Break-Even Analysis: Know Your Numbers to Make Better Decisions

How much do you need to sell to cover your costs? It sounds like a simple question, but many business owners can’t answer it precisely.

Your break-even point is the level of sales where your revenue exactly equals your costs—no profit, no loss. Below break-even, you’re losing money. Above it, you’re making profit.

Knowing this number helps you make smarter decisions about pricing, expenses, staffing, and growth.

What Is Break-Even Analysis?

Break-even analysis determines the point where total revenue equals total costs. At this point:

• All fixed costs are covered
• All variable costs are covered
• Profit is zero

It’s not a target—you want to exceed break-even. But knowing where it is tells you the minimum you need to survive.

The Basic Formula

Break-Even Point = Fixed Costs / (Price per Unit - Variable Cost per Unit)

Or expressed differently:

Break-Even Point = Fixed Costs / Contribution Margin per Unit

Where:

• Fixed Costs: Costs that don’t change with sales volume
• Variable Costs: Costs that increase with each unit sold
• Contribution Margin: Price minus variable cost (what each sale contributes toward fixed costs)

Understanding Your Costs

Fixed Costs

These stay the same regardless of sales:

• Rent and lease payments
• Salaries (for permanent staff)
• Insurance premiums
• Loan payments
• Software subscriptions
• Depreciation
• Base utilities

Fixed costs are the hurdle. You have to pay them whether you sell anything or not.

Variable Costs

These change with volume:

• Cost of goods sold
• Materials and supplies per unit
• Sales commissions
• Shipping costs
• Payment processing fees
• Direct labor (per unit produced)

Variable costs determine how much of each sale you actually keep.

Semi-Variable Costs

Some costs have both components:

• Utilities (base charge plus usage)
• Staffing (core team plus overtime)
• Marketing (base spend plus per-campaign)

For break-even analysis, split these into fixed and variable portions.

Calculating Break-Even: Examples

Service Business Example

Scenario: Consulting business

Fixed costs (monthly):

• Office rent: $1,500
• Software: $300
• Insurance: $200
• Salary (admin): $3,000
• Total fixed: $5,000

Variable costs per engagement:

• Subcontractor cost: $500 per project
• Materials: $50 per project
• Total variable: $550 per project

Average price per project: $1,500

Contribution margin: $1,500 - $550 = $950

Break-even: $5,000 / $950 = 5.26 projects per month

You need to complete at least 6 projects monthly to break even.

Product Business Example

Scenario: Online store

Fixed costs (monthly):

• Website hosting: $100
• Storage/warehouse: $800
• Salary: $4,000
• Insurance: $100
• Total fixed: $5,000

Variable costs per unit:

• Product cost: $15
• Shipping: $5
• Payment processing (3%): $1.05
• Total variable: $21.05

Average selling price: $35

Contribution margin: $35 - $21.05 = $13.95

Break-even: $5,000 / $13.95 = 358 units per month

You need to sell 358 units monthly to break even.

Restaurant Example

Fixed costs (monthly):

• Rent: $5,000
• Salaries (salaried staff): $8,000
• Insurance: $500
• Utilities (base): $800
• Total fixed: $14,300

Variable costs per meal:

• Food cost: $8
• Hourly labor allocation: $3
• Supplies (napkins, etc.): $0.50
• Total variable: $11.50

Average check: $28

Contribution margin: $28 - $11.50 = $16.50

Break-even: $14,300 / $16.50 = 867 meals per month

At 28 days of operation, that’s about 31 meals per day to break even.

Break-Even in Dollars

Sometimes it’s easier to think in revenue rather than units:

Break-Even Revenue = Fixed Costs / Contribution Margin Ratio

Contribution Margin Ratio = Contribution Margin per Unit / Price per Unit

Using the consulting example:

• Contribution Margin Ratio: $950 / $1,500 = 63.3%
• Break-Even Revenue: $5,000 / 0.633 = $7,899 per month

Using Break-Even for Decisions

Pricing Decisions

If break-even is too high, consider raising prices:

Original:

• Price: $35
• Variable cost: $21
• Contribution margin: $14
• Break-even: 357 units

If price increases to $40:

• Price: $40
• Variable cost: $21
• Contribution margin: $19
• Break-even: 263 units

A 14% price increase drops break-even by 26%. Of course, you need to consider if customers will pay the higher price.

