Before the advent of cloud services, companies generally had to either purchase their IT infrastructure assets – a capital expenditure (CapEx), or lease them – an operational expense (OpEx). However, with the adoption of Infrastructure as a Service (IaaS) and Software as a Service (SaaS) models, organizations have been able to shift more of their IT spending towards operational expenses (OpEx). In this blog, we’re going to take a look at why OpEx holds the advantage over CapEx when it comes to IT budgeting.
But first, let’s get a basic understanding of the differences between CapEx and OpEx since this is essential for anyone involved in financial decision making. CapEx and OpEx are treated very differently as far as accounting and taxation for the business are concerned.
What Does CapEx Mean?
CapEx, or capital expenditure, refers to one-time upfront costs incurred for assets that will be used in the future. A capital purchase shows up in the company balance sheet and depreciates in value over its lifetime. The business expects to derive value from the asset for a period of time longer than a single tax year.
Since the upfront cost could be substantial, budgeting for CapEx involves setting some money aside for these types of purchases. It usually also means that a more stringent