Sam Walton, founder of Walmart, once said that “control your expenses better than your competition. This is where you can always find the competitive advantage” (10 rules of building a business). For premier companies in Zambia that are in competitive waters (red oceans) this cannot be further from the truth. In a nutshell, competitive companies deal with the dynamics of managing Opex and Capex effectively in different ways in order stay ahead of their rivals.
Opex (Operating Expenditure) is the money spent in running the business and the financial statement responsible for tracking it is the Income statement. Capex (Capital Expenditure) on the other hand is the money spent for long term investments and the Balance sheet is responsible for recognizing it.
When a competitive premier company’s market share reaches equilibrium with its rival, that company can either increase or decrease its share of the cake based on how well it manages Opex and Capex. With margins almost predetermined, management teams that purse competitive advantage through the management of the dual will make notable decisions around the dual. For example, movement in Opex can be influence by the decisions the management team makes in terms of how much it wants to spend on salaries, administration costs, marketing, utilities, repairs and maintenance. With Capex, influence is directed towards the ‘spend’ on buildings, machines, cars, computers, office furniture and refurbishments.
The impact of Opex on the income statement is that it decreases the profitability of the company in a financial year. Conversely, the impact of Capex is that it increases the asset values recorded on the balance sheet. The latter does not affect profitability. However, over a period of time, depreciation of the fixed assets purchased do impact the profitability of the firm.
Two competitive arenas where movement in the Opex and Capex is notable in Zambia are banking and telecommunications. With banking, pride of premier banks is when they outdo their competitors by size of their balance sheet. The size of their assets (i.e. deposits from customers, size of loan book) is obsessively pursed to achieve competitive advantage. In order for the banks to achieve this, keeping a keen eye on Opex becomes a priority. Administration costs is the area where savings are usually made. Decisions such as going paperless and pursing technology are quite ubiquitous. The technology option can further be observed when banks chose to provide more self-service options (e.g. transacting on ATMs) which can inevitably lead to reduction of salaries by shaving the head count of the firm.
In the telecommunications arena, the balancing act is equally dynamic. On the one hand, spending on Capex can be the difference between the telco offering attractive products that consumers will purse hence increasing revenue. On the other hand, in order to sell, the marketing budget has to be substantial enough to ensure that the telco’s products are visible in the market. Therefore, due to the dependence on technological infrastructure to create value, reducing repair and maintenance is one area that is targeted. This is achieved through the capital investment in supreme technological infrastructure. Another is administration costs by opting for e-solutions as a means of delivering services to customers.
When the competitive pressure is high, some premier companies may be tempted to categorise expenditure as Capex instead of Opex. According to Warner and Hussain in their 2017 “The Finance Book” this happens when rewards are based on profit targets. What this implies is that for these companies, recognizing expenses as Capex as opposed to Opex has a favorable impact on the current year’s profits. However, prudence as demanded by stakeholders (such as shareholders) dictates that a clear and consistent policy must be in place. Therefore, the same items of expenditure must be treated the same way time and again. Failure to do this will automatically lead to walking the tight rope of creative accounting. Enron comes to mind.