When attempting to get funding for new equipment, site redesigns, apps, or new staff, editors sometimes need to think like a CFO. CFOs are always concerned about costs, but the tax ramifications of any expenditure is very important as well. Many, many times, I’ve been asked, “Is this CapEx or OpEx?” It’s a bit tricky, so here’s an explanation from one of my favorite financial friends.
Operating Expense: things that keep the company running
Capital Expense: building things and/or buying things
Buying computers is a capital expense, hiring staff is an operating expense.
Which Do CFOs Like Better?
CFOs usually like operating expenses. In general, operating expenses are deductible, while capital expenses are only partially deductible. (I’ll skip the explanation of depreciating assets that helps explain why.)
If you lease server space, you can deduct the full amount as an operating expense. If you buy the server, it becomes a capital expense and is only partially deductible. Although it doesn’t seem to make financial sense, sometimes a CFO would rather lease a server at $1200 a year than purchase the same server for $1000.
When pitching for new products or additional staff to the CFO, explain how your suggestion will increase revenues, reduce overall costs, and avoid large upfront expenditures.
When is CapEx is Better?
Capital expenditures are always needed to keep a company growing. Developing new products and breaking into new markets often requires new staff, new offices, etc. Healthy capital expenses are a sign of a expanding firm.
How Some Companies Game CapEx/OpEx
Once upon a time, there was an executive team that needed to boost the firm’s earnings by year-end to trigger their bonuses. After failing to find a company they could acquire by December, they decided to make a huge capital expense (a complete site overhaul). This went on the books as both an increase in the overall assets of the firm (because the site was worth more) and a higher net income for the company (because the cost of the redesign would be spread over several years.)
The company’s earnings increased, the stock took a little bump upwards and the execs received their bonuses. Win-win, right? Maybe, but what came next was a huge company-wide attempt to reduce operating costs. In order to justify the expenditure, the organization laid off 25 percent of the staff — including the same people hired to operate the newly launched site.