Opex vs Capex: some implications you need to consider

Beware: too much technical information might be hard to absorb

Beware: too much technical information might be hard to absorb

First things first: we are not tax advisers so don’t take what is written here as gospel – you have your own circumstances and need to take specific advice for your own, individual situation.  Phew – disclaimer out of the way…

What are we writing about this time?

One of the aspects of moving to a SaaS is how this swaps how you treat the payments for access: previously you would have used Capex and, with SaaS, you will swap that to Opex.

Advantages of Capex

Generally speaking, there are tax advantages to using capital expenditure to pay for investments, such as accountancy platforms (when you had to pay an arm and a leg upfront for an on-premise system).  This could be in terms of a reduction in tax over a set period.  In the UK, most advantage is given to start-up companies.  There will be a  set period over which such a system is typically amortised but, in my experience, once you’ve bought a system, there is no actual resale value (which would be the case with other assets – such as cars or buildings – in the asset register).

You will end up with a cost that has to be paid for the system and you will also have annual maintenance contracts which may (or may not) attract similar discounts from your final tax bill.

Advantages of Opex

Taking a SaaS system does not have this tax advantage.  But it does have the advantage of cash-flow, in that you pay for access to the system on a monthly basis (typically).  The advantage here is based around matching your income and expenditure streams – you don’t have large payments that are required both upfront and annually but you must ensure that your run-rate is sufficient to pay for access to the system on an ongoing basis.  The use of the system will be treated as an accounting expense rather than in acquiring an asset.

Most publishers of both on-premise and SaaS solutions will have spreadsheets and white papers about the cost of ownership.  Take a look at these and you will start to see how these are put together – every publisher constructs these to be most favourable to their particular situation but you will start to see patterns and be able to build something that will work for your company and is rational.

Notable operational changes

The big operational changes when moving to SaaS all revolve around hosting (and associated costs) and infrastructure and service contracts.  Part of the potential cost saving is a reduction in IT (both heads, hardware and service costs) which become less necessary because these are rolled up as part of the SaaS service.  However, unless you are moving all your systems to SaaS, then you will still need to retain some capability in-house, thus reducing the total possible saving.

Other possible operational changes occur at the start of the switch over.  You need to think about the new contracts that you will be obliged to sign if you want access.  Where does responsibility for data lie?  And how you can both input your data and, in the worst case scenario, how you will extract your data back out?  Better to know about this stuff up front rather than get nasty surprises later on.

Great advice

From experience of writing these, read your EULA.  Very few people do but it is worth it.  Even though it will be a long document (and will go against what most green advocates say), you probably want to print this out to do so.

In general, what we would say is that all the potential savings are real but most likely will not be as big as the publisher identifies and will not be realised as quickly as they say.  Also, your company’s exact structure and circumstances will make an impact which will increase or decrease the potential saving.  In fact, in certain circumstances, there might not even be a saving.

But, in parallel to this financial calculation, you need to evaluate functionality too.  It doesn’t have to be a comparison of the breadth of all the functionality on offer – but of what you actually use.  On the whole, the SaaS software is likely to be more user-friendly because it is younger and because SaaS companies know this is a key deficiency with on-premise software.

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For some, this will mean that there is insufficient saving to make the difficulty and risk associated with the project worthwhile.  Small advert – we can help you work this out – click here to go to our website.

If you liked this blog, then you might like this previous blog too.

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If you would like to know more or speak to us please contact Grant Sayer on M: 07872 073379 or John Stoddart on M: 07788 445903 or Email: info@centriclogic.com or see our website at www.centriclogic.co.uk

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3 Responses to Opex vs Capex: some implications you need to consider

  1. There’s room out there for greater understanding of how and when to wield a capex or opex strategy; avoid developing a capex Habit, so to speak, where accountancy, in order to make the Books more appealing, deprives IT of potentially sounder options on the opex side,

    • Hi Michael,

      This is a much more complex issue than we present here – there’s tax, there’s matching income & expenditure, there’s the availability & cost of capital to name a few. The one thing we’ve found with SaaS is that non-IT professionals are getting much more involved in the selection and ordering process so it is a much more direct internal conversation between the business and their finance function. It is not an easy one to resolve – there are so many aspects of this that affect the final decision.

      Thanks for commenting.

  2. Pingback: Opex vs Capex II: more things to consider | centriclogicblog

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