CapEx vs. OpEx: What's the Difference?

This article was first published in February 2018 and was updated in November 2024.

Understanding CapEx and OpEx

Capital expenditures (CapEx) and operational expenditures (OpEx) are two fundamental concepts in accounting and finance that help businesses categorize their expenses. Understanding the difference between CapEx and OpEx is crucial for making informed decisions about investments, budgeting, and financial reporting.

CapEx refers to the funds used to acquire, upgrade, or maintain a company’s fixed assets, such as property, plant, and equipment (PP&E). These expenses are typically large, one-time investments that benefit the company over an extended period, often exceeding one year. Examples of CapEx include purchasing new equipment, building a new facility, or acquiring a new business.

On the other hand, OpEx represents the recurring expenses incurred to support a company’s day-to-day operations. These expenses are typically smaller, ongoing payments that are used up within a year. Examples of OpEx include salaries, rent, utilities, and marketing expenses.

Capital Expenditure vs. Operational Expenditure

For any business, it is vital to keep track of cash flow, expenses, and accounting to stay competitive. CapEx projects play a significant role in enhancing a company’s operations and cash flow management. Two of the most important elements of business operations are capital expenditures (CapEx) and operational expenditures (OpEx), also known as operational expenses. 

Here, we examine the main differences between capital expenditures and operational expenditures, including their respective approval workflows. We also discuss how workflow automation can impact these two core areas of enterprise management.

Related

• Managing CapEx Approvals

• CapEx Planning Guide

• Workflow for Finance Operations

Differences between Capital and Operational Expenditures

Put simply, capital expenditures are payments made for long-term fixed assets, while operational expenditures are made for day-to-day expenses. Beyond these broad definitions, there are some key distinctions.

Capital Expenditures in a Nutshell

Capital expenditures are used to purchase assets that have a useful life of one year or more, such as the following:

• Buildings

• Capital leases

• Computers and computer-related equipment, such as servers and monitors

• Furniture and fixtures

• Intangible assets, such as patents or licenses

• Land

• Machinery

• Office equipment

• Software

• Vehicles

In addition to expenditures for purchasing these long-term assets, capital expenditures also include funds for upgrading or extending the life of an asset. Accordingly, software upgrades and property renovations would also come under CapEx.

Operational Expenditures in a Nutshell

Operational expenditures are the costs the company incurs for running its day-to-day operations. These are the ordinary and customary costs for the company’s industry. Examples include the following:

• Accounting fees

• Advertising and marketing expenses

• Insurance

• Legal fees

• License fees

• Maintenance and repairs

• Office Supplies

• Overhead costs

• Property taxes

• Rental payments

• Travel expenses

• Utilities

• Vehicle expenses, including maintenance and fuel

• Wages and salaries

Note that operational expenditures are often referred to as operational expenses or operating expenses. Using strict accounting definitions, the term “expenditures” refers to long-term spending, such as CapEx, while “expenses” refers to spending for day-to-day activities, such as OpEx. Nonetheless, the terms are often used interchangeably for OpEx.

Financial Reporting and Tax Implications

Financial Reporting for CapEx and OpEx

CapEx and OpEx are reported differently on a company’s financial statements. CapEx is recorded on the balance sheet as a capitalized asset, while OpEx is reported on the income statement as an expense. The accounting treatment for CapEx and OpEx affects a company’s financial ratios, such as return on investment (ROI) and return on assets (ROA).

CapEx is typically depreciated over its useful life, which can range from a few years to several decades. The depreciation expense is recorded on the income statement, reducing the company’s taxable income. OpEx, on the other hand, is expensed immediately, reducing the company’s taxable income in the year incurred.

Tax Differences Between CapEx and OpEx

The tax treatment of CapEx and OpEx differs significantly. CapEx is subject to depreciation, which allows companies to claim a tax deduction over the asset’s useful life. This reduces the company’s taxable income and, consequently, its tax liability. OpEx, on the other hand, is fully deductible in the year incurred, providing an immediate tax benefit.

However, the tax benefits of CapEx can be limited by the alternative minimum tax (AMT) and the tax reform laws. Additionally, the tax treatment of CapEx and OpEx can vary depending on the industry, location, and type of asset.

Accounting Differences

CapEx and OpEx are treated differently for accounting purposes. Operational expenditures are fully deducted in the accounting period they are incurred. On the other hand, capital expenditures are not fully deducted in that accounting period but instead deducted over several years based on depreciation or amortization. 

In addition, these expenditures are recorded in different types of financial reports. Operational expenditures are generally reported on the company’s income statement. Capital expenditures are generally reported on the balance sheet, as well as the profit and loss statement.

CapEx Approval Workflows

Capital expenditures pose several unique challenges for a business. Because of these challenges, the CapEx process requires a fairly intricate system of requests and approvals.

Benefits and Challenges of CapEx and OpEx

Benefits of Capital Expenditures

CapEx offers several benefits to businesses, including:

1. Increased efficiency: CapEx investments can improve a company’s productivity and efficiency, leading to cost savings and increased competitiveness.

2. Long-term growth: CapEx investments can drive long-term growth and expansion, enabling companies to increase their market share and revenue.

3. Improved asset utilization: CapEx investments can improve the utilization of existing assets, reducing waste and increasing productivity.

4. Enhanced competitiveness: CapEx investments can help companies stay competitive in their industry, enabling them to respond to changing market conditions and customer needs.

