- Capital expenditures for the conventional and non-conventional sector of the oil and gas extraction industry increased to USD 42.8 billion and USD 31.2 billion for the last year, respectively.
- Operational expenditures for the conventional and non-conventional sector of the oil and gas extraction industry increased to USD 30.3 billion and USD 28.6 billion respectively.
Every business has expenditures; that is what it thrives on. On an everyday basis, money is spent in raw materials, wages, equipment, patents, transport, etc. For convenience and effective finance planning, expenses are divided into capital expenditures and operating expenditures, also called 'Capex' and 'Opex' respectively (alternatively, they are addressed as capital and operating expenses as well). The former involves future expenses, while the latter involves current expenses. Careful planning is necessary in order to manage both these type of expenditures. A Capex vs. Opex comparison is given below, which highlights the important differences between the two.
- As already mentioned, it is an expenditure for the future.
- In a business, planning for future endeavors and projects is very important.
- For this purpose, certain assets need to be purchased and retained.
- This is undertaken by businesses in order to expand their operations and production.
- In fact, even an expense that involves improvement of an already existing asset can be considered as a capital expense.
- The asset has to be capitalized, i.e., it needs to have a life beyond the accounting period.
- Even the money that is spent on starting a new business can be considered as a capital expense.
- It is an expenditure for the present day scenario.
- Every business venture needs money on a daily basis for everyday expenses.
- For this purpose, money needs to be spent on stuff like light and electricity, rent, heat, wages, etc.
- A business needs operating expenses for its survival.
- The reduction of these expenses during troubled times in order to keep up with the cut-throat competition is a crucial responsibility that the management team needs to undertake.
- While doing so, care needs to be taken to see to it that the quality of products is not significantly altered.
Factors of Differentiation
◾ Throughput indicates the number of items that pass through a process. In case of accounting of throughput in Capex, it involves whatever money is spent on the inventory.
◾ In case of accounting of throughput in Opex, it involves the money that is spent in order to convert inventory into throughput.
◾ Whenever capital expenses are incurred, you cannot deduct them during that accounting period. Over some time, machinery, buildings, etc. (fixed assets) undergo depreciation, while patents, copyrights, etc. (non-physical assets), are amortized.
◾ Whenever operating expenses are incurred, they are completely deducted during that accounting period.
◾ It leads to a tax saving. This is because the expenses are entered as assets for the future, which lead to a depreciation on the income statement. Consequently, the profit is lowered, and it creates a tax saving.
◾ It leads to tax incurring. This is because the expenses are not registered as future assets, so they do not depreciate in value. Consequently, the expenses are charged against income for that accounting period, which leads to taxation.
◾ In the property and real estate business, capital expenses include the money that is spent on buying the property.
◾ Operating expenses in property deals include the money that is spent in maintaining the property.
◾ Capital assets, like factory equipment, production machinery, vehicles, buildings, furniture, computer systems, lab apparatus, patents, etc.
◾ Rent, utilities, machinery repair, worker wages, pension plans, advertising costs, accounting fees, legal expenditures, etc.
Some Points to Remember
- Understanding what expenses that come under each of the above is very important for any business.
- Deciding which expense is preferable among the two is difficult, as they both are vital for organizational growth.
- If at all any one needs to be preferred over the other, factors like taxation benefits and book value are considered.
- The operating expenses include the cost of goods sold, which involves direct labor, direct materials, property taxes, benefits, etc.
- Capitalized assets require plenty of maintenance.
- Lowering operational expenses may involve laying off employees, reducing material, etc.
- The country's tax laws play a vital role in deciding which asset comes under which expense.
Capital and operating expenditures are always planned and managed separately. They are crucial in determining how and how much an organization spends in the duration of the budgeting period. The expenses that are incurred under each of these methods vary with different companies, based on specific criteria. There might be crucial situations, wherein Opex becomes mandatory for a business owner and Capex becomes optional. Decisions taken in such situations must be carefully thought over and assessed, so that the business does not incur a loss.