!) over the usable life of the device.
Why it Matters!
Practically all organizations that have a formal budgeting process have 2 types of IT budgets: an Operating Budget and a Capital Budget. These budgets are often set based on the the organization’s goals or financial situation. For example, if an organization is tight on cash flow, they would much prefer to lease new servers or networking equipment for, let’s say, $800 per month, rather than writing a cheque for $50,000 all at once. Another example might be that a not-for-profit organziation is able to apply for a grant that will pay for a Capital Expenditure, but that grant would not cover regular Operating Expenditures.
There are also tax implications and advantages to either option, but we will not cover that here.
Which Model is the Best?
The way your organization spends money on technology depends on a variety of factors and there is no hard-and-fast rule on which option is the best one. What Oxygen is seeing as a trend, however, is a move toward more OpEx and less CapEx. OpEx is often easier for an organization to absorb, and there may even be some ‘consumption-based’ Cloud Solutions that reduce costs under an OpEx model. One of Oxygen’s Technology Success Specialists would be more than happy to provide a complimentary consultation to assess your organization’s needs.
The ‘CapEx’ Way
- Purchasing Server, Storage or Networking Equipment all at once
- Implementing an On-Premise Server Solution
- Building a redundant infrastructure for Business Continuity / Disaster Recovery purposes at another location
- Performing an Annual Cyber Security Assessment or Penetration Test
- Renewing your traditional AntiVirus software annually to get the newest version of the console and stay protected
- Buying new computers as your employees need them
The ‘OpEx’ Way
- Leasing Server, Storage or Networking Equipment at a competitive lease rate
- Migrating part or all of your infrastructure to the Cloud
- Looking at a ‘consumption-based’ Cloud Solution to pay for only services when required
- Utilize Oxygen’s Managed Vulnerability Assessment solution to perform regular assessments of your IT environment
- Subscribing to Oxygen’s Managed End Point Protection to increase security and reduce costs
- Developing an Evergreen Strategy or Hardware-as-a-Service program