[Guid_NewGuid]

Maybe someone who knows more about this stuff can enlighten me. From what I've heard there are actually only 2, opex and capex.

If I recall correctly capex is better for the business because of how it gets treated in the accounting stuff. This naturally gives rise to the feature factory style work of a lot of dev jobs. Some reason like they can record capex spend as an asset with depreciation. Is this true?

[zer00eyz]

This is close, there is more nuance to it, and a lot of it is going to be specific to your org.

If you work in office, and there are accountants there go make friends. They are just another flavor of nerd, so you're gonna get along with them, and they have insights into the company that you will never get outside of the C level.

IF you dont KNOW the answers to accounting questions, take some classes. Candidly this is a function of every business that engineers should be aware of! The projects that cost money upfront (OPEX) and can provably reduce recurring costs (CAPEX) can be HUGE wins for all involved.

There is a story about how Dr's in the US have no idea what a procured costs, and that many non us ones do. Though the example is about insurance, I think the lack of awareness of costs is pervasive in more places. Do you know your AWS spend? Do you know the per customer cost/spend (is that individual or organization).... These numbers start to matter in a value engineering situation.

[datadrivenangel]

Capital Expenditure (CAPEX) is the money invested up front, and Operational Expenditure (OPEX) is the money invested to operate the investment as you go.

[radiator]

> The projects that cost money upfront (OPEX) and can provably reduce recurring costs (CAPEX)

So you mean OPEX are upfront costs, and CAPEX are recurring costs?

[marcosdumay]

Yeah, whatever mistakes the GP did, those names are the other way around.

[zer00eyz]

Yes I did transpose them!!! I have since had coffee and am feeling much more on the ball, thanks for catching my error folks!!!!

[smugglerFlynn]

3 parts of organisation mentioned in the article have their own respective Operating Expenses (OpEx) and Capital Expenses (CapEx). OpEx is what you spend on day to day activities, and CapEx is what you invest into something that you will use long term. You can pay via CapEx or OpEx for the same exact result: e.g. if you purchase a car, that's CapEx, but if you rent it each month, that's OpEx. I'm simplifying, but that's the gist of it.

Organisations tend to move away from CapEx where possible, because of two reasons:

1. management decisions require accounting know-how and accounting 'magic' when CapEx gets involved

2. large upfront investments are much less flexible and more risky than day to day expenses

Let me illustrate.

Your marketing department is investing into new on-premises IT system to run promotions and campaigns. They are spending $1M dollars upfront for the installation, equipment purchase, system licenses and so on - all these expenses will be booked under CapEx. That marketing department also pays day to day salaries, and some other regular expenses, which all go to their OpEx.

Let's say right after system is launched and everyone in Marketing starts using it there is a 30% growth in # of leads they bring, and resulting 10% growth in sales. But what does that mean, financially? Was the project a success? 10% growth in sales might not cover full cost of our $1M investment, so for how long would we need to keep up the growth in order to see returns? What growth numbers do we need to keep seeing? What if we decide to adjust and purchase more hardware and licenses as we go? What if system unexpectedly required us to hire extra people in marketing, bumping up department's OpEx?

All that requires calculation, recalculation, excel spreadsheets crunching, more spreadsheets, and a few fat decks of powerpoints just to align all the decision makers around the numbers and understand what worked, financially.

Compare that to marketing department buying access to the same system in cloud via monthly subscription (let's say they start paying $10K total monthly - these will go to your OpEx). Any growth is now super straightforward to assess - you've invested $10K, you got 10% more sales that month, and you can now deduct all the combined OpEx from that number and see if you are still profitable after bringing the new system in. That's a reason #1.

Accounting and decision making complexity is not the only reason to prefer OpEx. Note that accountants came up with smart ways to make CapEx behave more 'OpEx-y' - for example, this $1M in the books will be spread across many months or years by using depreciation across system lifetime, so that upfront investments can be comparable to daily expenses. But the same way you are not buying a local car each time you arrive on a vacation somewhere, businesses don't want to have hands tied in large investments - oftentimes renting something is preferred, and business people will still call their decision to rent instead of buying "switching from CapEx to OpEx". That's a reason #2.

[count]

The CapEx -> OpEx push is also heavily tax based. I can write off (generally) 100% of an OpEx expense today (or, as I spend the money). CapEx expenses become Assets, which are tracked and taxed, and the business doesn't get to write off that spend immediately - it turns into a 'depreciation' write off, spread over the useful life of the item (sometimes 5, 10, or more years). Real estate, vehicles, large equipment, etc. is generally all done this way - a CapEx gets you an asset or property, which is then taxed and depreciated. Software licenses, insurance and other things can also be done this way (CapEx), depending on the terms and your accounting standards.

[dakna]

It has come up several times now on HN, but just as a reminder: With the changes to IRC Section 174, all software development expenses must be capitalized now. This even includes all expenses connected to software development.

https://www.eisneramper.com/insights/tax/impact-174-software...

[lotsofpulp]

> CapEx expenses become Assets, which are tracked and taxed,

> Real estate, vehicles, large equipment, etc. is generally all done this way - a CapEx gets you an asset or property, which is then taxed and depreciated.

What tax(es) are you referring to? Property taxes?

[PeterisP]

The general income taxes. Opex is close to cash flow, capex is not.

For a simplified example, let's assume that this year you bring in $100 of cash and spend $50 of it on opex and $50 of it on capex.

In this case, your revenue this year is $100, but your expenses this year are all $50 of opex plus some percentage (depends on over how many years you capitalize the investment, as set by your policies but limited by tax law) of capex, if it's a 5-year depreciation then it would be $10 of those opex $50, so for your $100 of outgoing cash $60 are expenses this year and $40 is treated as accumulated assets for future. So the accounting says that you have $40 of profit this year - and, crucially, it could have been as low as $0 or as high as $80 (this year! The total profit doesn't change, but it can get moved around in time to a different year) if your accountants can make the case that those activities were 100% opex or 100% capex.

And while there are various reasons why the company might prefer these numbers to look higher or lower, the main practical impacts are twofold - one is taxes, where saying that some expense is opex means you pay less taxes today, deferring them for a few years and improving your cash flow, but the other is stock market, where saying that some expense is capex means that your quarterly profit is higher and thus it helps your stock price and any employee benefits linked to stock price.

And because of that your management often will have KPIs with a very strong motivation to push things towards opex or capex depending on the company.

[count]

In some cases (e.g. a building or expensive equipment purchase, probably yes, property taxes in most jurisdictions, at least in the US). The depreciation is deducted from income for income taxes over time, rather than all at time of purchase as an opex expense is. This implies a higher income tax bill 'now', with a smaller deduction smeared over time.

[lotsofpulp]

> This implies a higher income tax bill 'now', with a smaller deduction smeared over time.

I would not characterize a lower deduction for a business expense as taxing something. I would have assumed it meant a buyer has to pay an additional tax as a result of purchasing something.

[count]

A business pays no tax on an OpEx. The specific tax on a CapEx depends on the jurisdiction.