All businesses have both capital and operational expenses. The operational kind are what it takes to keep the business running day to day. Your utilities are operational expenses. So are your office supplies. So are your salaries and wages.
Capital expenses are your investments for the future. If you go out and buy a building, that’s a capital expense. So are major pieces of equipment. Your in-house PBX telephone system is a capital expense and one that may soon become an operational expense instead.
What characterizes a capital expense is that it involves a large sum of money that is plunked down to acquire the asset. You derive the benefit of that asset over the years and may wind up paying for it over the years. Another approach is to go to the bank and extract some of your savings or take out a loan so that you can pay for the asset up-front.
Either way, your money is tied up for a long period of time regardless of how well your business is doing. Your cost is the same in lean times or boom times. You can hire or lay off employees. It has no effect on your capital items unless you decide to sell some off or acquire more.
What’s more, many capital expenses have operational expenses that accompany them. That new data center requires people to run it and additional cost for electricity. There are maintenance and upgrade costs to keep your asset up to date and functioning at peak efficiency.
All of this suggests that capital expenses are something of a gamble. You do your best trade studies to make sure you are buying the right thing, sized correctly to support your current and expected level of business. If you guess wrong, you either have to buy another one or rip out the one you bought and replace it with something that suites your changed requirements.
The last decade of rampant volatility has convinced many businesses that they need to be far more agile in riding the waves of business activity. One technology that is making this more possible for all size businesses is the cloud. The “cloud” is shorthand for any service that is performed remotely by a specialized service provider and purchased on a pay as you go basis. Many cloud services are priced by the “seat” or user by the month.
There are two advantages to this cost model. First, your costs vary with your level of activity. When times are lean, you cut back and use fewer services. You pay less each month. When business picks up, you use more services and add more “seats” as you add more employees. You pay more, but the increased income from your increased business activity covers this. At no time do you run to the bank to withdraw savings or take out a loan. The cloud is the epitome of OPEX.
What kind of services are available in the cloud? Certainly your computing services, including anything you would run in a data center yourself plus security for your networks. Also, your telephone system. Remember the expensive PBX acquisition? That’s gone for good with Hosted PBX services. Your phones work the same as they always did, probably with more features, but you only pay per phone per month. Sometimes the phones themselves are included, obsoleting any need for CAPEX at all.
Should you be joining the migration from CAPEX to OPEX, at least where technology is concerned? Find out the range of cloud services and pricing available for your business needs. Then see if it still makes sense to continue with capital expenditures.