OPEX

What it means

OPEX, short for operating expenditure, means the costs of running the business day to day. It includes wages and contributions, rent, energy, services, marketing, travel, maintenance and software subscriptions. What they have in common is that they create no long-term asset but are consumed in the period in which they arise and reduce profit in full.

The opposite is CAPEX, capital expenditure on acquiring long-term assets such as machines, buildings or long-lived software licences. CAPEX does not reach costs all at once but gradually through depreciation. The line between the two is set by accounting rules, for example when distinguishing a repair from a technical improvement.

The mix of OPEX and CAPEX affects financial ratios. Because EBITDA is calculated before depreciation, high CAPEX does not burden it, while every euro of OPEX reduces it. When comparing companies or assessing management performance, you therefore need to know how a company structures its spending.

How it works in practice

A typical decision is buy or rent. If a company buys a server, that is CAPEX and depreciation. If it instead subscribes to a cloud service or SaaS, it incurs OPEX. It is similar with an operating lease of cars or equipment. Moving to OPEX saves cash at the start but can be more expensive in the long run.

In budgeting, OPEX is usually planned by month and cost centre and tracked as a share of revenue. Part of OPEX is fixed costs that do not change with output, and part is variable. When looking for savings it pays to start with items that grow faster than revenue.

Under IFRS 16 most leases are shown by the lessee as a right-of-use asset and a liability, so rent moves out of OPEX into depreciation and interest. Slovak accounting rules do not apply this approach to operating leases. When comparing with foreign companies this can shift EBITDA considerably.

What to watch out for

Beware of deliberately shifting spending between OPEX and CAPEX. Capitalising costs that are really routine repairs improves profit and EBITDA, but it breaches accounting rules and will come out in an audit or tax inspection. Equally, expensing a technical improvement to reduce tax is not correct.

Software subscriptions are an inconspicuous source of OPEX growth. Licences renew automatically, user numbers grow and unused accounts are not closed. We recommend going through the list of all subscriptions once a year, checking how they are used and cancelling those the company does not need.