Your Money
As a small business owner, some of your biggest technology costs might include a point of sale (POS) system or a security system to prevent burglary and theft. These items are essential, but they can put you at greater risk of running out of cash before you can turn a profit. It may be time to explore a different way of managing your technology expenses.
CapEx vs. OpEx for IT budgeting: Which is better for your business?
You can approach Information Technology (IT) in two very different ways: as a capital expenditure (CapEx) or an operational expense (OpEx). But what do those terms mean, and why are they critical to the long-term health of your business?
What’s the difference between expenditures and expenses?
Terms like CapEx and OpEx can be a little intimidating, but the differences between them are pretty straightforward — with significant implications for your business.
Capital Expenditures (CapEx)
CapEx refers to one-time costs for fixed assets that you expect to own for at least one year. This type of expense often incurs a large upfront cost that must be depreciated and deducted on an amortized basis over the lifetime of the asset. Examples of CapEx IT assets might include laptops, servers, security cameras and other hardware that you own and maintain.
Operational Expenses (OpEx)
OpEx refers to the funds that support your day-to-day operations. These items generally involve little or no upfront cost, and OpEx purchases made in a single tax year are fully tax-deductible. Examples in IT include consumables (e.g., printer cartridges) and expenses like maintenance agreements, web hosting and pay-as-you-go SaaS or IaaS subscriptions.
The OpEx advantage: A flexible, scalable, predictable approach to IT spending
More and more businesses are moving away from the CapEx IT model, and for good reason. It’s difficult to adjust to changing conditions when you’re saddled with an inflexible piece of hardware. The OpEx model is a far more strategic approach to IT budgeting that enables you to scale your operations on a predictable flat-rate basis.
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Lower Upfront Cost
The more money you spend on CapEx, the less cash flow you’ll have to support day-to-day operations. Opting for OpEx services on a pay-as-you-go basis could free up budgetary dollars to drive revenue-generating projects that boost your bottom line.
Zero Maintenance
Hardware maintenance is more than a headache — it puts you at risk of racking up unexpected expenses. Letting a managed service provider deal with the hassle of maintenance and repair is a no-fuss approach to IT for greater peace of mind.
Easier Forecasting
It’s tough to forecast CapEx requirements. If you buy hardware on a four-year lifecycle, you need to consider what you’ll require years down the road. With an OpEx approach, you can contract for more bandwidth on an as-needed basis.
Tech changes constantly. Why keep investing in it every three years?
Many tech assets (such as computers, phones and digital signage) are deliberately designed to have a very short lifespan. This practice is known as “planned obsolescence.” Assets in this category are often prime candidates for OpEx classification. Other recurring costs like electrical power, Internet access and data transmission can qualify as OpEx items, too.
By outsourcing the management of these items to a managed service provider, you can step off the CapEx treadmill and liberate yourself from a great deal of complexity, responsibility and expense.
Ready to get more value out of your tech spend?
Schedule your Technology Cost Analysis today. We’d love to share strategies, insights and recommendations to help your business grow.
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