Capital expenditures (CapEx) versus operating expenses (OpEx)
1. Capital expenditures (CapEx) versus operating expenses (OpEx)
One area where cloud differs from traditional IT is in how managing costs changes when you move to the cloud. With organizations moving from on-premises infrastructure to on-demand cloud services, there’s a major shift in spending from capital expenditures to operating expenses. But what’s the difference between these two? Capital expenditures, or CapEx, are upfront business expenses put toward fixed assets. Organizations buy these items once, and they benefit their business for many years. For example, in IT, these expenditures might mean buying hardware like servers, printers, or cooling systems. Maintaining these assets is also considered CapEx because it extends their lifetime and usefulness. Small businesses can find CapEx spending challenging because large one-time purchases are often high cost. The more money you put toward CapEx means less free cash flow for the rest of the business. And then there are operating expenses, or OpEx, which are recurring costs for a more immediate benefit. This represents the day-to-day expenses to run a business. In IT, these expenses might be yearly services like website hosting or domain registrations, or the subscription fee for cloud services. OpEx covers the spendings on pay-as-you-go items, but are not considered major long-term investments like CapEx items. Understanding the difference between CapEx and OpEx is helpful in recognizing how costs differ between on-premises and the public cloud. In the on-premises CapEx model, cost management and budgeting are a one-time operational process completed annually. Data centers require a huge CapEx investment up front as organizations purchase space, equipment, and software and hire a workforce to run and maintain everything. Forecasting is based on a metric such as historic growth to determine the needs for the next month, quarter, year, or even multiple years. Moving to cloud’s on-demand OpEx model enables organizations to pay only for what they use and only when they use it. Budgeting is no longer a one-time operational process completed annually. Instead, spending must be monitored and controlled on an ongoing basis due to the dynamic nature of cloud use within organizations. How infrastructure is procured has radically changed, too. In a more decentralized cloud world, any employee can create resources in seconds on infrastructure owned and managed by a cloud provider. Organizations save on power, cooling, and floor space; they save on management because they don’t have to install, operate, upgrade, and troubleshoot it themselves. And they're not depreciating the equipment—the cloud provider is. Cloud gives organizations the ability to start small and grow organically instead of having to guess at what is needed next week, next month, and next year. Costs match actual usage and are now operational expenses.2. Let's practice!
Create Your Free Account
or
By continuing, you accept our Terms of Use, our Privacy Policy and that your data is stored in the USA.