What is an opening balance? Your complete guide
If you’ve just started a new business, or it’s your first time managing the accounts, you’re probably discovering a lot of unfamiliar terms. That’s why we’re here to keep things simple for you.
Today, we’re taking a deep dive into the term ‘opening balance’ – including what it is, how to calculate it, and what it means for your business.
What is an opening balance?
An opening balance is the amount of money a business has available at the start of a specific accounting period. This period could be a day, a week, a month, a quarter or a year, depending on how the business manages its finances. The balance can be a positive or negative figure, and can be a useful way of tracking a company’s performance across different periods. It’s also an important figure to have on hand for investors.
What your opening balance is, and what it means for your business, will vary depending on whether you’re starting a new company or managing the accounts of an existing one. Here’s a little more about what that means.
Different types of opening balances
When you start a new business, the opening balance for your account is usually zero – unless you spent money setting the business up. Any investments or loans will be entered as transactions during your designated financial period, so you don’t need to include them here.
If you’ve been running a business for more than one accounting period, then your opening balance is the amount of money left at the end of your previous accounting period, which is known as your closing balance. This balance (whether it’s positive or negative) is brought forward to become your business’ opening balance.
How to calculate your opening balance
Once you’ve been running a business for more than one accounting period, you’ll need to start calculating your company’s opening balance. If you’re using any accounting software, these figures will be automatically calculated for you. But if you’re managing your accounts manually, you’ll need to work out the opening balance yourself. Fortunately, this is pretty straightforward – all you need is the figure from your closing balance.
Here’s how that works in practice.
Let’s say you’re running a new business that’s coming to the end of its first accounting period, and you need to calculate its first closing balance. You can do this with a simple closing balance formula: opening balance + earnings - outgoings = closing balance. So, if it’s your first accounting period in the business, your opening balance would have been zero. Let’s then say you earn £10,000 and spend £3,000 during that first accounting period. Your closing balance would be £0 + £10,000 - £3,000 = £7,000.
That £7,000 closing balance would be carried forward to become the opening balance for your next accounting period. This means that the only opening balance formula you need is: closing balance = opening balance.
B/D vs C/D
If you’re using accounting software or working directly with an accountant, you might see the abbreviations B/D (brought down) or B/F (brought forward) alongside your opening balance. These refer to the fact that your opening balance is a figure brought forward from the previous accounting period.
Similarly, the abbreviations C/D (carried down) and C/F (carried forward) may appear alongside your closing balance, referring to the fact that the figure will be carried forward to the next accounting period.
Why are opening balances important?
There are a couple of key reasons why opening balances are a crucial figure for businesses – whether they’re a new startup or an existing enterprise.
The first is that calculating your opening balance is a simple, effective way of analysing your company’s performance, tracking trends, and spotting any problems with earnings or spending. For example, if you’re starting a new period with a negative opening balance, you might need to reduce your spending for the next period.
The other reason opening balances are so important is that they provide clear answers about your company’s performance to investors, stakeholders and tax authorities.
But for an opening balance figure to be accurate, every transaction (whether that’s earnings or outgoings) has to be accurately recorded, either in your accounting software or your cash book. Luckily, Mollie makes staying on top of your transactional data easy.
Real-time payments with Mollie
With Mollie as your payment service provider, you get real-time access to your company’s invoices and payouts, along with a detailed overview of your current balance. Plus, you can export all that data to your accounting software in just a couple of clicks. So, when it comes to things like calculating opening balances, you’ve got everything you need at your fingertips.
Looking to grow your business? Find out more about what payments with Mollie can do.