Tuesday, September 13, 2022

An Agile Coach's guide to CapEx and OpEx and Why they Matter

Budgets for services related to agile coaching are lumped into two spending categories: CapEx (capital expenditures) and OpEx (operations expenditures). Your client or your organization will make decisions on what services it's willing to pay for based on which category your service falls under.

Definitions

Just like doing personal taxes, how expenditures get categorized can help or hurt how much profit a company gets taxed against. Entrepreneurial junior high student Dominque is running a lemon stand. He's going to pay taxes on the profit made at the lemon stand. During his grand opening, he made $10. His friend Joey, whose mom is a CPA, has informed him that if he hasn't accounted for any expenditures, his day's taxable income will be $10. Joey tells Dominique over a glass of lemonade, "The name of the game is to report expenditures which will reduce the taxable profit of your business."

Expenditures

To have a lemonade stand, Dominque
had the following expenditures:

$2 serving pitcher
$5 stand
$1 sign
$3 lemons
$3 sugar
$0.10 water
$1 Kate <- Dominique's sister who is working as his employee

Capital expenses are typically one time expenses to get an asset setup. Operational expenses are typically materials you need to pay for to keep the business going. When you look through the seven expenditures, how many capex do you see and how many opex do you see?

(The answer written backwards is: eerht capex and ruof opex)

If you got the answer correct, Dominique will be able to report a taxable income of $10 minus opex of $7.10 which equals a taxable income of $2.90.

Digital Transformation

Silvstr, a friend of Dominique has a dad that is an Agile coach. Silvstr tells Dominique, "There's big money in it if you go digital." Dominique agrees to digitally transform his lemonade stand.

Silvstr bills the following to Dominique:

$2 design and build website
$0.20 monthly cloud hosting fee
$100 sign redesign service
$5 training service for Kate

That month Dominique makes $300. Joey asks Dominique to categorize his Digital Transformation expenses. For the above points, how many are for capex and how many for opex?

(The answer written backwards is: eno for capex and eerht for opex)

If you got the answer correct, Dominique's taxable income will be $300 minus opex (ignoring lemons, sugar, water, and Kate's wages) $105.20 which equals a subtotal (we aren't including the lemons etc) of $194.80.

Said another way, the creation of new software (the website) is a capex expense. The maintenance of the website (hosting), the sign, and employee training are opex.