What Does the Term Black Mean?
The term 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 term can also apply to individuals. Anyone who has more assets than liabilities, and is able to pay off his or her debts without any problem is said to be in the black.
Understanding the Term Black
The term being 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 is not overburdened by debt. 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 a different colored ink, negative earnings and other related figures are contained in parentheses on financial statements.
Although computers have replaced handwritten financial statements, the terms black and red are still in use.
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 they will continue to receive any income through dividends.
The economic cycle also factors in to 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.
- The term black is used to refer to a company's profitability and current financial health.
- The term 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 is not burdened by too much debt.
- Companies that are unprofitable and showing a loss are said to be in the red.
Being In the Red
There are times when companies find themselves in the red, despite the economic cycle. They may not be profitable because of 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.
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.