What is “balance of payments”?

Although it might seem totally unconnected to your business, it’s important to have a basic understanding of economics as well as accounting. While accounting focuses on the transactions and finances of your business, economics looks at finance in a much broader way, looking at the finances of entire countries and communities. This is where the balance of payments comes in. 

This article will help you understand what the balance of payments is and why it’s important. We’ll look at several different topics, including:

• What is “balance of payments”?
• What makes up the balance of payments?
• Why is the balance of payments important?

The balance of payments, also known as the international balance of payments or BOP, is a statement recording all of the financial transactions made between the entities of one country and the rest of the world. 

Entities could refer to individuals, businesses, or nonprofit organisations — the balance of payments would display the transaction made by any of these, as long as they operate within the country in question’s borders.

A country’s BOP can either be in deficit or surplus. If the imports of a country exceed its exports, then the BOP is in deficit. A BOP is in surplus if the opposite is true (its exports exceed its imports). Imports are things that entities within the country buy from other countries, and exports are things those entities sell to other countries.

A deficit means that the country bought more than it sold, and its economy may struggle due to a lack of cash funds. On the other hand, a surplus means the country sold more than it bought and made money. This is good in the short term, but it’s bad for a country to rely on exporting to other nations as this dependence can cause its internal economy might suffer. 

The balance of payments tracks all the money that comes into and goes out of a country. In this way, it’s sort of like tracking the national cash flow. Tracking your cash flow is much easier when the transactions involved are organised, and the balance of payments is no different. 

The transactions a balance of payment all fall under one of three categories, or ‘accounts’:

• Current account
• Capital account
• Financial account

The current account includes all the goods and services bought or sold and the payments relating to these transactions. This means even international payments that your own small business receives in exchange for your products are part of the BOP current account.

A nation records all the money made from things like tourism, transportation, or engineering works in the current account. Since the current account includes so much, the people calculating it must further divide it into visible and invisible items. 

Visible items are physical goods, so within the current account, this refers to everything from food imports and exports to major engineering products like ships and aeroplanes. 

Invisible goods are services, things that you can’t physically interact with but still have value. For example, if one country provides banking services to another, this would be an invisible item on the current account. 

The capital account includes any non-financial assets, like property and land. For instance, if a company buys a factory in another country to produce goods there, the capital account would record that transaction. It also includes things like loans between countries. 

The purchases of assets by people moving to another country are also in the capital account, as well as the taxes that come with those purchases. So if you move abroad and buy a house, that sales is part of the capital account.

The financial account doesn’t track transactions like the other two accounts. Instead, it looks at any financial investments between different countries. Say you’re looking for the right investors for your business, and they happen to operate out of another country. Their investment into your business would be part of the financial account.

As well as business investments, foreign purchases of stocks and equity are part of the financial account. As well as foreign investments into companies within another country, the financial account includes domestic investments into foreign businesses. 

There are a ton of different ways a business can measure its success, and it’s no different with countries. The balance of payment allows a country to find out how well it is performing economically, and it can compare its balance of payments to other nations to see how it stacks up. 

The balance of payments is also a vital part of a nation’s decision-making process. National leaders will use the information in a balance of payments to decide how their country will approach international trade and other similar financial matters.

Analysing transactions to create the balance of payments is a vital part of measuring a country’s economy. It’s also important for you to analyse your business’s transactions in a similar way, as although it’s on a much smaller scale, your business is part of its own little economy. 

Despite the smaller scale, this sort of analysis can still be quite complex. Luckily, technology can help you with this. There are tons of financial management apps available, and one of the best examples is Countingup.

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 
Find out more here.