Capital Expenditure vs. Operational Expenditure

Capital Expenditure vs. Operational Expenditure

A business has two types of expenditures, capital expenditures (CAPEX) and operational expenditures (OPEX), and both refer to money that is paid out of a company, but each are handled differently for accounting and tax purposes.

Capital expenditures refer to expenses that benefit the company in the future. Examples of CAPEX could include the purchase of new buildings or equipment, as these purchases will directly benefit the company in the future. CAPEX can also include improvements or additions to existing assets.

A budget that includes CAPEX will demonstrate how much a business is investing its future. Analysts often follow a company's CAPEX to determine the business's growth potential. CAPEX can vary from year to year, so analysts often look at the average CAPEX over a period of 2-3 years.

Operational expenditures refer to the expenses that a company incurs in their day-to-day operations. Unlike CAPEX, OPEX do not benefit the company in the future, as they are the expenses that are required to keep the company in business on a daily basis. OPEX often include rents or mortgages, payroll, and utilities. Repairs and maintenance are also OPEX, as long as they are not made to increase efficacy or the life of the asset.

OPEX is significant in that it details the cost of doing business for a company. These costs do not have any future benefit for the company, and simply exist to keep the business operational. A company with high OPEX could lose money if those expenses eat away at their profits.

Both CAPEX and OPEX are handled differently for accounting purposes. CAPEX is recorded as an asset on the profit and loss statement, while OPEX is recorded as an expense on the income statement. However, both are handled the same for tax purposes.

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