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A poll this week shows British businesses are increasingly cautious about their investment plans as they worry how the country's departure from the European Union will affect this year’s economy. In fact, the proportion of business decision-makers expecting investments to increase over the next 12 months fell to 29 percent from 31 percent in November, and The Bank of England has identified a fall in business investment as one of the potential big drags on the economy following June's Brexit vote. Similarly, the latest figures from the British Bankers’ Association showed that while overall borrowing rose during the month, business borrowing fell by £2.8bn to £261.7bn.
However, now more than ever, it’s vital that Britain remains open for business. Businesses are therefore seeking smarter guidance and cast iron reassurance on making the right financial decision. Reassuringly then, corporate procurement now offers companies much more flexibility with their capital investment. The growth of on-demand IT cloud based services has also introduced more choice about how to pay for expenses if a company chooses to lease the item rather than purchase it.
CAPEX (Capital expenditures) refers to the funds traditionally used to purchase major physical goods or services, essentially to expand the company's abilities to generate profits. This includes hardware, such as printers or computers, vehicles to transport goods, or the purchase or construction of a new building. The cost can be spread over a number of years, usually five to ten, generally longer for property.
OPEX (Operating expenditure) refer to the costs a company pays to run its basic business. In contrast to capital expenditures, operating expenses are fully tax-deductible in the year they are made. Sometimes, an item that would ordinarily be obtained through capital expenditure can have its cost assigned to operating.
There is currently a CAPEx to OPEX shift happening in software, business continuity, disaster recovery and firewalls. Whilst the model is not quite the same as leasing, in that software tends to be bought on a subscription basis and there are no outright ownership options at the end of the lease term, the principles of removing upfront expenditure and depreciation in favour of fully tax-deductible expenditure is identical, and similarly advantageous.
Whilst this model is not new to the IT market, it’s full benefit is now being realised across the industry as a means to overcome the post-Brexit anxiety in capital investment, with an uncertain future cashflow forecast ahead. The model of payment shifts investment from CAPEX to OPEX, and enables businesses to maintain their competitive edge without significant up-front payment for the required technology.
For example, when investing in new software many traditionally opted to purchase software licenses for a fixed price, whereas you may now elect a software subscription model (SaaS) for a monthly fee. With regard to infrastructure, you pay a public cloud to run workloads (OPEX) versus buying servers, storage, software then power and cooling cost (CAPEX). However, whilst this monthly payment options offer flexibility and the opportunity to spread your costs, companies need to ensure that they are looking into the total cost of ownership. In the case of public clouds, over three years a company would pay more to the cloud than if they had just purchased their own sever. So, whilst they would OPEX benefit, they could have purchased the server, the storage and then financed it and ultimately would have owned its own cloud under OPEX at less cost than the Public Cloud combined payments.
From a business finance standpoint, leasing equipment is certainly a smart option. Heavy upfront capital expenditure is eliminated in favour of smaller ongoing expenditure. Depreciation is no longer a consideration, and frequently lease payments are fully tax deductible. Hardware can be refreshed every few years, meaning an end to outdated technology. Lastly - and perhaps most significantly - the cash-flow benefits are enormous, with small regular payments replacing substantial upfront payments that can place considerable strain on finances. Altogether, to many people, leasing gives a ‘win win’ scenario from a business owner’s perspective.
Brexit fears or not, when it comes to IT investment, it certainly pays for businesses to research the different procurement options and weigh up the flexibility and tax efficiencies of operating expenditure, whilst ensuring you are not paying over the odds for payment terms that bend and flex with your business cashflow.
For more information on IT procurement, please contact XMA on 0115 846 4000.