Capital Expenditure(CAPEX), Operating Expense (OPEX) and Cloud.
Cloud Computing is an example of operating expenses(OpEx). OpEx is spending money on products or services like electricity, salaries, marketing and even paper and printer cartridges. Simply, OpEx is an expense that is required for the day-to-day functioning of the business.
When we start talking about operating expense, another contrast term comes into play in the background which is CapEx(Capital Expenditure). Let's see everything related to these terms now.😋
Understanding CapEx and OpEx
- This is funds/savings spent by business to acquire, upgrade and maintain physical assets like land, hardware, furnishings, buildings, etc.
- We can also say that these are expenses for long term benefits.
- CapEx is also considered as a negative investment as its value reduces over time.
- These expenses won't let you deduct from your taxes instead we have to recover these through time.
- For instance, I bought a
Machine A, after 2 years it has to be replaced because the version became outdated but
Ais working fine. Now, I bought the new version,
Machine B. As
Ahas to be replaced here by
Machine Ahas deducted itself from taxes, this leads to another negative investment by the company.
- So, it is sometimes difficult to identify the asset's actual cost and value to the company.
- This is spending money on products or services which will be used immediately.
- This is no upfront cost, we pay for products/services we use.
- Operating expenses are fully tax-deductible and can be subtracted from the revenue.
- OpEx reflects the cost of doing business because the benefits and value are immediate and can be easily recognised.
You buy products, use and get benefitted from them very quickly and visibly.
- If the operational expenditure is too high, we can quickly cut back on spending by switching to different products. This would be easy as we didn't invest much here.
Advantages of Cloud being an OPEX
- One of the main benefit of the cloud being an OpEx is that there is no need for long term investments.
- If the infrastructure requirements go down in between the time you bought the hardware and the time the hardware reaches its end of the lifespan then we will end up with a lot of negative investment.
- So, with cloud we can eliminate the need for buying infrastructure by selecting suitable service model. We can scale up/down the resources at any time.
- Another advantage is that OpEx is fully tax-deductible from the same year we purchased.
Which is Cheaper? CAPEX or OPEX
First things first, companies cannot choose to be completely CapEx or OpEx. They need to understand which areas come under OpEx and which under CapEx. For instance, if the company needs a private cloud model and it chooses a public model instead of hybrid just to reduce capital expenditure, it doesn't make sense right? So, try reducing capital expenditure rather than eliminating it.
Sometimes OpEx resources would be more expensive then CapEx resources. For instance, if we want to use a high-end speaker for the party you are hosting today, will it be convenient for you if you buy that speaker or if you rent that speaker? Even if the speaker is expensive we can rent it and pay only for a day rather than buying it and not using it again.
So, this is my take on CAPEX, OPEX and cloud. Glad that we all learnt a new topic today!😋😍