In 2023, what is the significance of CAPEX and OPEX planning?
For businesses that own and manage built assets and infrastructure, understanding and balancing capital expenditure (CapEx) and operating expenditure (OpEx) is fundamental.
Key terms being used:
CapEx = Capital Expenditure
OpEx = Operational Expenditure
CapEx refers to the funds needed to purchase, upgrade or extend the life of built assets. This may mean buying a new building or facility or making significant upgrades and extensions to existing ones. It’s typically a large, one-time expense that will eventually generate increased capacity or operational efficiency. CapEx is a long-term investment in the business.
OpEx involves the running costs involved in operating assets. This may include maintenance costs, staff salaries and utility bills. OpEx impacts profit and loss in the short term, which is why controlling these expenses can significantly affect profitability.
CaPex, OpEx and asset lifecycle
Built assets pass through different phases in their lifecycle, starting from planning/acquisition to operation, maintenance and eventually disposal and replacement. CapEx is typically required at the start of an asset’s life, to build or buy it, then OpEx is used to maintain and run it, with CapEx finally required to replace it (or to significantly expand or upgrade it).
Accurately forecasting CapEx and OpEx is crucial to optimising the life of an asset, and achieving the best return on an asset portfolio. Assets that are maintained properly, and upgraded at appropriate periods, will remain in optimal working order and deliver maximum value over their lifetime, whilst avoiding unexpected downtime or 'after hours' calls to fix or replace broken assets.
For example, compare the contrasting approaches of two retirement village operators, Shady Villas and Cosy Homes.
Shady Villas
In an attempt to keep costs down, Shady Villas keeps a very tight rein on OpEx. Repairs are carried out when a problem is reported, avoiding costs when their condition seems sound. In the short term, Shady Villas’ balance sheet looks great and profit margins are higher. But then a lift breaks down, meaning residents can’t access their units for several days. An un-inspected roof leaks, causing flooding damage and dampness. OpEx costs soar to fix the issues, as well as insurance premiums, and assets eventually need to be demolished and replaced with CapEx much earlier than planned.
Cosy Homes
Cosy Homes takes a proactive approach to maintenance. Inspections and maintenance are carried out on a regular schedule, with equipment replaced before it wears out completely. OpEx is higher but everything keeps running, with no insurance claims, and costs are stable and predictable. By treating OpEx as an investment in the value of its portfolio, Cosy Homes’ properties have a much longer lifecycle, are more comfortable for existing residents and more attractive to prospective ones.
Building long-term value
Accurately forecasting OpEx and CapEx is vital for long-term financial planning. That said, this can often be challenging, particularly when asset managers don’t have valid or reliable data on the condition of their assets. They may struggle to know whether a particular upgrade or refurbishment will deliver value, or how to proactively maintain their assets. This makes it difficult for asset managers to get buy-in from the board or other stakeholders to receive the budget they need, or successfully achieve other funding requests.
Cutting costs and squeezing higher margins at the expense of a portfolio of degraded, poorly maintained assets, that are approaching end-of-life prematurely, is not an organisational win. In fact, this increases the risk of unplanned downtime which carries financial and reputational risk.
Conversely, proactive and preventative maintenance optimises the condition of assets and thus increases the value of a portfolio. Strategic asset management is integral to an organisation’s performance and success, with both OpEx and CapEx viewed as an investment rather than an expense.
If you’d like more information on how AssetFuture can help your business move to a more strategic, proactive asset management approach, our team of asset management specialists is here to help.
Request a demo and start your journey today! 🚀