What is OPEX?

Table of contents

1. What is OPEX?
2. What are OPEX costs?
3. Why OPEX?
4. What is an OPEX Budget?
5. Difference  CAPEX OPEX
6. CAPEX and OPEX: a comparison of expenditure
7. Shift from Capex to Opex
8. Are “low-value assets” OPEX or CAPEX?
9. Is depreciation Capex or Opex?

OPEX is an abbreviation for Operational Expenditures (OpEx), which translates as operating costs or operating expenses. This refers to expenses that are required to maintain a company’s business operations.

In contrast to capital expenditure (capex), operating costs cannot be capitalized in the accounts and are reflected in a company’s income statement.

Examples of operational expenditure are

• the purchase of raw materials, consumables and supplies as material expenses in production
• Labor costs
• Rent and occupancy costs
• Expenditure on leased equipment, such as cars or computers
• Maintenance contracts
• Ongoing license fees
• Payments for as-a-service products, such as Cloud, Office365, SaaS, PaaS, IaaS or EaaS
• Insurance fees
• Interest expenses
• Depreciation and amortization
• Low-value assets

In principle, operating costs are made up of fixed and variable operating expenses. Fixed operating expenses are the expenses that a company needs in order to be operational. These include expenses such as personnel costs, rent, leasing costs, insurance fees, interest and depreciation. Variable costs, on the other hand, are expenses that are necessary for the manufacturing of products, such as raw materials and supplies.

OPEX is a financial key figure that is used to calculate the operating result of a company. In simple terms, operating costs are subtracted from sales revenue and the remaining amount is the operating result according to accounting.

An OPEX budget is a breakdown of cost types of the operating costs to be paid for the next year. Increasing or decreasing operating costs in the coming year are also documented in the budget. For example, it shows whether new headcounts are added or whether existing maintenance contracts expire. The total OpEx budget is then calculated against the expected revenues for the next year and checked to see whether the operating costs need to be reduced or whether an operating profit can be expected.

Capex (Capital Expenditure) are capitalizable expenses and therefore capital expenditure that can be depreciated, which go into a company’s fixed assets and reduce profits spread over a period of several years. In comparison, opex (operational expenditure) reduces profits immediately in the current financial year, in full.

As a rule of thumb, companies often want to shift expenses to Capex in weaker years, but prefer to declare them as opex in better years in order to optimize tax expenses.

An appropriate capex ratio can be seen as a sign of healthy company growth. It describes the ratio between capital expenditure and sales revenue. Depending on the industry and company, a different capex ratio may be considered favorable. For example, the necessary capital expenditure is usually higher in companies in heavy industry and telecommunications than in companies in the service sector.

Capex (Capital Expenditures):

• Purchase of hardware that is more expensive than low-value assets
• Purchase of production facilities or buildings
• Expenditure on office equipment and other required equipment
• Capital expenditure for vehicles
• Purchase of patents
• Investments for external software development, as long as these are not used for the maintenance or servicing of existing software. The software developed must have a real asset value for the company.

Opex (Operational Expenditures):

• The purchase of raw materials, consumables or supplies as material expenses in production
• Labor costs
• Rent and occupancy costs
• Expenditure on leased operating resources, such as cars or computers
• Maintenance contracts
• Ongoing license fees
• Costs for as-a-service products, such as cloud services, Office365, SaaS, PaaS, IaaS or EaaS
• Purchased services for operation in a company
• Insurance fees
• Interest expenses
• Depreciation and amortization

The shift from capex to opex, in other words from capital investments to operating costs, can bring various advantages for companies. Because less capital is tied up in the long term in this way, the company can react more quickly to changes in costs and availability. In addition, operating costs can be claimed for tax purposes in the same year. This allows the company to reduce its profits in the short term.

In the area of IT infrastructure, companies use cloud solutions or “as a service” models, to shift from capex to opex, for example. This means that both software and hardware resources can be rented. Some companies even rent office equipment such as laptops or monitors instead of buying them. One advantage can be that the company is less dependent on shorter product life cycles.

On the other hand, there are some potential disadvantages and risks of moving to the cloud, such as the high dependency on the provider and the rapidly increasing costs as data volumes grow, so that at a certain point, investing in your own IT infrastructure may prove to be more cost-effective.

Low-value assets are classified as OPEX costs because the acquisition or production costs can be deducted immediately as an operating expense.

The depreciation of an asset resulting from its use and the associated reduction in value is allocated to operating costs and is therefore opex.