Defining Business Terms with Business Acumen
Utilizing business acumen helps you to understand these business metrics.
CAPEX and OPEX may sound similar but are most definitely different. We want to clarify the differences so you’re able to make smarter business acumen decisions within your company. First, what does each mean? When you hear CAPEX, your executives are talking about capital expenditures. When you hear OPEX, your executives are speaking about operating expenditures.
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How does a company spend its money?
In business, you've got all sorts of ways in which you spend money. Capital expenditures and operating expenditures are how you are spending that money. Operating expenses refer to your day-to-day expenses such as labor and utility costs and can sometimes be referred to as period costs.
Capital expenditures are when you invest your cash into long-term investments. These would be items like buildings, equipment, vehicles, and even intangible assets such as software and patents. Anything you invest in that will be used for longer than a year is going to end up being capitalized. When a company determines how they're going to spend their money, they have their period cost. Those are the budgets that they set up every single year for their operating groups.
How does business acumen help you?
Operating expense is the easiest to find. You're going to see it on the income statement. To find it, you first must calculate all your period costs (revenue minus labor, operating, cost of goods sold, overhead costs, and selling expense) which are found on the income statement.
Capital expenditures are where we're going to take our extra money and invest it to grow and expand our business. Capital expenditures are on the balance sheet. If your company builds a new building, that will appear on the balance sheet as an asset. Over time assets actually depreciate in value which shows up on the income statement — what they call depreciation and amortization. Predominately, when you think of capital projects or capital investments, start on the balance sheet.
How Timing Differentiates Capex and Opex:
The difference between capital expenditures and operating expenditures is timing. Any purchases or investments you make that are greater than a year period of time are going to be capitalized. Anything less than a year period of time — or what we call your period cost stuff like labor, overhead expenses, utilities, etc. — are going to be your short-term expenses. That's going to be your operating expenses.
In business, you need to know where you're spending your dollars. Basically, as you look at CAPEX versus OPEX there are two different types of budgets or two different allocations of dollars that you’ve got to be tracking towards. There are capital budgets or operating budgets. You'll be asked, "are you going to expense this as an operating expense or a CAPEX?" Understanding how you should allocate those dollars or those expenses and record them so it gets the information that our executives want is vitally important in any business.
How can you set yourself apart?
The more you understand the difference between capital budgets or capital expenditures being long-term investments versus your day-to-day expenses, and make sure you're allocating them well, the more you'll be set apart as a manager within the organization. You'll be seen as someone who truly understands what we're trying to do as a business and how to expense those dollars.
Defining Asset Strength and Asset Utilization:
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