Opex vs. Capex: Why
They Must Be Managed
Differently
First: The basics
Opex (operating expenses) covers an organization’s day-to-day expenses that keep the lights on, including payroll, rent, and inventory costs. Capex (capital expenses) covers major purchases that are meant to improve efficiency or capacity of current operations and/or generate value over the long run. These include plants, buildings, technology, machinery and other equipment.
While both types of spending command a large share of an enterprise budget, and ultimately impact profit or loss, Opex is often initially targeted for digital transformation initiatives utilizing enterprise performance management (EPM) solutions. This is because Capex dollars on the balance sheet can be overshadowed by the day-to-day focus on the P&L. In the past, investments in capital projects could be revisited a few times per quarter; today’s pace of change in the business environment, however, demands more frequent reviews, and more detailed metrics.
Moreover, in many companies, the ritual of a monthly actuals review focuses mainly on Opex variances. Comparisons against the annual plan and the latest forecast dominate the discussion, with Capex often an afterthought, reviewed once a quarter or so.
With all the money that’s on the line, and its impact on revenue and growth, this frankly defies logic.
Very different data sets
Operational Expenditures (OPEX) and Capital Expenditures (CAPEX) each have different financial, operational, and regulatory implications. They are managed differently given their nature, approval processes, accounting treatments, and reporting requirements. For example:
1. Accounting Treatment
- OPEX: Expensed in the income statement in the period they are incurred, reducing taxable income immediately.
- CAPEX: Capitalized as an asset on the balance sheet and depreciated or amortized over its useful life.
2. Approval Process
- OPEX: Typically approved within departmental budgets and reviewed monthly or quarterly.
- CAPEX: Requires strategic planning, higher-level approvals (often from finance and operations executives), and alignment with long-term financial goals. Moreover, larger projects with longer time horizons often have “stage gates” – or “check in” points where progress can be evaluated and approvals remanded.
4. Budgeting & Forecasting
- OPEX: Managed through annual operating budgets, with ongoing adjustments based on business performance.
- CAPEX: Planned separately, often as part of a long-term investment roadmap, with detailed justification and ROI analysis.
5. Impact on Financial Reporting
- OPEX: Directly affects profitability in the period incurred.
- CAPEX: Increases asset value and is depreciated over time, impacting future income statements.
Very different management requirements
Given their different management, tracking, and approval processes, OPEX and CAPEX require distinct, purpose-built software solutions within enterprise systems that can efficiently and effectively provide the insights and automation required to maximize investments.
1. OPEX Management Software
- Enterprise Performance Management (EPM): Used by finance teams to consolidate financial results and manage the “closing the books” process (e.g., OneStream and Hyperion).
- Expense Management Software: Automates tracking of operational costs (e.g., Concur and Expensify).
- Procurement & Vendor Management: Tools to manage recurring vendor payments (e.g., Coupa and Ariba).
- Subscription & SaaS Spend Management: Helps track recurring software expenses (e.g., Zylo and SaaSOptics)
2. CAPEX Management Software
- Enterprise Capex Software: A dedicated solution to manage capital planning, budgeting, forecasting, approval workflows, and reporting (that’s Finario).
- Fixed Asset Management: Ensures compliance with depreciation schedules and asset tracking (e.g., Asset Panda, Sage Fixed Assets).
- ERP with Capex Modules: Some ERPs include Capex tracking capabilities integrated with accounting, though they fall far short in being a viable solution for true enterprise capital planning and management.
Needed: a single source of truth for Capex
Within most EPMs, Capex is represented as a single line item that reports what has been budgeted and spent, with little or no project-level detail. Insights into the rationale or projected financial return on the projects, actual dollars spent at any given point in time, and other key information and metrics are rarely available.
In an era of constant change and disruption, and where Capex budgets are substantial, this simply will not do. Companies need to take a more “activist” approach to their capital allocation strategies and management. In short, without a purpose-built solution for Capex, you’re operating at extreme disadvantage.
Is it efficient to continuously chase down data sitting in a spreadsheet on an engineer’s computer? To require five to ten days to produce an essential report, when it could be available in minutes? To make critical investment decisions without knowing what has been actually spent on projects already in progress.
Of course not.