Capital Expenditure – CapEx (Finance/Accounting): Includes all spending on an asset that is supposed to last for over a year (Apptio, 2018). Usually, it is used to undertake a new project, but it can be used for purchasing or changing equipment, buildings, etc. (Investopedia, n.d.b.). CapEx contains depreciation, look at my previous post for that (Apptio, n.d.; Investopedia, n.d.b.). A car is a great example for your personal CapEx, given that it depreciates over time and you purchase or lease it typically for more than a year.
Operating Expense – OpEx (Finance/Accounting): Includes all the ongoing costs for running as normal (Apptio, 2018; Investopedia, n.d.a.). For instance, OpEx could include rent, equipment, inventory costs, marketing, payroll, insurance, and funds allocated for research and development (Investopedia, n.d.a). Essentially, if you look at the rent you pay for living or for driving, that can be considered your own OpEx. If you also consider your health, dental, vision, disability, housing, car, etc. it can also fall under this category. Even gas to fuel up a car, given that it is used to make your asset operable fits under this category. According to Apptio (2018), bills like electricity, water, etc. can fall under this category as well.
You can be more CapEx or OpEx heavy in your budgets. Each with their benefits. For instances being more CapEx heavy, your costs are more predictable in the long run and you can easily calculate your net worth. In that scenario, you may not have enough cash to continue to pay for some opportunities. If you are more OpEx heavy you tend to save more money for investment purposes. Here you have more flexibility to take on an opportunity, but its harder to show/calculate your net worth.
Another way to look at this is OpEx is like the cloud service on your phone, you pay for what you use, be it 5 gigs, 25 gigs, 50 gigs, etc. Whereas, CapEx is steady and saying I rather pay for the entire asset and enjoy as much or as little as I want.
- Apptio (2018). Finance 101: 7 principles Every IT Cost Center Owner should know. Retrieved from http://apptio.com/Finance101Kit
- Investopedia (n.d.a.). Operating Ratio – OpEx Cost. Retrieved from https://www.investopedia.com/terms/o/operatingratio.asp
- Investopedia (n.d.b.). Capital Expenditure – CapEx. Retrieved from https://www.investopedia.com/terms/c/capitalexpenditure.asp