To invest or not – is a dilemma that most start-ups face. Here’s how new small business entrepreneurs can make a conscious choice between Capex and Opex. Establishing a small business involves large financial outflows on assets, inventory, wages, maintenance, recruitment and so on.
This outflow of funds can be categorized as Capex (Capital Expenditure) or Opex (Operational Expenditure), based on its nature and benefit. Capex is normally looked at as an investment that happens when you spend money on fixed assets or to add to the value of an existing asset.
On the other hand, the expenditure required for the day-to-day functioning of your business or and even short-term investments falls under the Opex category. However, choosing between Capex or Opex can sometimes be challenging, because there are some grey areas that exist between the two.
Here are some key questions that new entrepreneurs need to ask themselves before dipping into the enterprise’s treasury –
1. Are there long term benefits?
Consider if a Capex directly affects the long-term productivity of your business. If a Capex can increase the overall effectiveness and efficiency of your organization, then go ahead and think beyond just the current financial aspect. The long-term value addition should justify the investment. In addition, if an asset is required forms the core of your business, then you are better off investing. For instance, if your small business produces a product, then investment in the required machinery will be a Capex. You may want to rent out some of the furniture used since the asset does not form the core of your operations.
2. Are there chances of the asset becoming obsolete within just a few years?
When it comes to gadgets and gizmos, you might be better off renting rather than buying. Probably the only time buying makes sense, is when an electronic device serves multiple purposes, in spite of the rate of depreciation. The best example would be investing in an all in one printer, scanner, copier, rather than investing in three separate assets. In such a case, even when the device becomes obsolete five years down the line, your organization at least had multiple advantages while using it.
3. Can the asset’s life be extended by updating or with some extra investment?
If you make an investment today, ask yourself if the life of the asset or its utility be extended? If you invest in a software or a cloud-based app, does it facilitate aspects such as upgrades and portability?
4. Does it make sense to rent/ lease an asset instead of buying?
For instance, instead of investing in a small office space, you might be better of leasing it out. An investment in a bigger office space as your business grows would make better sense. That said, if you still want your own small office consider factors such as resale value and whether there are chances for expansion.
Here are some general guidelines to consider when it comes to making a choice between Opex and Capex:
• Opex gives you the power to predict and maximize free cash flows into the system, adding some much-needed liquidity to your business.
• Though Opex has its merits, it comes at a cost. If you look at the total operation costs (sans ownership), Opex can sometimes be much more expensive than Capex.
• With Capex you have the liberty to make changes to your assets based on the requirement, but, at the same time, it also creates a certain amount of rigidity in the terms of investments already made.