Since the global financial crisis of 2007/2008, every business has had to try and find ways to cut costs and save on expenditure. One way in which this has been facilitated, is through the growth of cloud computing and SaaS (software as a system), managed hosting, as well as CaaS (communication as a service).
These services are provided to companies in rental agreements (and therefore opex or operational expenditures), allowing them to cut down on their capex (capital expenditures). For example, instead of a company buying its own servers, whose resale value would be minimal compared to its original price, the business can rent out servers or use the cloud - allowing them to register the expenditure as opex rather than capex. The costs of maintenance won't be relevant with a rental agreement, as usually the rental firm covers these aspects.
According to Centric Logic, 'An SaaS system... 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 acquiring an asset.'
Companies can also scale-up or scale-down on the services as their requirements change, and they just pay for what they actually need and use. The drivers for CaaS and SaaS include budget restraints, limits in in-house IT expertise and a general unwillingness to spend massively on capex.
THE SMART APPROACH
"The smarter SMEs of today are looking at a model that enables them to go opex rather than capex," Vikram Chadha, vice president for SME Marketing, Commercial, at UAE telecoms provider du, said. "So what these companies are doing is they want to focus on their business and they want to basically take every other service from a specialist," he added. Du, he explained, offers SMEs an opex-based ICT package, charged on a per-monthly basis. This provides SMEs with two major benefits: "One, he is able to invest his capex properly into his business, and the second thing is it also enables him to go on the option of a pay-as-you-go model. So he does not need to buy 50 user licenses up front, because a particular company is giving him a discount," he said. "This is something that the SME is looking for - basically a lot of flexibility," he concluded.
Any move from capex to opex will be decided upon by the CFO, who is tasked with keeping balance between the two budgets. These decisions will be made according to the position in the tax year, future earnings forecasts, credit availability and cash flow, amongst others.
According to the Arrington Group, there are a few points to study when deciding how to move capex to opex.
Moving to opex:
- Short-term and relatively low-cost assets.
- Trial applications. An example might be something like a sales forecasting system. Using Software as a Service (SaaS) such as Salesforce.com is a monthly expense, and the service can be dropped anytime in favor of a competitor or in-sourcing your own sales forecasting system.
- Networking and desktop computers that you plan to refresh on regular intervals (e.g. every three years), because you can lease the equipment on-site with an operational lease structure.
Capex:
- Long-term, expensive assets that form a substrate for the business (you plan to keep the asset beyond its useful life).
- Networking and desktop computers where an operational lease is not an option.
- Purchased package software.
- Internal development costs for infrastructure applications and integration.
© Zawya BusinessPulse 2014
