What it means
Everyday finance language is full of colour. To say that a company is in the red is to say that its expenses are greater than its income, or that an account has dropped below zero.
The opposite phrase is in the black, which means profitable or in credit. The words describe the bottom line of a period.
If a business earns $400,000 and spends $450,000, the result is a loss of $50,000 and the business is in the red for that period. A single bad quarter does not make a company bankrupt, but a long run of red results will drain cash and eventually threaten survival.
Red also appears as a status colour in management reporting. In a budget report or dashboard, a red cell usually means that actual results are worse than budget by more than an agreed tolerance, with amber for a warning and green for on target.
The exact thresholds vary by organisation, so a reader should always check what each colour means before reacting. Bank accounts can also be in the red.
An overdraft occurs when the balance is below zero, and the bank may charge interest and fees on the negative amount. A business that regularly sits in the red on its current account usually has a cash flow problem that needs to be fixed rather than tolerated.
Being in the red is not always bad news. A young company investing heavily in growth may report losses on purpose while it builds customers, and an established business might show a loss after a one-off write-down.
The question is whether the red is temporary and planned or persistent and unexplained. The colour language is useful because it is quick.
A manager scanning fifty lines of a variance report can find the problems in seconds by looking for red, then spend the time on the few items that matter. The risk is that people react to the colour without reading the number, so the best reports show the amount and the percentage alongside it.
In practice
Real-world examples.
Example
A software start-up spends $1,200,000 in a year on salaries and servers while collecting $800,000 from customers. It is in the red by $400,000 but has raised investment to cover the gap while it grows, so the board treats the loss as planned.
Example
A department manager opens the monthly budget report and sees the travel line shaded red. Actual spending is $18,000 against a budget of $12,000, so she asks for an explanation and agrees on cuts for the rest of the quarter.
Example
A freelance photographer checks her account and finds a balance of -$350 after a client paid late. She moves money across from savings, because staying in the red would trigger overdraft charges from her bank.
Formula
Calculation
Result for the period = total income - total expenses (negative means in the red)
Suppose a bakery earns $480,000 of income in a year and has $520,000 of total expenses. Result = 480,000 - 520,000 = -$40,000. The bakery is in the red by $40,000, which is 40,000 / 480,000 = 8.3% of its income. The percentage is worth stating, because a $40,000 loss means something very different to a business with $480,000 of income than to one with $48,000,000.Case study
Seen in the real world.
Marlowe Street Cafe is an illustrative, fictional restaurant that opened with a loan of $150,000. For the first eight months its monthly reports were in the red, with losses of about $6,000 a month as it built its customer base.
The owner tracked three numbers each week: covers served, average spend per customer and food cost. By month nine the losses had shrunk to $1,500, and by month eleven the restaurant earned a small profit.
The illustrative point is that red figures need context. A planned loss with a clear route back to profit is a different matter from an unexplained loss that keeps growing. Her accountant also reminded her that the owner's pay, rent and loan interest were all in the expenses, so the true cost of running the cafe was visible in one place.
Watch out
Common mistakes.
- Assuming that being in the red means the business is about to fail, when many healthy companies run planned losses for a time.
- Assuming a red cell on a dashboard has the same meaning in every organisation, when the thresholds differ.
- Confusing a loss for the period with a negative cash balance, which are two different things.
Questions
People also ask.
Is in the red the same as bankrupt?
No, it means losing money or overdrawn, whereas bankruptcy is a legal state in which debts cannot be paid.
Why is it called red?
Bookkeepers once wrote negative amounts and losses in red ink so they could be seen at a glance.
What is the opposite?
In the black, which means making a profit or having a positive balance.
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