Integrity, morality, and ethics are interconnected but distinct
concepts. Integrity is about acting consistently with one's values and
principles, while morality refers to personal beliefs about right and wrong,
and ethics are societal rules or standards of conduct
Operating Profit
A company's operating profit is its total earnings from its core business
functions for a given period. Put simply, operating profit is a company's net
income from its core operations after accounting for operating expenses.
Operating profit excludes the deduction of interest and taxes, as well as any
profits earned from ancillary investments, such as earnings from other
businesses in which a company has a part interest. An operating loss occurs
when core business income ends up being lower than expenses.
Operating profit, also known as operating income or Earnings Before Interest
and Taxes (EBIT), represents a company's profit from its core business
activities, excluding non-operating items like interest expense and taxes.
Operating Profit = Gross Profit - Operating Expenses - Depreciation –
Amortization
Where:
Gross Profit = Revenue - Cost of Goods Sold (COGS)
Operating profit is also referred to colloquially as earnings before interest
and tax (EBIT). However, EBIT can include non-operating revenue, which is
not included in operating profit. If a company doesn't have non-operating
revenue, EBIT and operating profit will be the same figure.
shift operating costs to capital expenditure accounts
Shifting operating costs to capital expenditure (CapEx) accounts
involves classifying expenses that are typically treated as recurring, short-
term costs as long-term investments, impacting accounting and potentially
tax implications.
Here's a breakdown of why and how:
Why Shift Operating Costs to CapEx?
Long-Term Asset Creation:
If an expense leads to the creation or improvement of a long-term asset (like
equipment, buildings, or software), it can be justified as a CapEx.
Depreciation Benefits:
Capitalized expenses are depreciated over the asset's useful life, spreading
the cost over several accounting periods, potentially leading to lower taxable
income in the initial years.
Financial Statement Impact:
CapEx appears on the balance sheet as an asset, while OpEx (operating
expenses) are expensed on the income statement in the period they are
incurred.
Strategic Investments:
Capitalizing costs can reflect a company's focus on long-term investments
and growth rather than just short-term operational needs.
How to Shift Operating Costs to CapEx?
Asset Identification:
Determine which expenses result in acquiring, upgrading, or improving long-
term assets.
Capitalization Threshold:
Establish a threshold for the cost of assets that will be capitalized. Anything
below the threshold is typically expensed as an OpEx.
Accounting Treatment:
Capitalize the cost of the asset on the balance sheet and depreciate it over
its useful life.
Depreciation Method:
Choose an appropriate depreciation method (straight-line, declining balance,
etc.) to spread the cost of the asset over its useful life.
Documentation:
Maintain detailed records of the asset, its cost, and its depreciation
schedule.
Examples of Costs That Can Be Shifted:
Software Purchases: Purchasing a software license that will be used
for multiple years can be capitalized.
Equipment Upgrades: Replacing or upgrading equipment that
extends its useful life or improves its functionality can be capitalized.
Building Improvements: Major renovations or improvements to a
building that increase its value or extend its useful life can be
capitalized.
Land Acquisition: The cost of land is a CapEx, as it is a long-term
asset.
Machinery Installation: The cost of installing new machinery can be
capitalized.
Important Considerations:
GAAP and Tax Regulations:
Capitalization and depreciation methods must comply with Generally
Accepted Accounting Principles (GAAP) and tax regulations.
Asset Life:
Accurately estimate the useful life of the asset to determine the depreciation
schedule.
Impact on Cash Flow:
Capital expenditures can have a significant impact on cash flow, as they
represent a large outflow of cash in the short term.
Tax Implications:
Depreciation deductions can reduce taxable income, but the initial
capitalization can also impact cash flow.
Working capital, also known as net working capital (NWC), is the difference
between a company's current assets—like cash, accounts
receivable/customers' unpaid bills, and inventories of raw materials and
finished goods—and its current liabilities, such as accounts payable and
debts.
When should one opt for capital expenditures (CapEx)?
CapEx assumes a significant role in several domains, including but not
limited to:
Capital expenditures (CapEx) can facilitate a company’s expansion and
achieving objectives, provided all relevant factors are considered when
formulating a comprehensive capital expenditure strategy.
Businesses that make early technological investments may qualify for tax
breaks through their choice of capital expenditures (CapEx), which may vary
from nation to nation.
Business enterprises can potentially secure advantageous tax benefits by
opting for capital expenditures (CapEx). This strategic financial decision may
vary across different countries, mainly when investing in technology during
the initial phases.
When should one opt for operating expenses (OpEx)?
The OpEx initiative is strategically developed to attain optimal levels of
corporate performance. In the aftermath of the Covid period, the foremost
concern for a corporation is centered on the pursuit of cost reduction.
Considering those above, it is evident that Operational Excellence (OpEx)
might provide advantageous outcomes for a corporation due to the
subsequent rationales:
Adopting an Operational Expenditure (OpEx) model will allow the firm
to allocate its existing finances towards additional operations that
generate income, such as lead generation, research and development,
and resource expansion.
When a business adopts cloud-hosted services, it could achieve cost
savings in recruiting IT (Information Technology) resources since the
responsibility for maintaining the hosted services lies with the
suppliers.
Several organizations choose for OpEx due to its tax advantages since
it allows them to deduct the expenses associated with hosting services
fully.
