What Is in the Black?
The expression "in the black" is used to refer to a company's profitability and current financial health. A company is said to be in the black if it is profitable or, more specifically, if the company produces positive earnings after accounting for all expenses.
The term has roots in accounting history when accountants updated financial data in their books by hand before computers and software came into use. Accountants used different colored ink—both black and red—to denote a company's profitability. Unlike a company in the black, one with negative earnings or that is unprofitable is said to be in the red.
- The expression "in the black" is used to refer to a company's profitability and current financial health.
- The expression is rooted in accounting history when accountants updated financial data in their books by hand using black ink.
- When a company is in the black, it has positive earnings, is financially solvent, and not burdened by too much debt.
- Companies that are unprofitable and showing a loss are said to be in the red.
- Both terms, in the black and in the red, can also refer to an individual's personal finances.
- On financial statements today that don't use ink, negative numbers are typically entered in parenthesis or with a minus sign.
Understanding in the Black
The expression "in the black" is commonly heard in the financial world and refers to a company's most recent financial status, generally its last accounting period. When a company is in the black, it is said to be profitable, financially solvent, and not overburdened by debt (manageable debt is not an issue). As such, the future of the company is certain, so instead of the likelihood of going bankrupt, the company is able to continue its normal operations.
The phrase is derived from the color of ink used by accountants to enter a positive figure on a company's financial statements. Obviously, it is better to consistently be in the black than in the red as this indicates solid business performance.
Although computers have replaced the old ink-based system, the terms black and red are still used. Instead of different colored ink, negative earnings and other related figures are contained in parentheses on financial statements.
What Causes Companies to Be in the Black?
Companies strive to remain in the black because it means they are at or above the break-even point. By being profitable, they're able to pay down debt and can maintain their cash flows during difficult times. They also need to answer to their directors and, more importantly, their shareholders.
A profitable company boosts shareholder confidence and also ensures shareholders will continue to receive any income through dividends if dividends are offered. Companies that are in the black also have an easier time raising capital for any financial needs, whether that be debt financing or equity financing.
The economic cycle also factors into whether a company will be in the black. During times of economic certainty, companies often find themselves profitable. For example, when the economy is expanding, consumers are more likely to borrow and spend more. Retailers, for instance, are more profitable and can pay off more debt because interest rates are low.
On the other hand, when the economy is contracting and interest rates are higher, they may end up in the red, as the buying power of consumers becomes restricted.
Being in the Red vs. in the Black
There are times when companies find themselves in the red, despite the economic cycle. They may not be profitable because of their spending on research, new technology, or to pay off debt. But this isn't always a bad situation and isn't cause for concern as it may just be a temporary condition, with profitability just around the corner, especially if these expenses are setting up the company for future profitability.
If a company is consistently in the red, though, it may raise a red flag. Companies that constantly report a loss may lose shareholders, fail to attract new ones, cannot secure any financing, and may end up on the path to bankruptcy.