ALL POSTS BY

Blog

CAPEX and OPEX – The Differences and Advantages

We’ve often stated that business models are always changing. The time comes when old methodology and gadgets wear out their welcome, and companies must alter how they do things to stay in the game.

 

THE WAY WE DO BUSINESS IS CHANGING

Over the last ten years, we’ve witnessed the deaths of several brick-and-mortar stores as enterprises switch to the online market. We’ve seen factories in America shut down shift overseas to both China and South Asia, where labor and materials often cost less, and we’ve seen the dependence on social media grow as businesses seek new ways of attracting more customers.

 

Our Edge Device Management System makes managing Assets easier than ever!

 

PRODUCT-AS-A-SERVICE

The biggest change we’re seeing is the switching to product-as-a-service structures. This usually entails the fusion of genuine products with their accompanying services and monitoring software, so customers receive items in virtual or digital forms. One-time transactions are usually omitted from the equation. Instead, customers find themselves “subscribing” to a product, and paying a recurring fee for the service in question.

 

An example of this would be IIoT applications that allow the inter-connection of factory equipment through sensor-based technology. A manufacturer or executive pays a recurring fee to keep the respective technology going, while data is consistently collected so machinery can stay functional. The model grants sellers to earn more money and build long-term relationships with clients, while the buyer’s overall capital expenditure or CAPEX – a business model that many enterprises are now refuting in the name of OPEX – experiences a heavy decrease.

 

shutterstock_394279114.jpg

 

CAPEX – WHAT IS IT?

CAPEX expenditures often induce future benefits. Purchases like new factory equipment or machinery, or even buildings to house it all are all examples of capital expenditure. The transaction occurs now, but while the machinery is likely to increase production and efficiency over time, the company isn’t likely to witness immediate financial change.

 

CAPEX doesn’t just refer to monetary investments. It also means improving or adding to a company’s current assets. For example, if a manufacturer decides to invest in IIoT technology or the necessary data scientists to train employees, CAPEX is the relevant business model. Another example might include fitting equipment with sensors, so machinery can communicate and shed light on what problems require attention. It would be wrong to suggest that CAPEX hasn’t served its purpose. As one sees, the model does present clear advantages to business owners, but as times change, business models change, and OPEX is offering a future that managers and executives find too promising to pass up.

 

HOW OPEX IS TAKING OVER

OPEX refers to operating expenditures – the costs of a company’s day-to-day operations. This can include anything from a worker’s daily wages to electrical costs. In an IIoT-based setting, these costs might include data scientists’ salaries, employee training, or maintaining sensor functionality. There are no serious, future benefits to be had; money is simply being spent to keep things running.

 

Now, you might be asking yourself, “What could possibly be so beneficial about such a model?” At first glance, there is little to be gained. It seems like companies are just spending money. A business can even incur debt over time should its OPEX become relatively high. But where OPEX benefits a company is in how the category’s expenses are accounted for. While CAPEX may earn a company larger tax refunds at the end of each year, OPEX works to keep a business’ taxes low year-round. Typically, when a company recognizes an immediate expense, it is placed in the OPEX category, thus lowering funds owed for the tax year and granting the company instant savings, whereas much like the “future benefits” it offers, CAPEX calls for time before any money can be saved.

 

CONCLUSION

Given a company’s desire and willingness to stay on top, changes are constantly required. How a business functions, grows and produces a product will need to change if an enterprise wants to remain open, but it’s these changes precisely that pave the way for efficiency, improvements, and above all, learning, so that companies can stay strong and remain true to their customers.

 

Our Edge Device Management System makes managing Assets easier than ever!