CapEx vs OpEx – the differences explained when budgeting for new furniture

By 18th September 2019 Derek Stedman, Office furniture

Whether you’re moving into a new office space, or renovating an existing one, it can be a significant expense. Offices need to be extremely durable and adaptable, and it’s an investment in the future of your business.

But how do you budget for this? Is it a CapEx or OpEx expense? Or a combination of the two? As with any company expense or investment, you need to consider all implications from procurement approvals to SARS. Refitting an office is a big decision, and it’s important to have a clear financial plan before you start in order to avoid any surprises. Below are some guidelines to help you plan ahead and decide whether this will be a CapEx or OpEx expense for the company.

Understanding the terms

CaPex – Capital Expenditure (CapEx) is existing funds or credit used to acquire, upgrade, and maintain physical assets such as property, buildings, equipment or technology.

Opex – Operating Expenditure (OpEx) is the ongoing or running costs for a business, system or project.

Making the choice for your business

Figuring out which to use for your office fit-out depends on how your business is structured, and whether you’ll be buying or renting furniture and equipment, as well as your budget. The key options to consider are:

CapEx OpEx
Requires the business to have the funds available for the full project cost. Monthly running costs. (Office furniture can be added as a rental, without the need for a lump sum upfront.)
May require board or director approval and may not be readily available, or may need to be financed by the business’s banking institution Is an increase to the monthly overhead, with no cash outlay and does not impact the business’s funding lines with the bank.
Should be used in the business to generate income, not on a depreciating asset like office furniture. Enables a business to preserve it’s cash, to rather spend on capital assets.

All businesses would have their own internal policy regarding expenditure, whether the CapEx is available or whether to add costs as OpEx, but the question is: why outlay CapEx on a depreciating asset? 

Where CapEx and OpEx meet 

Quite often a combination of the two is needed as some parts of a fit-out will fall under fixed assets, whilst others will be categorised as ‘consumables’ and therefore form part of your OpEx. For example:

  • CapEx is required to cover the costs of the “bricks and mortar” or any work done to the building or premises. A rental option can only be used to finance movable assets, not fixed construction.
  • OpeEx would then be used to cover the costs of the movable assets (e.g. office furniture) on a rental basis.

While both options have their pros and cons, it really comes down to which option makes the most strategic business sense for each company. What we’ve discovered is that many companies generally follow the rule of thumb of using CapEx for an office fit-out, mostly because they are not aware that a rental option is available. 

What about tax?

As with any business decision, an office fit-out will have tax implications, and you need to keep these in mind from the start, as it will affect your budget as well as your annual reporting going forward.

According to SARS, OpEx is a taxable business expense and the VAT is claimed monthly.

CapEx, on the other hand, is a once off expense. SARS allows for asset depreciation and then is calculated as a once off as well. Office furniture is a requirement for a business to function and is listed as an asset, albeit a depreciating one. 

Why you want your office furniture to be OpEx

There are many benefits to choosing a rental finance, or OpEx route:

  • No lump sum needed
  • No depreciation
  • VAT is claimed monthly
  • Predictable budgeting
  • Refresh/replace goods at the end of the term
  • Extend rental at the end of the term at a reduced rate
  • No risk of asset obsolescence

For most companies it makes more sense to refit their offices via the OpEx route – it’s less risky and furniture or technology can be replaced or upgraded as needed without new CapEx investment.

That said, it depends entirely on your company size and strategy. It is, however, important to keep all of the above in mind as the decision you make around your office furniture now will affect your company finances for years to come, and you want to ensure you’re making the right decision based on your business projections.

Downloading our Guide to Improve your Office Space to get an idea of what an office fit-out is all about and start planning for your future expenses.

Download the Guide

Derek Stedman

Author Derek Stedman

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