There are a variety of expenses that come with owning and operating a business. These expenses can be separated into different categories. Two of the most common types of expenses are operating expenses and capital expenses. In this article, we’ll discuss what they are, the importance of them and how to calculate them.
What Are Operating Expenses?
An operating expense is an expense required for the day-to-day functioning of a business, meaning that a business incurs operating expenses on a recurring basis. Operating expenses include things like insurance, payroll, and marketing.
If equipment is leased instead of purchased, it is commonly considered an operating expense. General repairs and maintenance of existing fixed assets such as buildings and equipment are also considered operating expenses unless the improvements increase the lifespan of the asset.
What Are Capital Expenses?
On the other hand, capital expenses are incurred to create a benefit in the future. They are long-term in nature and are generally used to acquire things like property, equipment, and technology.
A capital expenditure is incurred when a business spends money, uses collateral, or takes on debt to buy a new asset or to add value to an existing asset with the expectation of receiving benefits for longer than a single tax year. Simply put, it represents an investment into the business.
The Importance of Operating Expenses & Capital Expenses
Capital expenses allow companies to help maintain their property and/or equipment and find ways to improve these assets, whether that's through repairing them regularly or by purchasing new ones.
On the other hand, when business owners are able to understand operational expenditures, they can often find cost-efficient measures and identify opportunities for increased efficiency.
How to Calculate Operating Expenses & Capital Expenses
Capital expenses can be calculated by using the information found on a company's financial statements, specifically its balance sheet. To calculate this figure, use the following formula:
Capital expenses = PP&E (current period) - PP&E (prior period) + depreciation (current period)
Whereas to calculate a company's operating expenses, simply follow this formula by adding all your day-to-day expenses together:
Operating expenses = accounting supplies + expenses on office supplies + insurance + licensing fees + legal fees + marketing and advertising + payroll and wages + repairs and equipment maintenance + taxes + travel + utilities + vehicle expenses
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FAQs
Capital expenditures are major purchases that a company makes, which are used over the long term. Operating expenses, on the other hand, are the day-to-day expenses that a company incurs to keep its business running.
What is the difference between a capital expense and an operating expense? ›
Capital expenditures involve significant investments that require a company to commit resources to something that will generate revenue in the future. Operating expenses involve smaller costs to support existing activities and don't create value or generate revenue for the business in the long term.
What is the difference between working capital and operating expenses? ›
Working capital is the money used to cover all of a company's short-term expenses, including inventory, payments on short-term debt, and day-to-day expenses—called operating expenses.
What's the difference between CapEx and OpEx? ›
OPEX, which stands for "operating expenses," refers to expenses incurred to maintain the day-to-day operations of a company. CAPEX, which stands for "capital expenditures," refers to expenses incurred to acquire tangible assets that will be used over an extended period.
What is the difference between IT operational and capital spending? ›
Capital expenditures include fixed assets that benefit the organization in the long term. Operational expenditures are ongoing costs that support daily business.
Are laptops CapEx or OpEx? ›
Traditionally, if a business wanted to invest in IT equipment, such as new laptops or PCs, they would pay for their technology upfront as a capital expenditure (CAPEX). CAPEX investments refer to any significant cash investment, including infrastructure, property, software licenses and equipment.
What is the formula for working capital of operating expenses? ›
List of working capital formulas. Working capital = current assets – current liabilities. Net working capital = current assets (minus cash) - current liabilities (minus debt).
Is working capital the same as operating profit? ›
Operating profitability measures how much profit a company makes on a dollar of sales after paying for variable production costs but before paying interest or tax. Working capital, on the other hand, is a measure of both a company's operational efficiency and its short-term financial health.
Is working capital a CapEx or OpEx? ›
While CapEx refers to long-term investments in assets, working capital refers to the short-term liquidity available to a business, calculated as current assets minus current liabilities. What is an example of OpEx? Examples of OpEx include salaries, rent, utilities, marketing expenses, and routine maintenance.
Why is OpEx better than CapEx? ›
Impact on Taxes
CAPEX may offer tax benefits through depreciation or amortization deductions over time, reducing taxable income. OPEX are typically fully deductible in the year they are incurred, potentially reducing taxable income for that year.
Capital Expenditures
office furniture would typically be considered a long-term asset, as it is not something that is typically replaced on a yearly basis. As such, it would fall into this category.
Why do companies prefer OpEx to CapEx? ›
"CapEx is recognised as an asset and is depreciated over its useful life, but OpEx is expensed immediately and not depreciated over any useful life. CapEx often has a more complicated approval process requiring high-level approval, but OpEx often has a straight-forward, pre-approved process in place.”
Are software subscriptions CapEx or OpEx? ›
OpEx includes IT costs for:
Cloud computing subscriptions (e.g., IaaS, SaaS or PaaS) Equipment leases. Software maintenance (e.g., associated with a perpetual license) – typically annual costs. Software subscriptions.
Are projects CapEx or OpEx? ›
CAPEX is an expense a project/business incurs to create a benefit in the future. OPEX covers the short term. OPEX is an expense required for the day-to-day functioning of a project/business.
Is hardware maintenance CapEx or OpEx? ›
IT is not always easy to classify, having elements of both OpEx and CapEx. Certainly, hardware and software are expected to last more than one year which would typically mean they are CapEx.
What is considered a capital expense? ›
A capital expense is a payment made by a business to acquire, create or enhance the business's assets. Examples of capital expenses include buying office furniture or a company car, investing in franchise rights, putting a new roof on a building, or adding new electric wiring.
What are capital expenses examples? ›
Types of capital expenditures can include purchases of property, equipment, land, computers, furniture, and software.
Which is a capital expense? ›
Capital expenditure or capital expense (abbreviated capex, CAPEX, or CapEx) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land.
What is the main difference between a capital expenditure and an operating expense quizlet? ›
CapEx is an upfront cost, which has a value that reduces over time. Operational Expenditure (OpEx): OpEx is spending money on services or products now and being billed for them now. You can deduct this expense from your tax bill in the same year. There's no upfront cost.
