What Does "In the Black" or "In the Red" Mean?

The terms "in the black" and "in the red" have important meanings in small business bookkeeping. They describe a company's financial health, with businesses operating at a loss being described as "in the red" and those that can meet their operating costs (and even generate profit) described as "in the black."

These red-and-black terms date back to earlier times of bookkeeping before computers. Accountants used to record income for the business in black ink, while debts and expenses were recorded in red ink. Quickly, the associations between red and debt and black and profit grew and continues to this day.

For those interested in accounting for small businesses, new businesses, and freelancers, here are the answers to some FAQs we see about these phrases.

"In the Red" vs. "In the Black"

The terms "in the red" and "in the black" provide a quick way to describe a company's financial health. Those operating at a loss are "in the red," so their debt and liabilities outpace their income. Those "in the black" have generated enough funds to cover their operating expenses.

What Does It Mean to Be "In the Red?"

When a business is "in the red," it means that the organization owes money or is in debt. This accounting term comes from before computers when company expenses were recorded in red ink — a different color from the typical black — to clearly differentiate them from an organization's income. A company "in the red," therefore, has more expenses than it can generate revenue to cover.

However, business owners should note that most companies go "in the red" for a brief period of time, particularly in the beginning. A business that starts with more debt than income can easily occur when an owner has to take out loans to cover the expenses of starting their business. For a well-run business, this only lasts a short while before the business starts to make enough money to cover its expenses.

However, a business that consistently finds itself "in the red" can indicate a more worrisome state. A business that has operated for several years and can't consistently maintain an income high enough to cover operating expenses can scare off investors and others who might have had an interest in the organization. Businesses that can't manage to stay "in the black" should carefully evaluate their business model and practices to find ways to turn their financial state around.

What Does It Mean to Be "In the Black?"

A business described as "in the black" is one that manages to generate enough revenue to cover its expenses and even profit. In the time before computers, accountants would record business income in black ink to make it clear that the business was thriving financially. When a business generates enough money to meet its debts, accountants will use the term "solvent" to describe the organization.

A business "in the black" positions itself well for bringing in investors and finding opportunities for growth. Those interested in the company can clearly see that this business model has generated enough revenue to cover expenses. This helps the business's reputation as a well-run organization.

How to Get "Out of the Red" and "Into the Black"

Businesses that find themselves consistently "in the red" will want to carefully reevaluate their business practices and business model so they can pave the way "out of the red" and "into the black." They want to turn their regular debt into positive cash flow so they can cover operating costs and begin to generate profit.

Several strategies can help businesses begin this important transition. Here are a few that business owners can utilize.

Take Inventory of Your Debt

Taking inventory of your debt requires carefully listing and analyzing the different liabilities and debts that your business owes. Make a chart of your current outstanding debts, then record your monthly payments, how much you need to pay until the full amount is paid off, and the interest rate on each debt.

Skynova's accounting software enables journal entries and expense tracking, making it simple for business owners to see exactly where their money goes. This can help you compile your debt inventory and analyze how you can turn your financial situation around.

Set a Plan to Get "Out of the Red" by Repaying Debt

Now that you can see your different sources of debt, the next step requires developing a specific plan to pay off that debt. Look at the debt that carries the highest interest rate and those with the largest monthly payments. Start prioritizing paying off debt that will have the biggest impact on your finances. Focusing on debt over adding other expenses can help businesses begin to minimize the "red" within their budgeting sheets.

Reanalyze Your Budget and Spending

As you begin to pay off your debt, you should reanalyze the budget and spending patterns of your business. Consider how your business used debts and liabilities in the past. For example, did you borrow money to make upgrades on equipment before you needed to? Find potential areas where spending can be reduced as the organization tries to turn itself around.

As you begin to reevaluate your budgeting, track your progress using journal entries with Skynova's accounting software. This product makes it easy to see your progress and how your business's debt aligns with the revenue you can bring in. If your strategies begin to work, you'll see that here.

Rethink Client Payment Terms

In addition to looking at your spending and budgeting, you also need to consider your client payment terms. Look at prices within the industry and your competition. How do your pricing and services compare to what others offer? Your income statement shows what you have earned within a given time frame, so compare that to your expenses at the same time.

If your business fails to generate enough revenue, it's possible that you don't have adequate client payment terms compared to the services you provide. See if there are ways to generate more revenue through client payments or adjusting your service offerings. You can use Skynova to create invoices and manage client payments to ensure that you receive the funds you deserve and track your business as it gets "into the black."

How Accounting Software Can Get Your Small Business "Into the Black"

Remaining "in the black" provides businesses with opportunities to secure investments and set themselves up for growth. Accounting software can provide these companies with the help they need to manage their finances so they can keep themselves "in the black."

With accounting software like Skynova, businesses can track:

  • Business transactions
  • Expenses, including credit card payments
  • Short-term and long-term debt, debits, and liabilities
  • Income and revenue

This can empower business owners with better insight regarding how their companies budget and generate revenue so they can organize their finances and achieve success. Small businesses have various competing responsibilities as they work to keep their companies running; they may not have the resources for full-time accounting departments. Accounting software can fill in the gaps so they can successfully track their financial statements and stay on top of their bookkeeping.

Know Whether You're "In the Black" With Skynova

Understanding the terms "in the red" and "in the black" can help businesses better navigate the financial aspects of running their companies. The insight these terms provide into a business's financial health can help you guide your business to success.

As you begin to plan for your business's accounting needs, see how you can use the suite of Skynova products, accounting software, and templates to excel. Make this next year a good year for your organization and plan with the right accounting software.

Notice to the Reader

The content within this article is meant to be used as general guidelines regarding financial decisions and improving your business budget. It may not apply to your specific situation. Always consult with a professional accountant to ensure you're meeting accounting standards.