02 May
2016

Choosing the Right Financial Model for Your Business

In October 2012, NASDAQ was one of the first major financial institutions to move to the cloud. With all of the compliance requirements and strict security regulations within the financial sector, this was a huge step to take in the early stages of cloud computing and cloud-based data infrastructure. Now, the cloud, SaaS and IaaS are common solutions that companies use in everyday operations.

post imageWith many firms, both large and small, considering a move over to cloud services, they have to decide whether to operate on a capital expenditure (CapEx) or operating expenditure (OpEx) model. In basic terms, CapEx is money businesses use to invest in physical assets, such as equipment, buildings or property. It also can be used to upgrade, maintain or expand their physical assets. OpEx, on the other hand, is funds that businesses use to perform their everyday business operations, such as employee salaries and money for research and development. One of the main benefits of an OpEx model is that it allows companies, especially small businesses and startups, to quickly scale and remain adaptable with ongoing business changes, needs and expenses. Cloud-based solutions allow for a greater amount of flexibility, especially as it relates to upfront infrastructure costs.

With the cloud, companies that traditionally invested in infrastructure costs upfront can now spread those costs out over time. This allows for greater spending flexibility with expenses that can assume profit more immediately, such as lead generation activities and marketing. Companies that need to decide on what expenses should go toward capital expenditures and what expenses should go toward operating expenditures must consider the pros and cons of both models.

Pros of CapEx

  • Ability to amortize costs and use as tax deductions over several years
  • Greater control over equipment ownership, data and costs
  • In-house control to mitigate security risks

Cons of CapEx

  • Amount of cash needed upfront to cover costs
  • Costs associated with storing and maintaining equipment, including labor costs
  • Inability to predict future company growth or loss, which makes it hard to predict true costs

Pros of OpEx

  • Pay-as-you-go (or pay-as-you-grow) model enables companies to pay only for capacity needed
  • Expenses are tax deductible in the year they are incurred
  • Costs of infrastructure, maintenance and expertise are outsourced to the service provider
  • Ability to make multiple investments because money isn’t soley tied up in large capital investments
  • Easier budgeting and approval process since infrastructure costs are lower

Cons of OpEx

Moving to an OpEx model with cloud computing is not for every company, however. There are several reasons that may prohibit companies from outsourcing their data storage and infrastructure. Some of those reasons may be due to security risks and compliance requirements. Likewise, larger companies have to consider profit margins from their in-house servers. These companies may find value in looking into reseller partnerships, which give them the flexibility to stay current and benefit from profitability in the long run.

Cloud-based solutions and OpEx models have been the model of choice for many entrepreneurs, CFOs and CTOs, ranging from huge brands like Google to local brands such as Adorama. With the many tools and solutions that are available through the cloud, it’s only natural that more companies are finding themselves moving toward a mix that includes an OpEx model.

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