Accounting
What Is CapEx vs OpEx?
CapEx is spending on assets with a useful life beyond one year: warehouse fit-outs, internally developed software, equipment. OpEx is everything that hits the P&L in the period you spend it. The split matters because CapEx is excluded from EBITDA, creates depreciation that reduces future taxes, and flows through the cash flow statement differently.
CapEx (Capital Expenditures) is investment in long-lived assets that benefit future periods. OpEx (Operating Expenses) is the cost of running the business in the current period. The split determines how costs flow through EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), taxes, and cash flow.
The split
- CapEx: warehouse buildouts, equipment, internally-developed software, leasehold improvements, capitalizable R&D. Sits on the balance sheet as an asset, depreciates over useful life.
- OpEx: salaries, rent (under most lease accounting), software subscriptions (SaaS), marketing, professional services. Hits the current-period P&L.
Example
A DTC brand spends $1.4M on a warehouse buildout (CapEx) and $400K on software subscriptions and SaaS tools (OpEx). The $1.4M is capitalized, depreciated over 7 years at ~$200K/year hitting D&A. The $400K hits OpEx fully this year. EBITDA: only $400K reduces it. FCF: the full $1.8M reduces it (capex is in the FCF formula).
The capitalization threshold
- Most brands: $2,500$5,000 threshold (items above this with useful life > 1 year are capitalized)
- Software dev: capitalize from application-development stage forward, expense planning + maintenance
- Leasehold improvements: capitalize and depreciate over the shorter of useful life or lease term
The most common mistake
Treating CapEx and OpEx as economically identical. They're not, CapEx pushes cost into the future via depreciation, OpEx hits now. The same business activity classified differently shifts EBITDA materially. Sophisticated buyers normalize at diligence; treat it that way internally too.
Frequently Asked Questions
why is the CapEx/OpEx split important?
It changes EBITDA, taxes, and cash flow. Aggressive capitalization flatters EBITDA without changing FCF.
when can software development be capitalized?
From application-development stage forward. Planning + maintenance are OpEx.
why do public companies prefer to capitalize aggressively?
It raises reported EBITDA. FCF is unchanged.
Related Terms
- What is capitalize vs expense?
- What is SG&A?
- What is depreciation?
- What is amortization vs depreciation?
- What is EBITDA margin?
- What is FCF margin?
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