Blog header with Apex and Opex text with Phandy

31st May 2023

Transitioning from Capex to Opex: Understanding the Why and How

Carissa Parnell

In an economy that can sometimes be turbulent, it is the responsibility of business managers and CFOs to oversee cash and carefully manage the cash flow of the business to establish a resilient model.

Among the various strategies available to decision-makers to achieve this model, transitioning certain Capital Expenditures (Capex) to Operational Expenditures (Opex) is undoubtedly one of the most effective. This approach reduces pressure on cash, limits opportunity costs, and fosters stronger growth. The benefits of this practice are numerous. Discover why and how to make the switch from Capex to Opex in your company! Before delving into the detailed explanation of why transitioning from Capex to Opex can be beneficial for your company’s economic functioning, let’s first review some basics.

Capex

Capex, or Capital Expenditures, refers to expenses aimed at improving the long-term income of a business. These expenses typically involve acquiring new machinery, vehicles, buildings, furniture, computer equipment, and more. They are generally substantial expenses for a company, which can strain cash flow while waiting for the results to materialize.

Opex

Opex, on the other hand, stands for Operational Expenditures, which encompass the day-to-day operating costs of a company. This includes controllable Opex, such as payroll, raw materials, subcontractors, and tools, where the manager can influence and manage these expenses. Additionally, there are non-controllable Opex, which are expenses that cannot be easily altered.Blog image showcasing phandy holding phone with money icon in it showcasing opex

Why Transition from Capex to Opex?

As mentioned earlier, a company must strive to remain or become sustainable, regardless of its economic model or business plan. This applies whether you are in the first year of a start-up or celebrating the tenth anniversary of a scale-up. To achieve this balance, it can be worthwhile to examine the distribution of Capex and Opex in your company. While some costs cannot be converted, you will discover that certain adjustments can be made, potentially helping you move forward with greater confidence and efficiency.

Preserve Your Cash

Capital expenditures are often significant, and not all of them yield immediate returns within the first year. This can create a dent in your cash flow. Owning a substantial number of vehicles entails financial risks, including maintenance costs, residual value on resale, warranty issues, and more. Choosing to pay for your fleet through monthly leasing fees can help mitigate these risks by placing them in the hands of a trusted third-party specialized in this area.Phandy sitting on a magnifying glass showcasing coin icon

Limit Opportunity Costs and Increase Flexibility

When establishing a business, purchasing furniture, computer equipment, or other assets instantly depletes your cash flow, which is often not unlimited. By spreading out these costs as operational expenses, you can maintain a cushion of financial comfort and seize opportunities that would have otherwise been missed due to financial constraints. In other words, converting Capex to Opex has the potential to accelerate growth and provide the best possible start. In situations where your company undergoes market-related changes or restructuring with new objectives, which is often the case with start-ups, leasing or rental solutions offer greater flexibility. This flexibility is less apparent when you own the assets outright, as it requires dealing with issues such as residual value over a specific period, sales processes, and deadlines.

Improved Predictability

It may seem obvious, but it is worth reiterating having a clear overview of expenses and income significantly facilitates daily business management. Transitioning from Capex to Opex

Contact us