Break-Even Analysis: Know Your Number
Find the sales you need each month just to cover your costs, so every decision starts from a real number.
How many haircuts, meals, jobs, or orders do you need each month before you make a single dollar of profit? Many owners guess. The ones who know the answer make faster, calmer decisions about pricing, hiring, and rent.
That answer is your break-even point. It takes about ten minutes to calculate, and it may be the most useful number in your business.
Fixed costs vs. variable costs
| Fixed costs | Variable costs | |
|---|---|---|
| What they are | Stay about the same each month | Rise and fall with each sale |
| Examples | Rent, insurance, software, salaried pay | Materials, ingredients, card fees, commissions |
| If sales double | Stay the same | Roughly double |
| How to lower them | Renegotiate, downsize, cut subscriptions | Better supplier pricing, less waste |
Tip
Some costs are a mix. A phone plan with overage charges or hourly staff whose schedule follows demand can be partly fixed and partly variable. For a first pass, put each cost where most of it belongs.
Contribution margin: what each sale really adds
Contribution margin is the price of one sale minus the variable cost of that sale. It is the amount each sale contributes toward paying fixed costs. Once fixed costs are covered, contribution margin becomes profit.
The contribution margin ratio is contribution margin divided by price. It tells you what share of each sales dollar is available to cover fixed costs.
The formula
Break-even formulas
Break-even units = Fixed costs / Contribution margin per unit. Break-even revenue = Fixed costs / Contribution margin ratio.
Worked example: a small bakery
- 1
Add up fixed costs
Rent $3,500, insurance $300, software $200, salaried manager $4,000. Total fixed costs: $8,000 a month.
- 2
Find contribution margin per unit
A celebration cake sells for $40. Ingredients, box, and card fees cost $15. Contribution margin is $25 per cake.
- 3
Divide
$8,000 / $25 = 320 cakes a month to break even, or about 11 a day over a 30-day month.
- 4
Convert to revenue
Contribution margin ratio is $25 / $40 = 62.5%. Break-even revenue is $8,000 / 0.625 = $12,800 a month.
Try it
Break-Even Calculator
Plug in your own fixed costs, price, and variable cost to find your number.
Break-even point
445 sales
$20,000 in revenue
Each sale contributes
$27.00
60% contribution margin
Monthly profit
$4,200
at 600 sales
Break-even = fixed costs ÷ (price − variable cost). Every sale past this point adds its full contribution margin to profit.
How to use your number
- Pricing: a small price increase lowers your break-even point, sometimes a lot. See Raising Prices.
- New fixed costs: before signing a lease or hiring, divide the new monthly cost by your contribution margin to see how many extra sales it requires.
- Slow months: compare expected sales to break-even so you know how much cash cushion you need.
- Margin of safety: the gap between your actual sales and break-even shows how far sales can fall before you lose money.
Owner story
Priya was weighing a second instructor at $3,000 a month. Each class pass brought $18 in contribution margin, so she needed about 167 more class visits a month to cover the hire. With a waitlist on three evening classes, she could see that adding sessions would cover it within two months, and she hired with confidence.
Illustrative composite, not a real customer.
Quick check
Your fixed costs are $6,000 a month. You charge $50 per job and variable costs are $20 per job. How many jobs do you need to break even?
Words to know
- Break-even point
- The level of sales where total revenue equals total costs, so profit is zero.
- Contribution margin
- Price minus variable cost for one sale, the amount that sale contributes to fixed costs and profit.
- Margin of safety
- How far sales can drop from their current level before the business falls below break-even.
Finished reading?
Track your progress through Stage 4: Grow.
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Separate Your Money: Business Banking From Day One
Why mixing personal and business money costs you at tax time, weakens your liability protection, and makes lenders nervous, plus the simple setup that fixes it.
Pricing for Profit: What to Charge
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