The terms “in the red” and “in the black” are important phrases in the terminology of finance and accounting. You don’t necessarily have to be in the finance department to understand or use these terms which have formed a relevant part of common conversation and our everyday speech.
Here's what we have in store for you:
- The Meaning, definition, origin, and examples “in the black” or “in the red
- The history of the phrase - to be in the red, or in the black
- The contemporary usage of in the red and in the black
- How to Get Out of the Red and Into the Black
- How a professional bookkeeping software can promote your business to be "In the Black"
- Difference between being In the Red and In the Black
- Positive or Negative Undertones
Meaning, Origin, And Effects Of Being ‘In The Red’ And ‘In The Black’
The phrase “in the black” means being economically profitable or financially solvent or just not in debt. A business that is “in the black” is usually profitable, or at least enough to make a profit without worrying about bankruptcy.
On the contrary, the expression “in the red” means that you are out of cash, don’t make enough money, are in debt, or have a deficit. The cash flow cycle of companies and people keeps changing every year, but organizations that have been in the red for quite a few years without a debt settlement plan will fall into bankruptcy or will financially fail. It could change after a few years, and generally, start-ups or new ventures are in the red during the first few years of their commencement. But if for several years, a company stays in the red, and there is no way that it could get out of the debt it is in, then its failure is certain.
Using “in the black” is a positive thing, and “in the red” is considered to be a negative thing. These color indicators are unique to the world of accounting and finance.
Definition Of Being ‘In The Red’ And ‘In The Black’
In the Red - In debt, or to owe money.
In the Black - Having more income than expenditures; to be making a profit.
Origin
In the past, the color red was used to depict a financial loss in the bookkeeping track of a business’s financial records. If you don’t make enough profits, or you lose money for a given year, your company will be shown in red. In the black means the opposite, when the color depicts the financial health and well-being of a person or a business.
Both phrases originated from the accounting practices and bookkeeping records of the economy and business, where financial gains were written in black losses and financial losses were written in red. The use of these words began in the first half of the 20th century – during the 1900s.
When accounting was done by hand
Before accounting was done on computers, it was done on paper. To differentiate between debit and credit, accountants started using black and red color ink for each. Red is a harsh color and tends to attract immediate attention, so it was used to denote debts, and losses. It generates an idea of something bad or negative.
When accounting was done on a computer
Even after the accounting was handled by computers, most software used parentheses to indicate a negative number or a debit by using a minus sign before a number or using red for debts and debts.
On the other hand, if you had an exceptionally good year at work or you inherited some money, then you would be “in the black” for some time.
Examples
These are examples in the form of a dialogue between two people:
In the Black - Two friends
Alan – Hey, Jim just called, and he has invited all of us for a grand party.
Ruskin – Yes, I have been invited too. What’s the occasion?
Alan – I don’t know! Maybe he is just celebrating his recent success with the new client. His business is in the black, and he is growing financially, so maybe it’s a treat for us.
Ruskin – That is amazing – he does work hard for it too. It’s nice of him to share his success with his friends.
In the Red - Two college students
Sneha: Did you read about the university’s financial difficulties in the news today?
Astha: No. Why?
Sneha: It says that our uni is in the red. It hasn’t been making a profit for many years now, and it is in massive debt.
Astha: Really?
Sneha: Yeah. If the situation persists, the university may have to get closed down.
Astha: That is hard to believe. We are paying so much tuition fees and the strength of the university is also good. I think it will recuperate and things will settle down soon.
Sneha: I hope you’re right.
Ways to Get "Out of the Red" and "Into the Black"
Companies that are consistently in the red need to carefully reassess their business practices to “get out of the red” and “turn to black”. They should make all possible efforts to clear their debts, generate profits, and cover operating costs. Here are a few strategies that will help organizations initiate this transition:
1. Take Inventory of Your Debt
You must assess your debt carefully and conduct a listing and analysis of what your company owes. Graph your current outstanding debt, the interest rate on each debt, and write down your monthly payments. You must make journal entries and keep expense tracking, so business owners can easily see where their money is heading. This helps you create a debt inventory and analyze how your financial situation can change.
2. Establish a plan to "get out of the red" by paying off debt
Now that we have identified the causes of the various debts, the next step is to make a concrete plan to repay those debts. Look at the debt with the highest interest rates and the debt with the highest monthly payments. Start paying off the debt that has the greatest impact on your finances. Focus on debt rather than adding other costs allowing businesses to minimize budget “deficits”.
3. Re-analyze Your Budget and Spending
It's a good idea to re-analyze your company's budget and expense, incurring patterns when you start paying off your debt. Think about how your company has used debt in the past and find areas where you can reduce your spending. When you start revaluing your budget, you must track your progress and see how your company's debt matches your income.
4. Rethink Client Payment Terms
Besides checking your spending and budgeting, you must also keep a tab on your client's payment terms. Make note of the prices within the industry and your competition.
If your business falls in the red category, check to see if there are enough ways to generate more revenue through client payments or adjusting your service offerings and track your business so that it converts "into the black."
How a professional bookkeeping software can promote your business to be "In the Black"
Incorporating effective accounting software well within your system can help your business remain "in the black" and provide your company with an opportunity to secure investments and set itself up for growth. Great accounting software can help you manage your finances and can help you track several other features like:
- Business and Commercial transactions
- Expenses like loan or credit card payments
- Short-term and long-term liabilities, debts, and debt
- Revenue and Income
This can empower business owners and help them stay on top of their bookkeeping with better insight. It helps companies budget and generate revenue so they can organize their finances and achieve success.
