Operating expenditure

Operating expenditure, operating expenses (OPEX) or manufacturing expenses are the costs that your company incurs while the main product of your business is being produced. OPEX include:

  1. Materials
  2. Labour costs
  3. Machinery
  4. The energy needed to produce the product
  5. Packaging
  6. Shipping materials etc.

For example, a company’s operating expenses for the production of a table would be wood, machinery costs and labour costs. To determine what the operating expenses for your business are, look at what costs will be gone if you shut the production of your product for some time.

Operating expenses can be found on the income statement and make a part of the operating income. With online accounting, you can easily track and analyze your spendings.

Operating expenses VS Overheads expenses
Operating expense ratio
Capital expenses

Operating expenses VS Overheads expenses

While the operating expenses are those which will go away if you stop the production, overheads expenses are those that will stay, like your spendings on the insurance or rent. In other words, operating expenses are needed directly for the production, while overheads can be described as spendings on everything else that ensures your business running.

Operating expenses Overheads expenses
Costs as a result of key business operations (materials, labour, machinery) Costs for running the business (rent, insurance, utilities)
Essential to run the business and can’t be totally avoided Can be reviewed regularly and even totally eliminated, usually in order to increase profitability

Operating expense ratio

Operating expenses ratio or OER helps you to measure how efficient you manage to keep costs low while generating revenues or sales. A lower ratio would usually mean that your company is more efficient, however, analyzing it in comparison with other OER of your company could be more demonstrative. The formula for OER is to divide a company’s operating expenses by its revenues.

The operating expanse ratio is also often applied in real estate businesses when it helps to see how much it costs you to have a property in comparison to how much revenue it generates. In this case, you divide the cost you offer to the tenants by the expenses you have on utilities, its insurance and maintenance.

Capital expenses

Capital expenditure or capital expenses (CAPEX) are purchases that your business makes as an investment. In other words, your company incurs these expenses now —  in order to generate profit in future. These are costs related to acquiring, upgrading and maintaining assets (both tangible and intangible) of your company, like property, equipment, etc. CAPEX is any expense your company capitalizes, it is shown on the balance sheet as an investment. CAPEX include:

  1. Manufacturing plants
  2. Equipment
  3. Machinery
  4. Building improvements
  5. Computers
  6. Vehicles, trucks, etc.

For example, if a sweets company buys a new plant, it will be considered a capital expenditure.

OPEX CAPEX
Day-to-day expenses Long-term expenses
Can be deducted from taxes Cannot be deducted from taxes

Possibility to deduct it from taxes is one of the key differences between OPEX and CAPEX. In terms of income tax, the possibility to deduct OPEX from income tax puts it before CAPEX for businesses. For example, a company will more likely prefer to lease hardware (OPEX) than buying it outright (CAPEX). So, the amount paid for leasing will be seen as expenses incurred as part of the company’s daily business operations and thus it can be deducted while filing income statement and paying income tax. The tax will be reduced because it is levied on net income. OPEX is also seen as more preferable as it makes more available at the present time. However, choosing CAPEX will lead to a higher value fo assets on your company’s balance sheet as well as a higher net income — what will make a favourable image of your company for investors.

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