Introduction
When a company talks about spending on its IT strategy, it is often difficult to understand whether this is CAPEX or OPEX.
The challenge for Information Systems Departments (ISDs) is to have a good understanding of these two "categories". so that they can be taken into account in budgeting exercises and in the company's financial strategy.
Definition of CAPEX and OPEX
- CAPEX stands for "Capital Expenditure" and refers to expenditure that is recorded as a long-term investment.
- OPEX stands for 'Operating Expenditure' and refers to current expenditure or charges relating to the maintenance and operation of assets.
Here are a few examples:
| CAPEX | OPEX |
|---|---|
| - Purchase of a new server to deploy an application - Implementation of an in-house data backup solution - Acquisition of licences for project or financial management software - Implementation of an information security system to protect sensitive data - Purchase of IT equipment for employees (PCs, laptops, tablets, etc.) - Development of an internal application to automate certain tasks - Setting up a network infrastructure to connect a company's various sites | - Maintenance costs for hardware and software licences - Support costs for end users - Salaries for system administrators and developers - Cloud hosting costs, such as storage and bandwidth costs - Energy costs to power and cool data centres. - Subscription fees for the use of software in SaaS mode (Software as a Service) - Expenses for ongoing IT training for employees - Technical assistance costs to resolve IT problems |
Why is this important for CIOs?
As a CIO, it is important to understand the difference between CAPEX and OPEX so that you can forecast long-term IT expenditure and make appropriate budgetary decisions.
Even though both categories of expenditure have a cash outflow impact, However, in terms of financial performance, the impacts are different for the income statement and the balance sheet.
- Expenses (OPEX) are recognised in the year in which the goods or services are provided.
| Example | CASH POSITION = CASH OUT | EXPENSES = OPEX over 2023 |
|---|---|---|
| Your maintenance contract runs from 01/06/23 to 31/05/24 for 120ke. Payment terms are very favourable for your supplier and you pay 100% in 2023. | 120ke | 7 months' expenses i.e. 120 x 7/12ths = 70ke + 5 months' prepaid expenses for 2024 |
- Fixed assets (CAPEX) are depreciated over the legal useful life of the asset which is included in the balance sheet.
| Example | CASH POSITION = CASH OUT | EXPENSES = OPEX over 2023 |
|---|---|---|
| Equipment of a acquisition value of 500ke is acquired and brought into production on 1 January 2023. The legal depreciation period is 5 years. | On delivery you will have paid 500ke | 1/5th of 500ke, i.e. 100ke in depreciation charges in your income statement for 2023, your budget reference year. |
When a company wishes to modernise its IT infrastructure, the costs associated with purchasing new hardware and software will be recorded as CAPEX, while the costs associated with maintaining these new assets will be recorded as OPEX.
This can also be the case when it comes to making lasting changes to the company's operating model with the aim of improving work processes.
The Cloud and the difference between CAPEX and OPEX
Software as a Service (SaaS) technologies and the use of the cloud have made the CAPEX and OPEX approach more complex.
For example, the migrating software to the Cloud may seem to be on OPEX.
In reality, this can include initial investment costs which are recorded as CAPEX. It is therefore important to understand the costs associated with migrating to the Cloud and to record them correctly as CAPEX or OPEX.
Cloud computing CAPEX or OPEX?
Cloud computing has become a key element in IT investment decisions for businesses. This has had a considerable influence on the distinction between expenditure capital expenditure (CAPEX) and operating expenditure (OPEX).
Before the arrival of the Cloud, companies generally had to invest in costly in-house IT infrastructureThese included servers, storage, network equipment and so on. All these investments were considered CAPEX.
With the Cloud, companies can rent IT resources from Cloud providers such as Amazon Web Services (AWS), Microsoft Azure or Google Cloud Platform (GCP). Instead of investing in costly in-house infrastructure, companies can uuse Cloud resources flexibly and pay only for what they consume. The costs associated with the Cloud are considered as OPEX.
However, it is important to note that the Cloud can also entail capital expenditure (CAPEX) for businessesThese include costs associated with migrating applications to the Cloud, setting up connectors to link applications together, etc.
At the end of the day, the distinction between CAPEX and OPEX depends on how companies choose to use Cloud technologies.
When a company opts for a public cloud modelcosts are generally considered as OPEX. When a company opts for a private or hybrid Cloud modelcosts can be considered as CAPEX or OPEX depending on the implementation and management of the Cloud infrastructure.
The sustainable transformation of a company's operating model
In the business world, it is common for companies to seek to improve their work processes to become more efficient and competitive. This may involve moving from a V-cycle project model to a more agile method such as Scrum or SaFE. This type of transformation can entail significant costs for the company, such as the cost of hiring agility coach, staff training and the introduction of new tools and processes.
It is important to note that these costs are not considered current expenditurebut rather as long-term investments because they are designed to bring about lasting change to the company's operating model and improve work processes for optimum long-term performance. As a result, these costs are generally classified as CAPEX rather than OPEX.
However, it is important to carefully consider the costs of this transformation and weigh them against the potential long-term benefits. The precise classification of CAPEX or OPEX will also depend on the company's tax strategy and budgetary constraints.
In conclusion, transforming an operating model can be a long-term investment for a business, but it is important to carefully consider the potential costs and benefits in order to make an informed decision.
Conclusion
The Finance Department and the Information Systems Department (ISD) must be aligned in terms of strategy and communicate effectively to avoid any confusion or misinterpretation of financial issues.
The personal opinions and interpretations can sometimes lead to conflicting messages for operational staff, which can make it difficult to understand the rules and financial issues at stake. The finance department plays a key role in defining and implementing the company's financial strategy. It is therefore It is important that it works closely with the IT Department to ensure a coherent vision and effective implementation of financial decisions.
Do not hesitate to call on the consultants of our firm of business consultancy to help you continuously improve the way you run your business.