CapEx and OpEx for Cloud Services: A Beginner's Guide
CapEx and OpEx for Cloud Services: A Beginner's Guide
Firstly, what is a Cloud Service?
The Cloud refers to any software or service that run on the internet instead of on your Macbook or your computer. This means that everytime you upload a photo on Facebook, watch The Crown on Netflix, or check your Yahoo Mail, you’re in fact utilising cloud services.
The greatest benefit of cloud services is that you can access your data from anywhere - as long as you have an internet connection. This is an especially important aspect for businesses relying on collaborative working between various depart-ments and/or locations.
This sounds all fine and dandy, but where does your data actually live?
Rather simplified, your data is being stored in enormous data centres located around the world. Instead of keeping your data in your hard drive, massive conglomerates such as Amazon, Google, and Apple keep it all safe and sound on their enormous data farms. In fact, these companies operate server farms that are so vast and power-hungry that they alone are responsible for more than 2% of the United States’ electricity usage. That’s a lot of power.
What are the Benefits to Cloud Solutions?
There are several benefits of implementing Cloud Solutions for your business. Most importantly, it frees up resources. By storing data and applications in a third-party cloud centre, you easily remove the need to manage the hardware or network-ing infrastructure, and you can host in a more flexible, scalable, and cost-effective manner.
According to Rackspace, who recently surveyed 1,300 companies, more than 88% claimed that they experienced cost savings after implementing cloud solutions. Furthermore, a whopping 56% even claimed they saw increased benefits after making the move. Additionally, more than 60% of the companies said that cloud computing actually reduced the need for their in-house IT team to manage and maintain infrastructure, thus giving them more time to focus on more important IT tasks. Not to mention, 62% of the companies revealed that they are in fact reinvesting their savings back into the business. These reinvestments opens for further growth by increasing the number of employees, drive innovation or by boosting the salaries.
Another clear benefit is the cloud’s ability to adjust to changes and developments. With a Cloud provider, you can scale up and down quickly, and easily adjust to new changes in your business structure. In fact, cloud services are allowing for small businesses to step up and compete with the big guys on the market. This trend allows the market to become more competitive, provide a better value, and to help you save money by automating your processes.
Utilising cloud services can undoubtedly deliver high scalability to your business.
What are CapEx and OpEx Solutions?
IT spending is big business. Let’s have a look at CapEx and OpEx, the two major options when it comes to IT spendings.
Firstly, Capital Expenditures, what we generally refer to as CapEx, are the spendings your business put towards fixed assets. Such assets can include the purchase and maintenance of buildings, vehicles or computer equipment. These are major spendings, often a one-time purchase, and they are intended to benefit your business for a longer period of time. The pro-curement cost show up on your balance sheet, and the cost is then depreciated over several years. Small businesses often find CapEx spendings challenging, as this generally includes the high cost of a one-time purchase. The more money put towards capital expenditures means less free cash flow for the rest of the business.
We also have Operating Expenses, simply known as OpEx, which can be described as the funds an organization uses to run its day-to-day business. Such spendings can include the subscription fee for cloud services, web site hosting or web domain registrations. OpEx cover the spendings on pay-as-you-go items, and they are deducted for your business’ income as they occur.
Most UK businesses usually prefer OpEx to CapEx for tax reasons. This is because buying equipment is considered CapEx, so not all of the spendings paid upfront can be deducted. As the amount paid to a vendor for leasing is considered OpEx, it’s incurred as part of the daily business operations, and you can therefore deduct the cash that you spent that year. Deducting expenses reduces income tax, which is levied on net income. However, if your business wants to boost its earnings and book value, you might want to make a capital expense and only deduct a small portion of it as an expense.
This will lead to a higher value of assets on your balance sheet, as well as a higher net income that you can report back to your investors.
CapEx, OpEx, and the Cloud
Understanding CapEx and Opex is instrumental in recognising what types of cloud service you need for your business.
One of the most popular cloud options on the market is the public cloud.
Here, the service provider is the one making the CapEx. You, as their client, invest in a pay-as-you-go model, an OpEx. This means that your data will be stored with the data of many other businesses, and all maintenance and upgrades will be performed by your provider. This is generally a good model for businesses lacking the resources of an in-house IT team.
Acquiring a Private Cloud, on the other hand, will involve that your in-house IT team invests in a CapEx solution, and then offers the resources in an OpEx model to various users or departments within the business. A business can also utilise re-sources from both private and public clouds, a solution which is known as a Hybrid Cloud. A hybrid Cloud can be managed by a single solution, and it can give your business better flexibility to control your costs.
So what can you take from this guide?
That Cloud Services are an imperative part of any modern business. However, there are so many solutions available that spending time finding the right system can cost your business a significant amount of resources, and it runs the risk of you implementing a solution that is far from ideal. Software Advisory Service can help you find the right cloud service tailored to your specific needs. We offer impartial expert advice that will save you both time and money, and we do it all completely free of charge.
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