Lingo Explained : Capex vs Opex

When dealing with the financial management of a business, the accountancy terms “Capex” and “Opex” will frequently turn up… Yet what do they mean? Let’s start off with the basic definitions ;

Capex

Capital expenditures are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing asset with a useful life that extends beyond the tax year.

Opex

OpEx (Operational expenditure) refers to expenses incurred in the course of ordinary business, such as sales, general and administrative expenses (and excluding cost of goods sold – or COGS, taxes, depreciation and interest).

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Still a bit fuzzy? How are they treated from an accounting perspective ;

Capex

Cannot be fully deducted in the period when they were incurred. Tangible assets are depreciated and intangible assets are amortized over time.

Opex

Operating expenses are fully deducted in the accounting period during which they were incurred

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Still a bit fuzzy? Let’s do some examples… ;

Capex

  • Buying a laser printer
  • Buying machinery and other equipment, acquiring intellectual property assets like patents

Opex

  • Buying paper and tones for a laser printer
  • Wages, maintenance and repair of machinery, utilities, rent, SG&A expenses

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So which one is preferred?

From an income tax perspectives, businesses typically prefer OpEx to CapEx. For example, rather than buy laptops and computers outright for $800 apiece, a business may prefer to lease it from a vendor for $300 apiece for 3 years. This is because buying equipment is a capital expense. So even though the company pays $800 upfront for the equipment, it can only deduct about $250 as an expense in that year.

On the other hand, the entire amount of $300 paid to the vendor for leasing is operating expense because it was incurred as part of the day-to-day business operations. The company can, therefore, rightfully deduct the cash it spent that year.

The advantage of being able to deduct expenses is that it reduces income tax, which is levied on net income. Another advantage is the time value of money i.e. if your cost of capital is 5% then saving $100 in taxes this year is better than saving $104 in taxes next year.

However, tax may not be the only consideration. If a public company wants to boost its earnings and book value, it may opt to make a capital expense and only deduct a small portion of it as an expense. This will result in a higher value of assets on its balance sheet as well as a higher net income that it can report to investors.

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Yet be wary… Where a CFO might be sensitive towards Capex, the common pitfall is to ignore the TCO of a given investment. Some investments will have a low Capex profile, yet their Opex cost will drive the TCO upwards, where it might have been better to go for the investment with a higher Capex profile…

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So what do you have to keep in mind? Your CFO will be sensitive to,Capex, yet be wary to achieve to most optimal TCO.

Major source for the above ; http://www.diffen.com/difference/Capex_vs_Opex

IT Budget : Run, Grow & Transform

One method of coping with your IT budget is by working with the “Run, Grow & Transform – Your business”-model. In essence is sets you to categorize your budget into three areas.

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Run covers the general day to day expenses of keeping the IT infrastructure running. Actually, this is your “SIB” (“Stay In Business”). Think in terms of lifecycle management and the human resource costs to maintain your environment.

Grow covers the expenses for expansion of services or growth of the company. Things like extending your virtualization or storage farm probably fall under this category. This budget aims to help the organization introduce new capabilities or improve existing ones.

And Transform covers the costs are made to change your nature. Here you should think of things like implementing a shopfloor system when coming from a paper workflow within an industry. These initiatives might seek to identify, for example, the right technologies for new organizational capabilities; fundamental changes to business processes; or a new product or service offering.

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When managing a budget in this manner, you should be able to gather tour full “Run” budget and a part of the “Grow” budget. If you fail to do so, then you have lost the confidence of your board. This part of the budget is in reality the minimal level you need to stay on par. A lower level will force you to start phasing out services from your service catalog!

Organizations that have to trim IT budgets should avoid cutting Run initiatives. Such cuts would introduce operational risk. If an organization already is going through a tough stretch, the last thing it needs is a server, application or network failure. This really is your “Stay in Business” IT budget.

Grow budget items should tie directly to the organization’s strategic initiatives. These initiatives usually are not as mission critical as Run initiatives and often have some time flexibility, which means that they are good candidates for starting early when additional cash is available, or for deferral if cash is tight.

When finances are tight, transform initiatives often are the first to be cut or deferred—unless they are associated with key strategic initiatives that the organization views as essential to its continued operation. Even if the organization doesn’t deem certain Transform initiatives immediately essential, care should be taken when considering cutting or deferring them. That’s because Transform initiatives often are key to the organization’s long-term health. Failure to provide adequate resources to Transform initiatives can stunt an organization’s future success.

RTO, RPO, … What the O?

Ever heard about the terms RTO (Restore Time Objective> and RPO (Recovery Point Objective)?

To explain it, let us take a look at this mockup…

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In the middle, the crash indicates the time disaster struck. When we go back to the latest point we took our backup off-site (in regards to the affected crash site), where this point should be less than the maximum tolerable period in which data might be lost from an IT service due to a major incident. So the arrow towards the left indicates the RPO. Be aware that storing these backups on the same risk site does not fulfil your RPO!

The arrow to the left indicates the time needed to restore the service. Be aware that this is from a non-technical / business perspective. So merely starting up the system is not enough. Users of the service need to be able to use it again!

In terms of costs, be aware that strict objectives will imply more expensive solutions. The closer you want the objectives towards your crash zone, the more expensive it will become. An RPO of 7 days will still allow tape backups to be taken offsite once a week, where 1 day will still allow a nightly replication, yet where shorten time constraints implies near online replication.

