Your break-even point is the amount you must sell to cover all your costs. Below it you lose money. Above it you make a profit. It is one number that tells you whether a plan can work.
Two kinds of cost
- Fixed costs stay the same however much you sell: rent, salaries, software, insurance.
- Variable costs rise with each sale: materials, packaging, payment fees, delivery.
The formula in units
Break-even units = fixed costs ÷ (price − variable cost per unit)
The part in brackets is the contribution margin: what each sale contributes towards your fixed costs.
Example. You sell candles for 20 dollars. Each costs 6 dollars to make and ship. Your fixed costs are 4,200 dollars a month.
- Contribution margin: 20 − 6 = 14 dollars.
- Break-even: 4,200 ÷ 14 = 300 candles a month.
The 301st candle is the first one that earns a profit.
The formula in sales
If you sell many different things, it is easier to work in money than units.
Break-even sales = fixed costs ÷ contribution margin ratio
The contribution margin ratio is the contribution margin divided by the price.
Example. Using the candles: 14 ÷ 20 = 0.7, or 70 percent.
- Break-even sales: 4,200 ÷ 0.7 = 6,000 dollars a month.
That matches 300 candles at 20 dollars each.
For a service business
Your variable costs are often small, and your main fixed cost may be your own pay.
Example. A consultant charges 100 dollars an hour. Software and payment fees per hour are about 5 dollars. Fixed costs, including the owner's own monthly pay, are 6,650 dollars.
- Contribution per hour: 100 − 5 = 95 dollars.
- Break-even: 6,650 ÷ 95 = 70 billable hours a month.
That is about 16 hours a week. If you cannot bill that many, the price or the costs need to change.
In a spreadsheet
- Fixed costs in cell A1, price in B1, variable cost in C1.
- Break-even units: =A1/(B1-C1)
- Break-even sales: =A1/((B1-C1)/B1)
What to do with the number
- Test a plan. Can you realistically sell that much? If not, change the plan before you start.
- Set targets. Your monthly sales goal should be comfortably above break-even.
- Lower it. Raise prices, reduce variable costs or cut fixed costs. Each lowers the bar.
A small price rise often moves break-even more than you expect. See how to raise prices without losing customers. Your budget gives you the fixed costs, and profit margin shows how much you keep once you pass break-even.