CapEx vs OpEx: Capital Expenditures & Operating Expenses Explained BMC Software Blogs

Without a full picture of the useful life of assets being invested in, you could lose out on some fairly significant tax advantages. Because fixed assets do not expire within a year, you’ll need to expense them over time. This is done by calculating depreciation over the useful life of the asset and then posting a depreciation journal entry to your general ledger using the appropriate schedule. Capital expenditures, or capex, are the funds used by business owners to purchase physical assets designed to increase the value of their business. Capital expenditures can also be used in order to maintain or improve a current asset. Capital expenditures are key indicators of the efficiency in use of capital which can positively or negatively affect margins (i.e., profit on product).

For nearly a year, we have been experimenting with SGE and Search labs across a wide range of queries. And now we are starting to bring AI overviews to the main Search results page. We are being measured in how we do this, focusing on areas where gen AI can improve the Search experience, while also prioritizing traffic to websites and merchants. Capital expenditures (CapEx) refers to the money a company spends towards fixed assets, such as the purchase, maintenance, and improvement of buildings, vehicles, equipment, or land. You might also hear this called PP&E, short for property, plant, and equipment. The process of businesses making strategic investments is known as capital expenditure, or CapEx.

Maintenance Capex vs. Growth Capex: What is the Difference?

Higher CapEx can reduce FCF, impacting a company’s financial flexibility and ability to pay dividends or reduce debt. In terms of valuation, investors often use metrics like price-to-earnings (P/E) ratios, and higher CapEx can lead to lower earnings, potentially influencing these valuation metrics. You can think of capital expenditures (capex) as long-term, less frequent utilizations (uses) of capital.

Return on investment ratios, hurdle rates, and payback periods are areas to analyze when determining the benefit of a capital expenditure. Much of the need for capex comes from the assessment of department heads, who run the day-to-day operations of a certain group. They are well aware of any issues within their group that would need updating or replacement. This bottom-up approach assessment helps determine whether any capex expenditures are beneficial for long-term growth, what is economically feasible, and what the return on the investment will be.

How do capital and revenue expenditures differ?

The core of our capital allocation framework remains the same, beginning with investing aggressively in our business, as you have heard us talk about today, given the extraordinary opportunities ahead. We view capex meaning the introduction of the dividend as further strengthening our overall capital return program. Now, let’s look at how well we are positioned for the next wave of AI innovation and the opportunity ahead.

Unlike the depreciation of CapEx, OpEx are fully tax-deductible in the year they are made. Management is often tasked with decreasing OpEx spending without blunting the firm’s ability to compete or produce. Try Shopify for free, and explore all the tools you need to start, run, and grow your business. Even if you’re not there yet, having a high level understanding of how CapEx could help you grow your business down the line can give you a massive leg up on your competition. That doesn’t mean a car is expected to stop working in year six or that a building will crumble in year 40, only that, for the IRS’ purposes, the value can be depreciated in that time span.

CapEx vs OpEx: Capital Expenditures & Operating Expenses Explained

The key difference between capital expenditures and operating expenses is that operating expenses recur on a regular and predictable basis, such as in the case of rent, wages, and utility costs. Capital expenses, on the other hand, occur much less frequently and with less regularity. Operating expenses are shown on the income statement and are fully tax-deductible, whereas capital expenditures only reduce taxes through the depreciation they generate.