Why do we need “IT”?

In today’s world we cannot imagine our day to day lives without technology. This reaches from our personal to our professional experienxce. At a given point, I posed myself the question ;

“What business benefit does IT bring to the table?”

We have sales that makes sure prospects become customers and make sure that they stay wit us. Production creates the product, supply chain optimizes the processes between vendors, … and so on.

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After pondering about it, I came to the conclusion that there are two benefits ;

Acceleration
Some call it “Time to market”, others say “Speed of exection”, … But feel free to name it any way you want. In essence the ability to change quickly is where IT needs to prevail. If IT becomes a bottleneck for the organization, the it has lost its main function. And here we see one of the basic aspects why some IT departements are losing the fight for budget. If you are a bottleneck for the company, why should it invest in “you”?

Scalabiliy
IT prevails in automation and automation wins when an economy of scale is at hand. When a company is expanding their operations, then IT will be there to make sure that the costs do not grow exponentially. That is why IT is more native to enterprises and still a bit akward to small business owners.

Insight on “Gartner 2013 : Top 10 Strategic Technology Trends”

Source : Gartner Identifies the Top 10 Strategic Technology Trends for 2013

Gartner released their Top 10 Strategic Technology Trends of 2013. Here’s my insight on the relation / impact towards the Benelux market.

Mobile Device Battles
This battle will continue! Where it used to be Apple versus Google… We now see Microsoft coming up with a competitive offering. Here my opinion is that the true battle for the Benelux enterprise market lies between Apple and Microsoft.

Mobile Applications and HTML5
When one takes a look at the “App Stores”, “App Markets”, etc… You’ll notice that most “apps” are mostly frameworks to connect to back-end web services. This way the providers can reuse a lot of their logic for different clients. So I totally follow the vision of Gartner that web interfaces with a low technology impact on the client will be the way of the future.

Personal Cloud
Not sure about this one… People are still very reluctant to bearing costs. Yet the cloud needs to get financed. So where the need is there, I don’t think the wallet will follow.

Enterprise App Stores
Before we get here… I would hope that companies get thinking about a service catalog. That way they would not blindly follow technology, and get things aligned between IT and business.

The Internet of Things
Everything connected! Every device is getting some kind of connectivity towards the network. So I totally follow this vision from Gartner.

Hybrid IT and Cloud Computing
Next year (2013) will be a very harsh year for a lot of companies within the Benelux. Many vendors are repeating (and repeating) the “Cloud”-mantra to a lot of customers/prospects. Time and time again they say that “THE cloud” will reduce the costs of the IT organization. Yet the reality is far from it! Cloud service have a lot of benefits, yet reducing costs is mostly not one of them. Adding functionality is more the thing, yet reducing costs can only be done by reducing services/functionality. In my honest opinion, the only way organizations can reduce costs it to identify (and catalog!) their services. This list can become an argumentation internally in order to justify the IT costs and become a possible starting point to discussed (un)needed services.

Strategic Big Data
I think this is valid for the “Fortune 500”, yet the Benelux market is far too small for this. Some niche players may have a specific need for this (telecom, banking, … marketing agencies), yet most industry / service companies can surely do without.

Actionable Analytics
Analytics is the way to go if you want to optimize your business! Whether it’s an internal department looking to optimize its costs, or the general business looking to go “lean & mean”… How can one optimize, if one does not know how things are running? You cannot compare things without having a monitoring system.

In Memory Computing
This sounds too much like the “noSQL”-movement from last year. Whilst it sounds very nice, most Belgian companies are way too traditional for such technologies. This is mostly due to the fact that no transactional state can be guaranteed…

Integrated Ecosystems
Many companies are noticing that the cloud solutions they have engaged in are islands on their own. Identity management and federation services will move towards this need… Such systems will be able to integrate several islands into one logical system for the user. This as the 5+ passwords to remember are getting a bit too much.

African Proverb about Life

Every morning in Africa, a gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a lion wakes up. It knows it must outrun the slowest gazelle or it will starve to death. It doesn’t matter whether you are a lion or a gazelle. When the sun comes up, you better start running.

No is an answer too!

“Yes” in an answer. “No” is an answer too. Even ” I don’t know” is an answer.

To not respond at all is the worst response ever… It’s plain rude & ignorant! How many times I’ve seen this in business scenarios.

“Let’s just play ostrich and let it all blow by. It’s not my problem!”

Startup Lessons from Hubspot

Source : Startup Culture Lessons From Mad Men

Interesting post, yet some things don’t work out in environments which require attendance (conform low attendance helpdesk) :

Vacation Policy = No Policy : Nice one, where I would only add one exception “until minimum attendance is reached.

“We don’t care which 80 hours you work” : Agree completely! An happy employee will work more. A time registration system will only do the opposite of which should be the objective of the system.

Extreme Transparency : This gets rid of all the rumour flows and so on which paralyse the performance of any organization.

Seat rotation : Sounds like a cool concept. In (even not so) big coorporations, one may find that (s)he only knows their “cubicle”.

HubSpot Fellows : A coaching concept which is needed in ALL companies. Don’t hire people, push them in the pool and say it’s a good guy/girl if (s)he doesn’t drown.

All other points : … focus on the social side of the human being. Where creativity is needed (and trust me, you need it to let your company grow!), you need a social environment where people feel comfortable, appreciated/respected & nourished.