Blog · Finance metrics and formulas
Operating expenses are charged to profit in the period; capital expenditure buys long-lived assets that go on the balance sheet and are depreciated. This page compares the two in one table, gives examples, the test that decides, and works a buy-or-subscribe decision through EBITDA, operating profit and cash over five years.
OPEX vs CAPEX is a question of timing. Operating expenses are the costs of running the business this period, charged to profit as they are incurred. Capital expenditure buys or improves an asset that will serve for more than a year, so it goes on the balance sheet and reaches profit gradually, as depreciation. A $36,000 annual service and a $150,000 machine can do the same job and show up in completely different lines.
| OPEX | CAPEX | |
|---|---|---|
| What it is | Day-to-day cost of running the business | Purchase or improvement of a long-lived asset |
| Where it is recorded | Income statement, in the period | Balance sheet, as property, plant and equipment or an intangible asset |
| Effect on profit | Full amount reduces EBITDA and operating profit now | Depreciation or amortization over the useful life, below EBITDA |
| Effect on cash | Paid as incurred, in operating cash flow | Paid up front, in investing cash flow |
| Examples | Salaries, rent, cloud subscriptions, marketing, repairs | Machinery, vehicles, buildings, capitalized software, major upgrades |
Operating expenses: salaries and benefits, office rent under an operating lease, cloud and software subscriptions, utilities, marketing, travel, insurance, and repairs and maintenance that keep an asset working as it was.
Capital expenditure: production machinery, delivery vehicles, buildings and land, warehouse racking, servers the company owns, internal-use software in its development stage, and upgrades that extend an asset's life or add capacity, such as a new roof or a second production line.
Three questions, in order.
Tax and book treatment often differ. This page is about management reporting: the book numbers in the P&L and the budget.
A company earns EBITDA of $900,000 a year before this decision. It needs one piece of equipment for five years.
Straight-line depreciation = (Cost − Residual value) / Useful life in years
In Excel, the SLN function does it:
=SLN(150000,0,5)
which returns 30,000.
Year one, in USD:
| Line | Route 1: CAPEX | Route 2: OPEX |
|---|---|---|
| EBITDA | 900,000 | 864,000 |
| Depreciation | 30,000 | 0 |
| Operating profit | 870,000 | 864,000 |
| Cash out for the equipment | 150,000 | 36,000 |
Cumulative cash out, by year:
| Year | Route 1: CAPEX (USD) | Route 2: OPEX (USD) |
|---|---|---|
| 1 | 150,000 | 36,000 |
| 2 | 150,000 | 72,000 |
| 3 | 150,000 | 108,000 |
| 4 | 150,000 | 144,000 |
| 5 | 150,000 | 180,000 |
The check: over five years each route charges its full cost to the P&L. Route 1 charges 5 × 30,000 = $150,000 of depreciation, equal to the purchase price; Route 2 charges 5 × 36,000 = $180,000 of operating expense, equal to its cash. Expense and cash agree in total; only the timing differs.
Route 1 shows EBITDA $36,000 a year higher, because depreciation sits below EBITDA. It shows operating profit only $6,000 a year higher (870,000 against 864,000), the gap between the service fee and the depreciation. And it costs $114,000 more cash in year one (150,000 against 36,000), which Route 2 only catches up with in year five.
Free cash flow = Operating cash flow − CAPEX
That is why a capital-heavy plan can look strong on EBITDA and weak on free cash flow. Read EBITDA beside the cash it takes to keep the assets running; EBITDA margin shows how much the depreciation add-back changes the picture by industry.
Software and cloud. Internal-use software can be capitalized under ASC 350-40 once it reaches the development stage. A cloud subscription is OPEX, but under US GAAP (ASU 2018-15) qualifying implementation costs are capitalized and expensed over the hosting term. IFRS reporters usually expense configuration and customization costs as the work is done, following the IFRS Interpretations Committee's 2021 agenda decision.
Repairs vs improvements. Restoring a machine to working order is OPEX. Replacing a major component that extends its life is CAPEX. The line is a judgment, so write the policy down.
Leases. Under ASC 842 a lease over twelve months puts a right-of-use asset and a lease liability on the balance sheet. An operating lease still shows one straight-line cost inside operating expenses; a finance lease shows depreciation and interest instead. Under IFRS 16 almost every lease is treated that second way.
If the general ledger, the asset register and the purchase orders disagree on what is capital, fix that before reading any cost variance. The same discipline applies to cost to serve per customer, which traces operating costs to the customers that cause them.
Most cost variances that look alarming are timing or classification: a capital purchase coded to an expense line, or a lease that moved. Covirage joins the ledger, budget and purchase-order exports, and its tools build the cost bridge by driver while keeping capital and operating spend apart; the external AI model writes the commentary from those computed lines and never does the arithmetic. See cost and variance analysis, and FP&A software alternatives for variance analysis for how other tools handle it. To plan both kinds of spending, see capital vs operating budget; for the profit line that depreciation sits above and below, see EBITDA vs operating income; and for how costs behave as volume changes, see fixed vs variable costs.
It depends. Software the company buys outright or builds for internal use can be capitalized under ASC 350-40 once development starts. Cloud subscriptions are operating expenses, and under US GAAP qualifying implementation costs are capitalized and expensed over the subscription term.
Rent is an operating expense in the P&L. Under US GAAP (ASC 842) a lease over twelve months also puts a right-of-use asset and a lease liability on the balance sheet, but an operating lease keeps a single straight-line cost in operating expenses. IFRS 16 splits it into depreciation and interest.
Not directly. The purchase goes to the balance sheet and depreciation is added back in EBITDA, so CAPEX does not reduce it. It reduces cash immediately and operating profit gradually through depreciation.
A company policy amount below which items that would qualify as assets are expensed anyway, because tracking them is not worth the effort. It must be applied consistently. For US tax, the IRS de minimis safe harbor lets a business expense items up to 2,500 dollars each, or 5,000 dollars with audited financial statements.