However, CapEx also presents several challenges, including:

1. High upfront costs: CapEx investments often require significant upfront costs, which can strain a company’s cash flow and increase its debt burden.

2. Risk of obsolescence: CapEx investments can become obsolete quickly, especially in industries with rapid technological changes.

3. Depreciation risks: CapEx investments are subject to depreciation, which can reduce their value over time.

CapEx Challenges

Capital expenses tend to require a large initial outlay of money or capital. They are also often financed by debt, which requires the company to keep a close watch on CapEx debt levels and debt servicing costs. 

These expenditures also require the decisionmaker to foresee the company’s long-term needs. This injects a high uncertainty into the process since the organization must also account for potential losses. Capital expenditures are often difficult to reverse without incurring large losses. After all, real estate, machinery, and vehicles cannot be quickly returned or discarded.

CapEx Requests and Approvals

So, it makes sense that capital expenditures go through a lengthy request-and-approval process. When a CapEx request is made, the requester must document the need and the expected outcome. If any supporting documentation is necessary, such as bids or photos, it must accompany the request.

CapEx approvals often go through several layers of management due to the high-stakes nature of these expenditures. Requests with certain criteria, such as a dollar threshold, may need these higher-level approvals. For example, any CapEx request above a certain amount, such as $50,000, may need to be routed to the CFO.

The CapEx approvers also need to be able to take the company budget and future spending into account. If they need additional information and documentation, they must be able to notify the requester accordingly.

OpEx Approval Workflows

For any business, keeping a handle on operational expenditures is critical for the bottom line. This is because, unlike capital expenditures, operational expenditures cannot be delayed or postponed - they are necessary for daily operations. Most other options for controlling immediate bottom-line results will not be as effective.

A company may instead try to increase revenues by increasing the price of the company’s products or services. However, customers may not be willing to pay more. The company could also opt for cheaper labor or materials, effectively lowering the cost of goods sold (COGS). But this could negatively impact the quality of the company’s products. This leaves minimizing operating expenditures as the best bet for increasing net profits.

OpEx approval workflows tend to be similar to CapEx workflows. The main difference is that they begin with purchase requests, ultimately leading to purchase orders. Since operational expenditures tend to be lower-value with more immediate urgency, they do not have as lengthy of a review-and-approval process as capital expenditures. However, the OpEx approval workflow must move quickly to keep up with the company’s daily activities and needs.

How Automation Can Streamline Both CapEx and OpEx Workflows

CapEx and OpEx workflows can benefit by moving away from manual processes and toward automation. Manual processes rely on spreadsheets, emails, paper forms, and faxes, all prone to errors and delays. On the other hand, an automated system can minimize errors and speed workflows along.

CapEx and OpEx automation platforms can ensure the following takes place:

• All requests are submitted with the necessary information and documentation

• Reviewers can approve requests quickly, even by email or phone, while having quick access to dashboards showing relevant information, such as the remaining budget.

• Requests can be sent to alternate approvers, and approvals can be sequential or parallel.

• The platform can automatically escalate requests to higher-level approvers based on request criteria (such as dollar amounts) or inactivity.

• Audit trails are generated automatically.

• The system integrates with financial reporting and increases transparency

If you want your CapEx and OpEx workflows to move with maximum efficiency, consider the benefits of an automation solution. For simplicity and company-wide integration, seek out an automation platform that can handle both capital and operational expenditures.

CapEx vs. OpEx FAQ

• What is the difference between CapEx and OpEx?

CapEx (Capital Expenditure) refers to funds used by a company to acquire, upgrade, and maintain physical assets, while OpEx (Operational Expenditure) is the ongoing cost for running a product, business, or system.

• Why is it important to distinguish between CapEx and OpEx?

Distinguishing between CapEx and OpEx is crucial for budgeting, tax reporting, and financial planning as they are treated differently in accounting.

• How can workflow automation benefit CapEx and OpEx processes?

Automation can streamline approval workflows, reduce errors, and ensure compliance by providing a structured process for handling both CapEx and OpEx.

• What are some common examples of CapEx and OpEx?

CapEx examples include purchasing buildings, machinery, and vehicles, while OpEx includes rent, utilities, wages, and maintenance costs.

• How does Nutrient Workflow automate CapEx and OpEx approval processes?

Nutrient Workflow uses automated workflows to manage CapEx and OpEx requests, including necessary documentation, multi-level approvals, and tracking for compliance and efficiency.

Additional Resources

• Investopedia

• Wall Street Mojo

• Corporate Finance Institute

FAQ

What are CapEx and OpEx?

CapEx refers to capital expenditures for acquiring or upgrading fixed assets, while OpEx involves the ongoing costs necessary for daily business operations.

Why is understanding CapEx and OpEx important for businesses?

Recognizing the differences between CapEx and OpEx is crucial for accurate budgeting, financial planning, and tax reporting.

How can businesses effectively manage their CapEx and OpEx?

Businesses can streamline their management of CapEx and OpEx through automation, which enhances workflow efficiency and reduces errors.

Can you give examples of CapEx and OpEx?

Examples of CapEx include purchasing machinery and buildings, while OpEx covers costs like rent, utilities, and employee salaries.

How does workflow automation impact CapEx and OpEx approval processes?

Workflow automation speeds up approvals and increases accuracy by providing a structured process and reducing the risk of errors.