The Discounted Cash Flow
First, let's talk about discounted cash flow. The DCF method is very well suited to valuing a startup because it relates to future performance. This makes this method perfect, of course, as start-ups usually have no older performance (i.e. historical data) to show. However, it must also be said that this method is not suitable for start-ups that do not yet have any sales to show. In most cases, other indicators such as market size or the degree of innovation are decisive. The DCF method should therefore only be used in combination with other variables to value start-ups.
An important step of the DCF method is the estimation of the current and future cash flow, for which we need to project the costs and turnover as accurately as possible.
Two of these indicators to correctly estimate the outgoing cash flow are CapEx and OpEx.
CapEx
CapEx is the abbreviation for capital expenditures and describes expenditures on long-term assets such as buildings, vehicles, machinery, furniture and software. A major common feature of these fixed assets is their necessity for day-to-day operations and that they cannot be quickly converted into cash. CapEx expenses can be claimed and written off for tax purposes. As a write-off, they thus reduce profit.
Most start-ups have a negative operating cash flow in the first few years because, for example, they have to invest a lot in operating working capital (net current assets). For example, sharing economy providers such as Lime or Tier have to make high investments in the beginning to buy e-scooters. Similarly, office furniture and especially "phonepods" are CapEx-intensive. A soundproof phonepod already costs between €15,000 to €25,000 without transport and set-up costs. With such a large capital outlay, a company's runway can be shortened by as little as 1-2 months.
OpEx
The opposite of CapEx is OpeEx. OpEx is the abbreviation for "operational expenditure" and refers to the ongoing and recurring costs of maintaining operations or a product. These could be, for example, salaries and rent. In contrast to CapEx, OpEx is shown 100% on the balance sheet, i.e. €500 of rent is reflected as €500 in operational expenditure.
Through "as-a-service" or "on-demand" solutions, the recurring costs (OpEx) can be scaled flexibly and thus the risk of a cash burnout can be avoided. In recent years, this was before "X-as-a-Service" such as Software, Data or Infrastructure, i.e. mainly the shift of IT infrastructure to the cloud and to other providers. It's pretty unlikely to find a company today that still runs their own servers in-house.
The Difference
Well, what is the difference between CapEx and OpEx? Let's take a coffee machine as an example. Buying the coffee machine is an investment (i.e. CapEx) because the coffee machine will be needed for a long time. Coffee beans, filters, water and electricity are consumed on an ongoing basis and are needed to maintain the machine, therefore this is an Operational Expenditure.
If we combine CapEx and OpEx we get "TotEx" i.e. Total Expenditures.
An Example
Let's take an example. Imaging you are a company and want to move to another office. As soon as you find an office and sign the contract, it is time to organize the furniture which your coworker will use. Now you are facing three different ways to approach this case: We can either Buy, Lease or Rent furniture.
Buying office furniture requires a lot of capital investment. From our professional experience we know the following cost categories: One-off and recurring.
One-off costs are the costs for project development, design, delivery, furniture, installation and final removal.
Recurring costs are costs which are impossible to estimate or predict: Maintenance costs and the costs for flexibility.
Leasing is cheaper than buying but at the end of the fixed leasing period, the lessor will examine the leased furniture for any damages which inherits the risk of high costs.
Renting office furniture is even cheaper than leasing because the residential value of furniture is not included in the monthly rent. It is also the only way which provides any flexibility, thus the tenant can freely change his furniture according to his/her needs.
If you want to compare your offers for office furniture, you can use the following link and download our CFO furniture Excel
Summary
OpEx provides transparent and constant cash flows over time, making valuation easier and more accurate. Switching the business model to an OpEx-based "asset light" strategy is thus beneficial for valuations and can significantly extend a startup's cash runway.
CapEx are particularly advantageous when the goods/assets to be purchased are to be used in the long term or, for example, are a critical factor in the company's success. A company that rents out high-quality furniture should rather prefer to buy it, since on the one hand it differentiates itself from other providers and on the other hand this asset will also be used in the long term. Companies that work in cybersecurity or confidential data have to weigh up whether they trust a cloud provider or prefer to build their own server structure that is well decoupled from the rest of the IT infrastructure.
Companies should rather spend their money on developing their business and customer promise, rather then spending it on expensive CapEx investments, such as furniture.
NORNORM and OpEx
We at NORNORM offer start-ups as well as large companies the option of all office furniture as an OpEx variant and thus enable an easy-to-calculate cost planning and evaluation basis. With 3€ per furnished square metre and a notice period of only 6 months, our customers can scale in all directions and flexibly save costs. In addition, we have already enabled some clients to switch to remote or hybrid working, as furniture can be exchanged for others on a quarterly basis. Do you notice that relatively few employees appear in person in the office? No problem, we can convert existing workplaces into comfortable social spaces where colleagues can relax between meetings.