Difference between being In the Red and In the Black
Let’s look at a few differences between the term ‘In the Black’ and ‘In the Red’.
1. Solvency
"In the black" companies generally have higher assets than liabilities, are more financially stable, have lesser debt, and are solvent as compared to "in the red" companies. Companies with a "surplus" degree tend to pay off their debt easily, while the companies in “deficit” degrees which are “in the red” businesses, tend to have a higher debt and are almost volatile. Hence, these companies struggle and usually default in payment of their liabilities, rather than paying their timely regular expenses.
2. Profitability
The revenues surpass the expenditures in the businesses with the ‘In the Black’ remark. These companies have positive earnings and show profitability as compared to 'in the red' companies. But these aren’t permanent positions. Many ‘in the black businesses’ can eventually turn into ‘in the red’ and vice versa. This depends on various internal and external factors, so these expressions are not forever.
3. Performance
‘In the Black’ companies depict good operational performance and higher profitability, whereas businesses ‘In the Red’ have reported loss and show underperformance. In the Black companies have exceeded or met the targeted operational performance, and In the Red companies have performed below the targets.
4. Uncertain/Certain Future
‘In the Black’ companies have a safe and growing future and can continue to operate normally in the future. Companies with an ‘In the Red’ degree tend to have an uncertain future regarding the company's growth, future, and stability.
5. Raising Capital
Companies that are in the black will find it easier to raise funds through private and public financial institutions, and banks. The reliability of these companies in the market makes it easy to raise funds through a variety of platforms. On the contrary, in the red companies find it difficult to raise money and even if they are offered financial support, it would be available at a much higher interest rate because of the poor credibility and unreliability.
6. Stakeholders
Stakeholders of a company enjoy the benefits of the success of black companies. Stakeholders like employees, debtors, creditors, suppliers, investors, shareholders, and customers tend to pay dividends frequently and remain satisfied with the delivery of high-quality products on time. But the stakeholders of companies ‘in the Red’ are mostly dissatisfied and stressed whether they will get the anticipated returns or not.
7. Positive or Negative Undertones
Black has a positive implication, whereas Red has a negative effect. Positive or negative undertones in the black and in the red in the financial statements have been used for ages and to date, denote the expressive perfectly.
8. Bankruptcy Risk
Bankruptcy risk If a company writes "red" for a long time, the risk of bankruptcy increases. Lack of funds and loss loans mean that you cannot pay your contributions on time, which increases the risk of default. Prolonged situations like this can lead to bankruptcy. Similarly, "in the black" companies are unlikely to default. If others are stable, "surplus" companies have little risk of default or bankruptcy.
How can Deskera Help You?
Deskera Books is an online accounting, invoicing, and inventory management software that is designed to make your life easy. A one-stop solution, it caters to all your business needs from creating invoices, tracking expenses to viewing all your financial documents whenever you need them.
Through Deskera Books, your accounting would be handled by it, with all that you would need to do is update your invoices, your account receivables, and accounts payable, and the operating expenses incurred as well as operating income earned on the software. In fact, you can even delete or edit the existing debit notes and credit notes, as is applicable.
The platform works exceptionally well for small businesses that need to figure out a lot of things when they are setting out. This delightful software allows them to keep up with the client’s expectations by assisting them in overseeing a timely delivery.
With the well-thought and well-designed templates, you can now anticipate your work to become simpler. These templates can be used for transactions like invoices, quotations, orders, bills, and payment receipts.
If yours is a drop shipping business, you can easily track your orders and create new dropship orders for your suppliers based on the customer orders.
Deskera People is another platform that enables you to expedite and simplify the processes. Through its automated processes like hiring, payroll, leave, attendance, expenses, and more, you can now unburden yourself and focus on the major business activities. It also assists with driving growth for your business by integrated Accounting, CRM & HR Software.
The entire setting up process on Deskera Books is super easy, with you having to only sign-up using your email address or social authentication, and half of your work would be done. Once you have registered on Deskera Books, you would get pre-configured accounting rules, invoice templates, tax codes, and a chart of accounts, to mention a few vital features. Lastly, your accountants can be added to your Deskera Books account for free by just inviting them to use the system.
With so many features at your disposal, making your accounting, reporting, and compliance easier, what are you waiting for?
Conclusion
Being "In the black" is considered better than being "in the red", as these colors signify the interpretation of the financial condition of a company or individual. To conclude, we can say is in the black surely is a better situation where the company is a good financial condition dealing with debts steadily, but today being in the red, always doesn’t mean danger.
This could also mean, a new company, investing heavily in research and development in the first few years and being in the red, but eventually, it pays off immensely and being in the red initially leads to being in black eventually. Thus, it is not advisable to rely entirely on the "In the Black" element and look at the holistic approach to analyze the financials of a person or a business.
Key Takeaways
- The English expression ‘in the black’ means that a business has more money than it owes, or it is earning more money than it is spending. In the black businesses are profitable and financially solvent
- The phrase ‘in the red’ is used in contrast to the phrase "in the black" to describe a business that has negative earnings
- The terms originated from the color of ink used in hand-manged manual bookkeeping procedures, used by accountants to enter the figures in the financial statements
- With the advent of computers, the ‘in the black’ and ‘in the red’ regime continued and currently has become an expression in which red denotes expenses and black denotes income
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