Operating expenses are usually ongoing costs incurred for daily operations that keep the business running like employee pay and marketing costs. Capital expenses, on the other hand, are typically one-time costs of purchasing fixed assets and making long-term investments like buying a building, upgrading technology, or purchasing patents, to name a few examples. Let’s explore the key differences between operating expenses and capital expenses so you can learn how they play a role in your business planning. As you’ll see, determining which expenses are operating expenses and which are capital expenses is not always clear cut.
What Are Capital Expenses?
A capital expenditure (CapEx) occurs when a company spends money, utilizes collateral, or incurs debt to purchase a new asset or enhance value to an existing one. These are often one-time expenses. Examples of CapEx include:
Purchasing office space or machineryMajor upgrades to existing facilitiesFiling patentsBuying company vehicles
What Are Operating Expenses?
An operating expenditure (OpEx) is a daily cost required to keep the business operational. Typically, these are recurring, short-term expenses. Examples of operating expenses include:
Employee wagesRentInsuranceSuppliesLegal feesMinor repairsTaxesTravelUtilitiesMarketing costs
CapEx vs. OpEx: Key Differences
Capital expenses and operating expenses have significant differences in terms of how they are applied to taxes and how they are accounted for in a budget. Companies also may have different processes for how each type of expense is approved. Here are some of the key differences between capital expense and operating expenses. On the other hand, operating expenses can be deducted from the company’s taxes the same year they were incurred.
Budgeting
Most capital expenses require an upfront payment and are considered long-term investments. This means you may have to budget for CapEx well in advance or consider taking a loan. However, since operating expenses are typically less expensive and short term, operating expenses may not require as much advanced planning as capital expenses, and you generally won’t need loans for them.
Approval Process
Since capital expenditures are a relatively expensive cost toward a long-term investment, they typically require higher-level approvals. The approval process can take time and delay the purchases. On the other hand, regular operating expenses are typically pre-approved in a budget, so they don’t require repeated approvals. Once approved, the bills for operating expenses are paid regularly, sometimes through an automated process.
How Both Expenses Matter to Your Business
A business’s success depends on managing and monitoring both capital expenses and operating expenses. Knowing how much your business is spending and the rate of return you’re getting on that investment gives insight into how you can invest better, save more, multiply profits and find more growth opportunities. “Companies can use CapEx to maintain their plant, property, and equipment and identify methods to improve them, whether by enhancing them or purchasing new ones,” Lyle Solomon, an attorney with Oak View Law Group in Auburn, Calif., told The Balance in an email. “OpEx can be used to find cost-cutting measures and identify opportunities for increased efficiency.”
The Bottom Line
Capital expenses are long-term investments you make to improve your company while operating expenses are costs you incur to keep your business operational. CapEx includes major expenses like patents and buying office space while OpEx includes recurring expenses like staff salaries and machine upkeep. Both these types of expenses are important to keep a business functional and growing.
