As finance leaders, we’re responsible for uncovering cost savings and increasing efficiency across the business. Finding opportunities to operate more efficiently is a common challenge for CFOs across all types of industries. At Motus, we’re able to find cost savings and optimize cash flow through how we manage our business expenses.
One of our primary strategies for managing our business expenses as we grow is trading capital expenditures (CAPEX) for operational expenditures (OPEX) whenever possible. In doing this, we avoid spending large amounts of cash on physical assets and instead pay for the exact costs required to run the business. It’s not just a practice of mine – in fact many finance leaders are adopting this strategy for how they approach managing expenses.
This shift in how finance leaders manage expenses — especially related to their IT spend — is important in 2017. Given the advances of technology, there’s an opportunity for CFOs to leverage cloud-based technology to free up cash flow for other investments and run their business more efficiently.
Here are 3 reasons why CFOs should move from a CAPEX to OPEX strategy:
1. Cost efficiency
Arguably the most compelling reason for CFOs to move to operational expenditures is to increase cost efficiency across the business. Part of this is a result of cloud adoption changing the way finance and IT leaders work together to run the business. Consider an example related to IT spend where rather than purchasing physical servers to run on premise, you instead switch to a monthly subscription of cloud storage from Amazon Web Services (AWS).
In this example, you’re able to eliminate the large capital needed to purchase, run, and manage the servers. Instead, you’re allocating exactly what’s required to run the business based on the needs at that time (i.e. headcount). With this approach, you can scale more easily as requirements change. This also presents the business with an opportunity to afford the latest technology without having to dedicate capital to large, upfront costs.
Looking for these opportunities to “rent vs. own” and by negotiating better pricing at tiered commitments can drive down the average cost of each employee. It also provides you flexibility to reinvest elsewhere in the business toward revenue-generating activities. This approach can also improve financial ratios for your company such as return on invested capital. For example, when finance leaders eliminate capital outlay — like owning corporate fleet vehicles — and the working capital needed to manage that type of vehicle program, the result is cost savings for the business and increased returns on a lower base of assets owned by the company.
2. Mitigated risk
Another benefit of embracing an OPEX strategy is to reduce risk and liability for the company. A growing part of the CFO’s role and responsibilities is mitigating risk across the organization. Whether it be through compliance with government guidelines, physical security related to accessing the office building, or data protection and cybersecurity – CFOs need to ensure their business is protected against present and potential threats.
Leveraging cloud-based technologies in an OPEX model not only provides cost savings but also offers greater security for the business. In the example provided above, renting cloud storage from AWS allows you to avoid a large upfront capital expense. In addition, it also protects your corporate data in a disaster recovery event (i.e. building fire, power outage, mistakenly deleted files). In this scenario, you’d be able to recover the corporate data stored in the AWS cloud and restore the files to keep the business operational. This type of spending offers redundancy for the business, in turn significantly reducing risk.
Consider another example where finance leaders dedicate capital toward purchasing company-owned vehicles. In these fleet vehicle programs, the company is 100% liable for the risk. With an OPEX approach to this type of business expense, CFOs find cost savings and significantly reduce risk. Rather than budgeting for a large, capital expense, consider letting your employees drive their personal vehicles for work. From there, simply reimburse their business mileage on an ongoing basis (as they drive). This way you reduce risk and potential liability for the business by reimbursing employees to insure their own vehicles with required coverage levels and only assume incremental risk for the business use of the vehicle.
3. Improved Reliability
In addition to the reduced risk associated with OPEX investments, this strategy also introduces better reliability. As a finance leader, investing in the products and services needed for the business to operate efficiently and the workforce to be productive is crucial. With OPEX investments, you know your employees are supported with the resources they need and therefore you have greater reliability in terms of how the business operates.
For example, VoIP (Voice over IP) phones allow your employees to operate more efficiently. Sales reps who rely on their phone to generate revenue benefit from this type of OPEX investment. If a sales rep is traveling or out of office, they can easily make calls and connect to their voicemail over the internet from their VoIP phones. As a finance leader, you gain better reliability in terms of the sales team’s productivity which results in generating more revenue for the business.
OPEX investments also make it easier for CFOs in terms of budgeting and forecasting. When you’re allocating the same amount of capital for each employee every month, you can more accurately predict spend across each month, quarter, and fiscal year. In a CAPEX model, you may have large upfront cash expenditures and ongoing expenses to maintain your infrastructure. You will likely underutilize these assets at purchase and run into capacity constraints later, which hinder your ability to grow.
For finance leaders looking to save and operate more efficiently, the OPEX investment model is your best option. When you begin moving your capital expenditures to operational expenditures you’ll discover cost efficiency, reduced risk, and improved reliability. Collectively, these benefits will result in a more profitable, efficient business.
The CFO Corner is a recurring series on the Motus blog featuring advice from Motus Chief Financial Officer Tim Brown who has spent his career working with technology and growth companies as an executive and investor. The topics covered range from management best practices, insights on industry trends, and advice for the modern finance leader.