CapEx versus OpEx: What’s the Best Way to Fund Your Software Purchase?

January 20, 2021

Software Purchase CapEx vs. OpEx

The sheer number of EHSQ software solutions in the market can make the software buying journey very complex. In addition, getting buy-in from internal stakeholders can be equally as challenging. With the introduction of cloud-based or software as a service (SaaS) options, where the licensing component is considered an operational expense, comes an additional consideration: whether to view the expense as a capital expenditure (CapEx) or an operating expenditure (OpEx).

Purchasing EHSQ software–and this is true of most large procurement projects– requires a lot of research and preliminary work to ensure that you are making the best long-term decision. Not only can the process be long and arduous, there are also many factors to consider and many scenarios to examine. In fact, when it comes to deciding which software solutions to select, technology and technological capability are merely one aspect of the final decision. As such, one of the most important considerations is budget and the payment structure (i.e. how your organization will pay for the new software).

This is most true when it comes to today’s software landscape. Cloud and SaaS-based software solutions have created new purchase options that go beyond owned or perpetual software licensing, which ultimately give potential buyers new financing models to consider.

It can’t be assumed that all decision makers have a strong understanding of key accounting practices to apply when it comes to making large software purchases. In particular, the fundamental differences of allocating EHSQ software as an operational expense or a capital one. What is critical during the approval process is to present the total long-term benefits and the potential financial implications in extensive detail.

CapEx vs. OpEx Expenses

Here are the key differences between capital expenditures and operating expenditures:

  • Capital expenditures cover any major investments in goods which are reflected on an organization’s balance sheet. Assets that are used in the long-term, such as property, infrastructure or equipment (including owned software licenses) are considered to be capital expenditures. From an accounting perspective, these must be depreciated over the life of the asset to reflect its current value on the balance sheet and is typically calculated over a period of three to ten years.
  • Operating expenditures are reflected on a completely different set of accounting reports, specifically, those that show your organization’s profits and losses. The reason for this is that operating expenses are incurred on an ongoing basis. This is commonly referred to as the cost of doing business.

Shifting capital expenses to operating expenses can be a clever way for organizations to stretch their budgets–at least from an accounting standpoint. This accounting flexibility is now an option for software purchases, with the introduction of SaaS-based tools.

The table below summarizes the key differences between both options:

Capital Expenditure (CapEx)Operating Expenditure (OpEx)
DefinitionAssets that purchased with a useful life beyond the current yearThe ongoing costs of doing business
How it is PaidThe total amount is paid upfrontMonthly or annually recurring fees
The Duration of Time it is Paid OverOver a three to ten lifespan (as the asset depreciates)In the current month or year
The Software is Listed AsProperty or equipmentAn operating cost
Tax TreatmentDeducted over time as the asset depreciates in valueDeducted in the current tax year

The Benefits of Allocating Software Purchases as OpEx Expenses

What also plays a key role are the rapid changes in technology. While new hardware runs faster, uses less energy and provides more cores every year, SaaS platforms often have rapid upgrade cycles with a constant flow of improvements. What this means is that it might not be wise to make large investments in technological solutions as they may become outdated or obsolete in a matter of a few years.

Moving software purchases to the OpEx expense category is one of the many advantages that cloud solutions has brought to many organizations as it helps them essentially do more with less. In the end, it’s a win-win for all parties concerned.

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