I do not understand what capital expenses are compared to just typical business expenses. Also what it means it capitalize an expense? I thought maybe amortize it, but I really am not sure? Thank you!
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A ‘capital’ expense is normally a one time fee for the aquisition of some asset. If you go buy 40 Boeing 787s, that is a capital purchase. You buy them once and are done with that. The maintenance costs associated with those planes are ‘operational expenses’, or expenses that are incurred by using products. If you ‘capitalize’ something, that is to say you have wrapped some operating expenses in with the capital purchase. So back to our planes, say for a little bit extra Boeing will throw in oil changes (yes, I know planes don’t have ‘oil changes’ in the traditional automotive sense) to sweeten the deal. That oil change is normally an operational expense, you pay it when it is time, after so much use. In this case, you pre-paid it on purchase, so you have successfully ‘capitalized’ the expense.
We did the inverse in IT a few years ago, instead of ‘capitalizing’ everything we were told to ‘operationalize’ everything. This helped move everything to the ‘cloud’, the story was it made the expenses more predictable. It didn’t, in fact it covered up how much of a rip-off some cloud products were, but for a time this was the major selling point. Our capital expenses would drop like a rock! They did, then again, we never had to pay $30 mil in monthly operational expenses for the right to access our own data either….
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