25 February 2025
CapEx vs OpEx: Everything You Need to Know
5 minutes
Capital expenditure vs operational expenditure (or CapEx vs OpEx) — what’s the difference? The very short answer is:
- CapEx = Long-term investment
- OpEx = Short-term expenses
Those definitions can be confusing — particularly because both terms include the word expenditure. How can CapEx be an investment while OpEx is an expense?
Let’s look at precisely what constitutes each type of expenditure and examples of how they might be implemented in your business.
What are CapEx and OpEx?
Both CapEx and OpEx relate to the expenses of running a business. While CapEx refers to the tangible investments you are likely to use in your company for a long time, OpEx refers to the running costs you will continue to pay on a day-to-day basis.
CapEx: definition, types and examples
CapEx, or Capital Expenditure, are expenses related to your business’s tangible assets that will be used over a long period. These are larger investments that you make for items necessary to grow or maintain your business.
There are three types of CapEx:
- Growth CapEx relates to investments aimed at expanding your current business, including buying new machinery, vehicles or property. Growth CapEx is also known as Revenue CapEx.
- Maintenance CapEx is for sustaining your current business revenue. If a piece of equipment fails, for example, you may need to purchase a replacement to maintain your current profit.
- Strategic CapEx is aimed at long-term growth and development, including financing research and development initiatives and developing new products and services.
CapEx can potentially make or break a business. The right decisions will result in a favourable return on investment (ROI).
Some industries are more capital-intensive. If you are interested in starting a mining business, you will likely be forking out more than you would for counselling services.
Buying the wrong machinery, unsuitable property, or outdated computers could all result in huge expenses without much yield. That’s why shareholders, investors and analysts are usually very interested in a company’s CapEx — it shows the kind of foresight a business has in terms of their financial future.
So, what might that look like in practice?
CapEx in action
Say you open a printing business and buy new printers for your company. These are investments that you need to make for your business to run. They will be once-off purchases that will be used for an extended period (all going well, longer than a single tax year). Consider this Growth CapEx.
Equipment isn’t the only kind of Growth CapEx. You might also buy a piece of property for your business to operate from, as well as vehicles and computers.
Of course, it may be the case that your printers break down or become obsolete at some stage. It will then be time to invest in equipment to continue to maintain or grow your company. This will be Maintenance CapEx.
At some point, you may want to consider expanding into 3D printing. However, before making any big decisions, you would like to first understand how viable this venture would be. You spend money researching this in detail before you launch in this direction. The costs you incur doing so will be Strategic CapEx. (Note that funds spent on research related to marketing will usually be considered OpEx rather than CapEx as they will be ongoing rather than related to a particular investment.)
OpEx: definition, types and examples
OpEx, or Operating Expenses, are the essential expenses related to your business's day-to-day running (or operation).
OpEx includes staff wages, transport costs and energy bills to quite literally keep the lights on. If you are renting your premises, this will also be considered OpEx.
OpEx has a major impact on your bottom line. If managed correctly, it will allow your company to run like a well-oiled machine — you just have to ensure that the running of that machine is not costing you more than its bringing you in.
OpEx in action H4
Back to your new printing business. Those new machines need paper and ink. These will be operating expenses. You’ll need to make these purchases on an ongoing basis and the money you spend on them won’t turn into a tangible asset that you can continue to use for the foreseeable future.
But your OpEx won’t end there. Your insurance, building rental, and the staff you pay to make magic within it, will also all fall under this category. Funds you allocate to market research and the carrying out of advertising campaigns will also be in this pool.
All of these expenses should be weighed up to see if they are yielding positive results for your company. You can do so by calculating your OER, or Operating Expense Ratio, as follows:
OER = Operating Expenses / Effective Gross Income
If your printing business has a gross income of £50,000 for the year and your OpEx is £3,000, you will work out your OER as:
£3,000 / £50,000 = 0.06 (60%)
An OER of between 60 and 80% is considered healthy.
The difference between CapEx and OpEx
Because different businesses have different needs, it can be tricky to tell whether a particular purchase is necessary for the day-to-day running of a company or is a long-term investment.
So, here’s a quick test:
Will you use this particular purchase in your business for longer than a single tax year?
If so, it’s CapEx. If not, it’s OpEx.
So while you will still need toilet paper, insurance, and pencils in years to come, you won’t need that roll of toilet paper, that month’s insurance, or those particular pencils. These will all be OpEx.
CapEx and OpEx also depend on the kind of business you are in. If you are starting a roadside coffee stall, investing in a worthwhile coffee machine would be considered CapEx. However, if coffee is not your business but helps fuel your employees, your in-office coffee station may be considered OpEx.
Other crucial differences include:
- How they are recorded on your business balance sheets:
- CapEx will be recorded as an investment. An investment is something that you buy for your business and will be used to help it grow (or survive) over an extended time.
In accounting terms, CapEx will usually be listed on the PP&E section of your balance sheet (Property, Plant, and Equipment) as well as an investment on your cash flow statement. It’s important to record depreciation if the asset will lose its value over time.
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- OpEx will be recorded as an expense on your income statement. These are considered deductions at tax time. An expense is a cost that will be useful to your business for the period in which it is made.
(Renting of your premises, for example, will be vital for your business for the rental period but will not turn into a tangible asset that you can use in the long term.)
- Longevity. CapEx tends to be a once-off investment while OpEx tends to be ongoing. One key differentiator is whether the purchase is likely to continue to benefit your business a full tax year after it has been purchased. If so, you’re dealing with CapEx.
- How you pay for them.
- CapEx can be financed through outside financing, such as loans.
- OpEx should be financed from within your company’s budget.
CapEx vs OpEx: FAQs
Is a laptop CapEx or OpEx?
If a laptop is going to be used meaningfully in your business for longer than one financial year, it’s considered CapEx. Your company’s IT infrastructure is a serious investment that should be made with longevity in mind. However, there are situations where a laptop might be considered CapEx. Say you are renting laptops for project-based work that you need to pull off in a short period. This rental could be an operating rather than a capital expense.
Is SaaS OpEx or CapEx?
SaaS, Software as a Service, is typically considered OpEx. Cloud-based software works on a subscription basis. The advent of SaaS has changed the nature of IT spending in many companies. Rather than making large upfront investments in their software needs (which would be considered CapEx), businesses now connect to cloud-based services which they subscribe to on an on-going basis (which has made them OpEx).
CapEx and OpEx: Quickfire summary
Both CapEx and OpEx have to do with costs that your company incurs. The difference lies in whether you’re buying a tangible asset that your business will use for an extended period (CapEx) or are paying for short-term daily expenses (OpEx).
If you’re not sure, ask yourself whether a particular purchase will still be a valuable part of your business after one tax year has passed. If the answer is yes, you’re dealing with CapEx. If the answer is no, the expense is likely related to your day-to-day operation, and is therefore OpEx.
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