Understanding the difference between Capex and Opex software starts with the basics: At the highest level, Opex is an expense required for the day to day operation of a company, while Capex is an expense incurred to create a benefit in the future.
But operating expenses (Opex) and capital expenses (Capex) are treated quite differently for accounting and tax purposes. They also require different treatment for budgeting reviews, approval, and reporting. Before we get into those details, here’s an accounting refresher to differentiate the two types of expenses.
Operating expenses are incurred during regular business, such as general and administrative costs and the cost of goods sold. Conceptually, operating expenses are your day-to-day costs that impact the income statement in the period when cost is incurred.
A capital expenditure is when a business purchases an asset, or adds value to an existing asset, that will benefit the business over multiple years. Capital expenses are recorded as assets on a company’s balance sheet rather than as expenses on the income statement. This asset is then depreciated over the total life of the asset, with a period depreciation expense charged to the company’s income statement, normally monthly.
While both Capex and Opex are expenses, their natures are very different. Purchasing a new capital asset is fundamentally an investment. If made wisely, it will add to the value of the business and improve its cash flows over time. Which is why, while an ERP system can properly record both types of expenses, Capex requires additional decision support to help make sure that your limited funds are invested in the way that will be most beneficial to your organization.
Operating expenses tend to be routine like an electric bill or payroll taxes. Capex is driven by anticipated need, impacts multiple income statement periods, and has to utilize limited funds for competing projects. A typical GL reporting module simply is not designed to address all these concerns.
A dedicated, unified approach to Capex, on the other hand is the best practice. By connecting budgeting, approvals, forecasting and post implementation reviews, you can be in much greater control of your data, the insights it produces, and your ability to make decisions that will lead to more agile decision making, fewer cost overruns, and smarter strategic growth initiatives.
As stated previously, Opex is fairly routine bill paying (which is a bit over simplified but basically correct). Capex is forward-looking to understand what the business will need in the future. You need a Capex solution with budgeting functionality that lets users – any user from any function or business unit – input project ideas as they occur and collect them for review when the budget cycle begins. You also need to be able to sort and rank these ideas against each other in order to create portfolios of possible projects and evaluate their potential ROI impact on the business. This type of functionality does not exist in standard accounting modules or most budgeting/forecasting tools as they are not designed specifically for Capex.
After a budget has been approved it is time to flesh out project ideas into full-fledged requests. This includes documentation of need, expected outcome, detailed costs, a standardized ROI impact model, bids, photos, depreciation treatment, etc.This approval process should not just be a dollar threshold matrix but activity-based as well. Moreover, the approval routing should be dynamic; for example, technical projects should include engineering approval and projects with significant IT involvement should typically include additional IT review. This level of documentation and review is simply not needed for Opex.
This entire submission, collaboration and approval process is housed within the Capex tool itself. All forms, documents, communications and approvals are saved in one location. No emails to track down, no need for Excel support, and no separate and disconnected processes that use simplistic workflow tools like SharePoint.
Reporting and Forecasting
Once your projects are underway, you need to know how they are performing. Not just the status of actual spending but a comparison to budget and a forecast of future spend. A dedicated Capex system provides standard dashboards as well as ad hoc reporting options. These dashboards and reports can be summarized at a corporate level for C-suite level reviews or can be drilled down to location for plant level reviews. Bottom line: everyone is using the same data.
While reporting and forecasting can be found in solutions for Opex, the dedicated Capex process includes these activities in the same location as the budgeting and approval process thereby creating a single version of the truth for the entire Capex lifecycle. Additionally, unlike an enterprise performance management system which is ideally suited for Opex, a purpose-built Capex solution provides the ability to see any investment’s cost detail consolidated into budgeting and forecasting reports by entity and fiscal year, as well as spanning multiple fiscal periods. The single repository also provides significant time savings for internal and external audit teams.
The ultimate performance measurement of a Capex project is not coming in on time and on budget. The true measure of success is a Capex project that delivers the ROI impact that was expected per the approval criteria. The only way to measure this is to perform a post completion review and communicate the results. These results should be searchable by all users so they can help others leverage the success of prior efforts or, in the case of under performing projects, avoid potential issues and pitfalls in the future.
All business incurs Opex and Capex. Since capital expenses are also investments, it becomes clear that a generic accounting or budgeting module and email just is not the way to administer a capital program. You need a dedicated, integrated solution like Finario, the first cloud-based enterprise capital planning software purpose-built for Capex. By unifying capital budgeting and project forecasting with approval workflow, Finario delivers financial reporting automation across the investment lifecycle.