CAPEX and OPEX are terms used in business management and real estate investment, but recently they are also often used in the context of IT system construction and DX conversion.

Management of CAPEX and OPEX is essential when considering how to efficiently link business funds to cash flow.
This time, we will introduce the difference between CAPEX and OPEX and how to manage them.

Difference between CAPEX and OPEX

CAPEX and OPEX are both terms used to classify expenditure items in corporate management, but they are differentiated depending on the nature of the expenditure.

Appropriately dividing and managing spent expenses is essential for understanding whether fund management is being carried out properly and how expenditures are linked to sales and profits.

CAPEX is translated as "capital expenditure" and refers to expenses spent for the purpose of maintaining and increasing the value of owned assets.
In real estate investment, it refers to the cost of updating the building frame and exterior walls, as well as the cost of updating elevators and common facilities, to improve the value of a building, but in terms of business management, it can also refer to capital investment costs in general.

The cost of purchasing production equipment and building a plant are typical examples of CAPEX, but the cost of purchasing large-scale servers and building your own IT system are also classified as CAPEX.

What is OPEX (Operating Expenditure)?

OPEX stands for “business operating expenses.”
OPEX covers all expenses necessary for business, such as personnel costs, consumables costs, water and heating costs, advertising costs, etc.

In real estate investment, it may be difficult to draw a line between building repair costs and whether they are CAPEX or OPEX costs, but in accounting terms it depends on whether the costs are to improve the value of the building or to maintain and restore the previous condition. The way it is processed will change.

How to manage CAPEX and OPEX

While CAPEX has the aspect of an investment to improve profits in the future, OPEX can be said to be an expense that is directly linked to monthly profit and loss calculations.

Because the nature of expenses differs between the two, it is necessary to carefully consider how to manage them and the impact on management when restraining expenditures.
It is necessary to judge whether expenditures are appropriate by considering the time axis from expenditure (management investment) to sales and profits.

Accounting treatment of CAPEX and OPEX

In order to use the concepts of CAPEX and OPEX in business decisions, it is important to understand how CAPEX and OPEX are reflected in financial statements.
First of all, OPEX refers to expenses such as personnel expenses and utility expenses, so most of them overlap with accounting selling expenses and general and administrative expenses.

However, depreciation expenses that are not actually paid are not included in OPEX.
Therefore, OPEX is calculated by subtracting depreciation from SG&A expenses.

On the other hand, CAPEX is not expensed as SG&A expenses along with expenditures, but is recorded as an asset.

Since depreciation is recorded as an expense each year, there is a discrepancy between the actual cash flow and the expense recorded.
It can be said that this is a more difficult number to manage than OPEX.

Trends seen and management methods when CAPEX increases

An increase in CAPEX means that companies are actively making capital investments for various purposes, such as expanding production scale or introducing IT to improve business efficiency. .
Since it will be recorded as an asset in the financial statements, CAPEX will need to be managed by creating a separate list.

CAPEX is often spent from a long-term perspective in anticipation of company growth, so it may not immediately lead to effects such as sales and cost reductions.
Therefore, when determining whether CAPEX expenditures are being carried out effectively, it is important to manage budgets and actual results based on long-term business plans.

Trends seen and management methods when OPEX increases

Since the majority of OPEX is recorded in SG&A expenses, it can be managed relatively easily by creating monthly and annual trends for each SG&A expense item.

However, OPEX is the sum of many expenditure items, so just because OPEX increases or decreases, you cannot immediately conclude that it is positive or negative in terms of management.

It is necessary to check how much each expenditure item in OPEX is increasing or decreasing, and if so, whether sales are also increasing accordingly.
Since short-term changes are directly reflected in management numbers, it is best to verify the effects over a relatively short period of time, such as monthly or quarterly.

Converting CAPEX to OPEX

In recent years, there has been a shift from CAPEX to OPEX, mainly in the IT field.

"Converting CAPEX to OPEX" refers to using an external system instead of developing and constructing an in-house system and operating it in-house.
Developing a system in-house with a large initial cost is equivalent to capital investment/CAPEX.
On the other hand, when you pay a monthly usage fee to use an external system, the usage fee is recorded as part of operating expenses, so it is OPEX.

A typical example would be to use an external cloud server instead of installing a large-capacity server in-house, but it is also possible to use an external cloud server instead of installing a large-capacity server in-house. It might be close.

Reasons why CAPEX is becoming OPEX

One of the major reasons why the shift from CAPEX to OPEX is progressing is the rapid pace of technological innovation in IT infrastructure.

Not only does it cost a lot of money to develop and build your own IT infrastructure, but it also costs a lot of money to update it to keep up with technological innovations.
Sometimes updates can't keep up and you end up having to develop a new system.
This does not provide sufficient CAPEX cost-effectiveness.

On the other hand, if you can convert the cost of system construction and operation into OPEX, you can continue to use a system that is suitable for the times. In addition to the initial cost of system development, maintenance costs such as personnel costs for in-house system operation can also be reduced, improving cash flow.

In particular, using external systems such as standardized business management systems and inventory management systems will help reduce unnecessary expenses.

Appropriately manage CAPEX/OPEX

By appropriately managing CAPEX and OPEX, you can check whether investments made to improve performance and business operations are being utilized efficiently in management.
OPEX is easy to manage on a monthly basis, but CAPEX is amortized over several years, so you need to be creative in measuring its effectiveness.

All expenses should be spent proactively if necessary for business purposes, but it is better to periodically verify whether the investment is commensurate with achieving the objectives.