OPEX – definition and meaning
OPEX stands for ‘operating expense‘ , ‘operational expense‘, or ‘operational expenditure.’ It is the expense that a company incurs through its normal business operations. In other words, it is the money that a firm spends on a day-to-day, ongoing basis to run a business or system. It includes, for example, inventory costs, marketing, payroll, equipment, rent, R&D, advertising, and insurance.
We can also write the terms ‘operating expense’ and operational expense’ in the plural – ‘operating expenses’ and ‘operational expenses.’
According to the Financial Times Lexicon, ‘general expenses,’ ‘operating costs,’ and ‘running costs‘ mean the same as ‘operating expense.’
The counterpart of OPEX is CAPEX, which is the money a company spends on improvement or buying fixed assets. CAPEX stands for ‘capital expense‘ or ‘capital expenditure.’
Senior management is continuously trying to keep operating expense to a minimum. However, it must not be so low that it undermines a company’s ability to compete effectively in the marketplace.
Cutting OPEX to boost profits
There are several ways companies can boost profit. They can raise prices. They can also find new markets or product channels.
However, when new markets or product channels, and raising prices are not possible, people focus on OPEX. In other words, they try to reduce operating expenditure.
Don’t reduce OPEX too much
Management can lay off workers, spend less on training, and reduce the R&D budget. However, there is a risk that if you cut OPEX too much, you could be undermining the company’s prospects.
What might happen if you slash your training budget, but your competitors don’t? In a couple of years time, your rivals may have a labor force with better skills. If good skills matter in the future, your company will lose out.
If you cut the R&D budget, but your rival does not, it may have a fantastic product in the future. Your company could suffer if that happens and you has no new products in the pipeline.
Put simply, if you cut your operational expenditure too severely, the company’s bottom line will eventually suffer. ‘Bottom line’ in this context means ‘profits.’
Company executives aim to reduce operational expenditure but maintain the same level of production and quality. If they can achieve this, the overall value of their company increases.
Regarding OPEX, TechTarget makes the following comment:
“There is a direct correlation between OPEX and the value of the enterprise, in that when the OPEX decreases, while maintaining the same level of production and quality, the overall value of the enterprise increases.”
OPEX may also stand for ‘operational excellence.’ To achieve operational excellence, a company tries to reduce inefficiencies and boost quality.