CapEx to OpEx: What Makes Sense With Your IT Spending

Traditionally, IT investment has been a one-off capital expenditure followed by a period of 3-5 years’ usage, where the asset value is written off in the company accounts before the whole cycle begins again. But more recently, there has been a shift in thinking towards spending on technology as an operational rather than capital cost. The flexibility and efficiency of cloud services and cloud solutions, the reliable predictability of managed IT services, and the rise of the “as a service” model are causing this change.

CapEx and OpEx Defined

CapEx, or capital expenditure, refers to one-time upfront costs incurred for assets to be used in the future. Some examples of IT items that fall under this category include new software solutions, relevant network infrastructure, IoT devices, printers and scanners, and asset upgrades.

With a CapEx budget item, the business incurs expenses in the present and expects to generate profit in the future. Since the upfront cost could be substantial, budgeting for CapEx involves setting some money aside for these types of purchases. It usually also means that a more stringent process must be followed to get approval for these purchases.

OpEx refers to the day-to-day operational expenses that support the business. Unlike CapEx, OpEx has no or low upfront costs and allows companies to spread their expenses over time. OpEx in IT includes costs for SaaS licenses, IaaS subscriptions, equipment leases, contract-based services, internet, and utilities. Because the costs are ongoing, OpEx is part of a business’s profit and loss system.

Accounting Differences Between CapEx and OpEx

The biggest difference between CapEx and OpEx is how purchases are deducted come tax time. Any OpEx purchases made in a single tax year can be deducted entirely. For example, if you spent $1,000 on ink and paper throughout the year, the entire $1,000 can be deducted at tax time.

CapEx deductions, in contrast, are amortized and depreciated. CapEx purchases must be deducted over time. For example, a $20,000 piece of hardware your company purchased has to be deducted over time—maybe $2,000 a year over ten years. The IRS sets the timelines when it comes to amortization, depreciation, and CapEx. Your accountant will be able to calculate CapEx amortization. However, it’s important to note that IRS tax code section 179 allows (in certain circumstances and meeting certain conditions) companies to treat CapEx purchases as OpEx purchases, allowing you to keep more cash on hand.

Benefits of Switching to an OpEx Model of IT Spending

Lower Costs

The shift from CapEx to OpEx avoids high capital expenditures to purchase new equipment to replace the previous (outdated or overhauled) equipment and also avoids the need for training the entire team each time a change is made. OpEx removes the need for any hefty upfront investments, replacing them with predictable monthly fees.

Why purchase on-premises technology and infrastructure when you can rent what you need and shift ownership and maintenance responsibilities to a vendor? By getting costs under control and offloading the infrastructure burden to a third party, your IT department will have more cash for investments and other projects that drive revenue and growth.

Scalability

There’s a greater likelihood of making errors estimating future capacity requirements when purchasing IT assets and IT services with CapEx. For example, if you overshoot on everything needed to set up a private cloud service and your need for private cloud services doesn’t grow fast enough, you lose money on wasted goods and work.

On the other hand, a more flexible approach to IT infrastructures like pay-as-you-go cloud services and other IT operational expenditures allows your business to keep up with the competition by paying for only what you need when you need it, so you don’t get stuck with a huge bill for outdated infrastructure. Resources can be provisioned and de-provisioned instantly, as needed, without an exorbitant cost attached. This frees up IT operations to scale up and down according to the organization’s needs.

Agility

Letting your equipment dictate your business approach, rather than your business needs driving your IT infrastructure, limits your ability to adopt newer, better technologies. You sacrifice agility when you invest a lot of time, money, and manpower in a CapEx expense and can’t bear to change after investing all those resources on a prematurely aging setup. This is a guaranteed way for your business to become irrelevant.

The OpEx approach to IT expenditure gives modern businesses the agility and flexibility they need to stay relevant in ever-changing markets and meet their clients’ needs more quickly and successfully. You don’t own the elements of an OpEx infrastructure, so you are never forced to strategize according to what you already have.

With OpEx, you are free to adapt your IT capabilities according to your business goals, rather than your business goals to static IT capabilities, allowing you to stay up-to-date on market strategies and the technology you need to keep up with the competition. And as you know, in the fast-paced world of business, the more easily and speedily you can respond to changing market trends, the better you can meet your customers’ needs and grow your profits and overall value.

Employees Can Focus on Core Business

Your talent is your most valuable asset. Because your company does not own OpEx services, you are not responsible for keeping them up and running. You are paying a vendor who is responsible for ensuring service is always available and functional – you don’t have to worry about maintenance and upgrades. What’s more, your provider will invest in the infrastructure and latest technology to ensure there is no single point of failure in your solution.

This frees up your IT team to focus on more strategic initiatives that bring value to the business rather than getting mired in the day-to-day operations of IT hardware and software. It also means lower costs for you and a reduced risk of downtime.

Bottom Line

Shifting from CapEx to OpEx can create many opportunities for your organization. It frees up valuable resources that would otherwise be spent managing onsite infrastructure, makes future spending more predictable, lowers capital costs, allows you to be more agile, and you only pay for the capacity that you need when you need it.

If you’re considering switching to an operational expense model, ECW Networks & IT Solutions can help you make the most of your IT budget, drive business growth and maximize profits. Contact us today to schedule a consultation.