Break-even point

What is break-even

It's the number of units to sell to cover all costs, with no profit or loss. From that point on, every sale is profit.

How it works

Break-even = fixed costs ÷ (price − variable cost per unit). The margin per unit is what's left from each sale to cover fixed costs.

Fixed and variable: where the line falls

A cost is fixed if you pay it even when you sell nothing: the rent, the accountant, the software subscription, the depreciation of the oven. It is variable if it is born with the unit sold: raw materials, packaging, the platform's commission, shipping.

Many costs look like one family and belong to the other. A permanent salary is fixed, Saturday's casual shift is variable. Electricity is nearly always mixed: part of it is lighting and fridges running anyway, part of it is the oven that only turns on when there is an order. Putting all of it among the fixed costs raises the break-even point; putting all of it among the variables lowers it. When in doubt it is safer to err upwards, that is to treat the doubtful part as fixed.

The contribution margin is the number that matters

The denominator of the formula, price minus variable cost, has a name: contribution margin. It is how much each single sale contributes towards covering the fixed costs, and from then on towards profit. If it is small, the break-even point explodes: with 10,000 in fixed costs and a margin of 2 you need 5,000 units, with a margin of 5 you need 2,000.

From which follows the most useful thing break-even teaches: raising the price lowers the break-even far more than cutting costs. An extra unit on the price goes entirely into the margin; a unit saved on materials does the same, but is nearly always harder to find.

Break-even in units and break-even in revenue

Someone selling one product thinks in units. Someone selling twenty different ones cannot: a count in units is meaningless if one item costs 3 and another 300. In that case break-even is worked out in revenue, dividing fixed costs by the average percentage margin. The catch is that the average shifts as soon as the sales mix changes, so it has to be redone when the range changes.

Another calculation worth doing is break-even per day: dividing break-even revenue by the days you are open gives a figure you can check that same evening, instead of finding out at month end how it went.

What break-even does not see

It is not the same thing as money in the bank. You can be above the break-even point and run out of cash, because customers pay in ninety days and suppliers in thirty: break-even talks about costs and revenue, not about when the money actually moves.

And it does not account for your own work. If the sum does not include a wage for the person running the business, the break-even point is that of a company where one person works for free: above that level you are not earning, you are merely no longer losing.

Nearby tools

For the price with and without tax there is VAT calculator, and for markup Percentage calculator. Self-employed people will find in Freelance hourly rate the calculation backwards from the take-home target, and in ROI calculator the return on the initial investment.