Cost Decisions

Reducing fixed costs lowers break-even:

Original fixed costs: $5,000 Break-even: 357 units

If fixed costs reduced to $4,000: Break-even: 286 units

A 20% reduction in fixed costs = 20% reduction in break-even.

Expansion Decisions

Before adding costs, calculate the new break-even:

Current situation:

• Fixed costs: $5,000
• Break-even: 357 units

After hiring new employee:

• Fixed costs: $9,000
• Break-even: 643 units

Can you increase sales by 286 units to justify the hire?

Product Mix Decisions

Compare contribution margins across products:

Product	Price	Variable	Margin	Margin %
Basic	$50	$30	$20	40%
Standard	$100	$55	$45	45%
Premium	$200	$90	$110	55%

Higher margin products reduce break-even faster. Which should you focus on?

Target Profit Analysis

Break-even is the minimum. What if you want to make a specific profit?

Sales for Target Profit = (Fixed Costs + Target Profit) / Contribution Margin

Example:

• Fixed costs: $5,000
• Target profit: $3,000
• Contribution margin: $14

Sales needed: ($5,000 + $3,000) / $14 = 571 units

Margin of Safety

Once you know break-even, track how far above it you operate:

Margin of Safety = (Actual Sales - Break-Even Sales) / Actual Sales

Example:

• Break-even: 357 units
• Actual sales: 500 units
• Margin of Safety: (500 - 357) / 500 = 28.6%

You can lose 28.6% of sales and still break even. Higher is safer.

Multiple Product Break-Even

Most businesses sell multiple products. The calculation becomes:

Weighted Average Contribution Margin = Sum of (Product Margin × Sales Mix %)

Example:

Product	Margin	Mix %	Weighted
A	$20	50%	$10
B	$45	30%	$13.50
C	$110	20%	$22
Total			$45.50

Break-even units = Fixed Costs / $45.50

Then allocate across products by mix percentage.

Break-Even Limitations

Understand what break-even doesn’t tell you:

It’s Static

Break-even assumes costs and prices stay constant. Reality changes constantly.

It’s Based on Estimates

Your variable cost calculation may not be perfectly accurate. Use break-even as a guide, not a guarantee.

It Ignores Cash Flow Timing

You might break even annually but have months where cash is short. Break-even doesn’t address timing.

It Assumes Linear Relationships

In reality, variable costs might change at different volumes (quantity discounts, overtime, etc.).

It Doesn’t Account for Risk

Two businesses with the same break-even can have very different risk profiles based on how certain their revenue is.

Practical Applications

Monthly Check-In

Know your monthly break-even and track actual sales against it:

• Week 1: At 25% of break-even? On track.
• Week 2: At 45% of break-even? Slightly behind.
• Week 3: At 70% of break-even? Need a push.
• Month-end: Above break-even? Profit. Below? Loss.

Scenario Planning

Run different scenarios:

What if revenue drops 20%? Are you still above break-even?

What if a key expense increases? How does it affect your break-even?

What if you cut a product line? How do fixed costs and contribution margin change?

New Venture Analysis

Before launching a new product or service:

• What’s the break-even point?
• How long until you reach it?
• Is it realistic?

Pricing Strategy

When setting prices:

• At this price, what’s break-even?
• At a higher price, what’s break-even?
• Which scenario is more achievable?

Improving Your Break-Even Position

Lower Fixed Costs

• Negotiate rent
• Outsource instead of hiring
• Switch to variable cost structures
• Reduce subscriptions and overhead

Reduce Variable Costs

• Negotiate better supplier prices
• Improve efficiency
• Reduce waste
• Automate processes

Increase Prices

• Add value to justify higher prices
• Test price sensitivity
• Focus on premium segments
• Reduce discounting

Improve Sales Mix

• Promote high-margin products
• Phase out low-margin items
• Bundle strategically
• Train sales team on margin awareness

Your Break-Even Action Items

Calculate Your Break-Even

1. List all fixed costs monthly
2. Calculate variable cost per unit (or as percentage of revenue)
3. Determine contribution margin
4. Divide fixed costs by contribution margin

Use It for Decisions

• Before adding expenses, recalculate break-even
• Before hiring, calculate the sales increase needed
• When pricing, compare break-even at different price points

Monitor Regularly

• Track actual vs. break-even monthly
• Recalculate when costs or prices change
• Use margin of safety to assess risk

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Want help understanding your business’s financial dynamics? At Profit Path Books, we help small business owners understand their numbers and make more profitable decisions. Book a consultation to discuss your situation.