Operational and Strategic Finance

Capital vs. Operating Expenditures (CapEx vs. OpEx)

Companies incur two main types of expenses. Capital Expenditures (CapEx) are large, one-time purchases of long-term assets (e.g. a new factory, machinery) that will provide benefits for many years. CapEx is recorded as assets on the balance sheet and depreciated over time (spreading its cost). In contrast, Operating Expenses (OpEx) are day-to-day costs of running the business, such as rent, utilities, salaries, and supplies. OpEx is expensed immediately in the period. For example, buying a computer for $1,000 is a CapEx (an asset), while paying $100/month for office internet is an OpEx. Leasing or renting equipment shifts costs to OpEx (regular lease payments) instead of CapEx. Generally, CapEx appears on the balance sheet and cash flow from investing, while OpEx appears on the income statement.

Amortization and Depreciation

When a company buys a long-term asset, it cannot expense the full cost immediately. Depreciation spreads the cost of a tangible asset (like equipment or a vehicle) over its useful life, reducing its book value gradually. Amortization is similar, but applies to intangible assets (like patents, software, or licenses). Amortization systematically lowers the book value of an intangible asset over time. For example, if a company purchases a software license for $10,000 that will be used for 5 years, it might amortize $2,000 each year. This way the expense is matched to the period the asset helps generate revenue. Depreciation/amortization appear as non-cash expenses on the income statement, reducing reported profit without using cash in that period.

Leasing vs. Renting

Leasing and renting are alternatives to owning assets. Renting is typically short-term (e.g. renting a camera for a week) and is treated entirely as OpEx. Leasing is a longer-term agreement (like a car lease for 3 years); it may be structured as an OpEx (operating lease) or treated like borrowing to finance an asset (capital lease). In practice, leasing spreads out payments without large upfront cost. For example, a company might lease a copier and pay monthly fees (OpEx), whereas buying it outright would be CapEx.

EBITDA

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company’s underlying operating profitability. To compute EBITDA, start with net income and add back interest, taxes, depreciation, and amortization expenses. For example, if a company has $20,000 net income, $5,000 interest, $5,000 taxes, and $10,000 total depreciation & amortization, its EBITDA is $40,000. EBITDA is useful for comparing companies’ operating performance since it removes non-cash costs and financing effects. However, note that critics say it ignores real costs like asset depreciation.