When a business is replacing or upgrading their technology, there are several things that must be considered. What are the issues this technology will solve for the business? Can the network and infrastructure currently support it? How much downtime is needed to implement? How will users be trained on this new technology? In addition to all of these questions, the number one issue (especially among small and mid-sized businesses) is how they will fit the technology purchase into their budget.
This is especially the case when it comes to today’s communications technology. The evolution of business phone systems to the cloud (or hosted) has created new purchase options beyond the traditional owned perpetual software licensing. The financing models used to purchase phone systems is now a choice between Capex and Opex- but which is better for business? When does it make sense for your business to buy, and when does it make sense to lease?
Capex vs. Opex Review
Before discussing which finance model is preferable, it’s important to understand the difference between the two and how they influence a company’s bottom line. Prior to the birth of cloud computing, if a business needed a new phone system, the only option they had was to purchase the PBX hardware up front and file the investment as a capital expenditure (Capex). By definition, capital expenditures cover any major investment (such as property, infrastructure, equipment, or software licenses) which will show up on a company’s balance sheet, along with its depreciation. On the other hand, Opex consists of operational expenses, which are ongoing business costs such as rent, utilities, wages, and services. Because these are ongoing, Opex is reported as a company’s profit and loss. While the Capex finance method was the norm for a PBX purchase, it created a barrier-to-entry for budget-tight companies wanting to take advantage of new communications technology. Today, companies have a choice between vendors that offer on-premises phone systems (Capex purchase), hosted phone systems (Opex purchase), and vendors that offer both- such as Digium.
Buy or Rent: Which is Better?
There are times when buying technology equipment up front is the way to go. Budget aside, there are several factors to consider when deciding between an on-premises and hosted system, such as resources to manage and maintain the system and room for growth. If your company has the resources as well as the budget to purchase up front, it’s a wise Capex investment (plus most equipment falls under Section 179 as a tax deduction). On the other hand, there are several businesses that not only don’t have the capital to purchase an on-premises PBX, they also don’t care to manage their phone system at all. As software, hardware, and everything-as-a-service is added to the cloud, many IT operations are now on the Opex side of things, and businesses are preferring the freedom it provides.
- Moving to an Opex model for a phone system enables a company to use its available cash for other revenue-generating activities, such as lead generation, product development, human capital, or research and development. Also, a company can save on IT resources as far as phone system management, repairs, and upgrades; with a hosted system, that is all the vendor’s responsibility.
- Many CFOs today prefer Opex for the tax benefits. Opex allows a company to write off the entire monthly expense of a hosted phone system as a day-to-day operating expense. With the Capex model, a company can only write off a percentage of the cost of a new premises-based system per year, based on a depreciation schedule of assets. The Opex model puts a company in a better position when it comes time to pay taxes, as they’ll be able to take a larger deduction based on the amount accrued from the total number of monthly payments. Companies aren’t expected to derive value from an operational expense for a decade.
- Using a hosted solution under Opex allows companies to scale their technology and only pay for what they use. For example, if a company needs to add users (extensions) during a busy season, they can do so with a simple phone call. Users are added immediately, and the increased cost for each user is simply added to the monthly bill. Similarly, if users need to be removed from the phone system, it requires only a quick call, and the next bill is lower. If you have to close down the business for a month and you don’t make any phone calls, you’re bill will reflect that.
The move to cloud has leveled the playing field for businesses of all sizes by shifting several technology purchases from Capex to Opex, including the business phone system. There are considerations to both owning and renting equipment, but as you can see, the Opex model has several advantages and is becoming the optimal choice for companies with budget and growth in mind.
If you still can’t decide between Capex and Opex, check out this post