Your break-even point is the number of sales it takes to cover all of your costs. Below it you are losing money, above it you are making a profit. It is one of the most useful numbers a small business can know, and it takes three inputs to find.
What you need
- Fixed costs: what you pay whether you sell anything or not. Rent, insurance, subscriptions, loan repayments, your own wage.
- Selling price per unit: excluding GST.
- Variable cost per unit: what it costs to make or deliver one more sale. Materials, packaging, payment fees, freight.
The formula
Selling price minus variable cost is called the contribution margin. It is what each sale puts towards the fixed costs.
A worked example
A coffee cart has fixed costs of $3,600 a month: site fee, insurance, equipment lease and a part-time wage. A coffee sells for $5.00 ex GST. Beans, milk, cup and lid come to $1.40.
Contribution margin = $5.00 − $1.40 = $3.60
Break-even = $3,600 ÷ $3.60 = 1,000 coffees a month
Break-even revenue = 1,000 × $5.00 = $5,000
Trading 25 days a month, that is 40 coffees a day before the cart makes a cent of profit. Every coffee after the 1,000th adds $3.60 to profit.
Adding a profit target
To find the sales needed for a particular profit, add the target to the fixed costs:
For $2,000 profit a month: ($3,600 + $2,000) ÷ $3.60 = 1,556 coffees.
Three ways to lower your break-even
- Raise the price. At $5.50, the margin is $4.10 and break-even drops to 879.
- Cut variable costs. Getting the cost down to $1.20 lifts the margin to $3.80 and break-even drops to 948.
- Cut fixed costs. Shaving $360 off the monthly fixed costs brings break-even down by 100 coffees.
A small price rise usually moves the number further than the same percentage cut in costs, because all of it lands in the contribution margin.
If you sell more than one product
Use an average. Work out your total sales and total variable costs for a typical month, find the average contribution margin as a percentage of sales, and divide fixed costs by that percentage to get break-even revenue.
Try it with your own numbers: open the break-even calculator.