Just as engineers need to balance quality, performance and cost while designing products, a company’s finance team must balance cash flow, expenditures, and projected return-on-investments. Many engineers may not realize that the traditional desktop-installed software they purchase today often becomes a company asset that depreciates over some number of years.
Desktop software with significant upfront costs ties up valuable money, impacting cash flow and potentially keeping companies from making other meaningful long-term investments. SaaS (Software as a Service) solutions, such as Onshape, provide pay-as-you-go subscriptions with no upfront license fees, which is a much more attractive proposition for the bean counters. To understand why, you must first understand the difference between Capital Expenditures (CAPEX) and Operating Expenses (OPEX).
Capital Expenditures (CAPEX) are funds that a business uses to purchase goods and services that expand its ability to generate profits. These expenditures can range from a new building to computers, printers, and yes, installed software. If the asset’s useful life extends past one year, your accounting team will spread that cost over multiple years using depreciation. The cost of installed CAD licenses is often depreciated over a 3-year period.
Operating Expenses (OPEX) are the ongoing costs a company incurs to run its daily business (wages, utilities, legal fees, office supplies, rental and repair costs, etc.). Unlike Capital Expenditures, these expenses are not depreciated over time, but rather are fully recognized in the year in which they are paid. Many SaaS solutions like Onshape are considered OPEX, because you only pay for what you use.
When trying to convince “the powers that be” to buy new or additional CAD seats, your CFO will most likely prefer the subscription model of a cloud-based CAD system like Onshape (OPEX), versus the outright purchase of a traditional installed CAD system (CAPEX). Here’s why:
- Less cash is required upfront.
- Without depreciation, the company does not need to prepare supporting financial schedules, keep track of the installed software asset, etc.
- There is no guesswork required to estimate ROI.
- The company is not stuck with the solution (and the “stranded capital” used to pay for it) if it becomes no longer useful or outdated.
- The company can pay for exactly what it needs and scale as requirements change.
- The budgeting process is straightforward as short-term spending requirements are easier to understand.
- Precious capital can be redeployed to other long-term investments.
- Less IT and hardware resources (giving rise to even more CAPEX) are required to implement the system.
So as you are evaluating your CAD tools, think about more than just the list price of the solutions. The economic substance of your transaction and the accounting for it will be significant factors for your finance team. It’s no understatement to say that your choice can have a potentially large impact on your company’s growth and profitability!