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How to Calculate Your Break-Even Point

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At its simplest, a break-even point (or BEP) is the point at which your business’s expenses equal its revenue. In other words, if you’re breaking even, you aren’t spending more than you’re making—which also means you aren’t making more than you’re spending. At your break-even point, your business isn’t profitable, but it also isn’t losing money: it’s at an exact net neutral.

Like a lot of supposedly simple accounting principles , the break-even point is a little harder to understand than it initially appears. Let’s dive into how to calculate your break-even point and how it can guide your business.

How do you calculate your break-even point?

The basic break-even point calculation is pretty simple (we've got an example that spells it out further down):

Break-even point = Total fixed costs / (price per unit – variable costs per unit)

Of course, before you can calculate your break-even point, you need to figure out your total fixed costs, variable costs per unit, and price per unit:

• Total fixed costs are expenses that stay the same regardless of how many products you sell. Costs like rent, salaries, and fixed interest rate payments all count as fixed costs.
• Variable costs per unit are expenses that vary with product creation. For instance, your sales commissions, shipping costs, and costs of raw materials vary month to month depending on how many products you sell.
• Price per unit means how much you sell each product for. You’re the one who sets this cost, and a break-even point can show if you’re selling your product for too little or too much (more on that below).

The answer to the equation will tell you how many units (meaning individual products) you need to sell to match your expenses.

Note that the total fixed costs aren’t per product but rather the sum total of your business expenses over any given time period, whether that’s a month, quarter, or year (you choose!). In contrast, variable costs are per unit.

While gathering the information you need to calculate your break-even point is tricky and time consuming, you don’t have to crunch the numbers with just a pen and paper. Any number of free online break-even point calculators can help, like this calculator by the National Association for the Self-Employed.

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What is an example of a break-even point calculation?

Let’s say Maria owns a small business that primarily sells handmade quilts. Between rent, property insurance, and other crucial expenses, Maria’s fixed costs total $2,000 a month. She sells each quilt for $500 each and determines that variable expenses for each product come to about $250. For her, the break-even point formula would look like this:

$2,000 / ($500 – $250) = 8 products/month

So to break even, Maria needs to create and sell eight quilts a month. If she wants to turn a profit, she'll need to sell at least nine quilts a month.

What does your break-even point tell you?

Your break-even point can help you answer the following questions:

• How many products do you need to produce and sell before you start turning a profit?
• Are you selling your products at too low a price per unit to make a profit?
• Do you need to lower any fixed costs (e.g., your own salary, your advertising budget, or your electric bill) to break even?
• Is your business model sustainable? In other words, is it even possible for you to break even given your anticipated fixed expenses, costs of labor, sales, and costs of production?

In our example above, Maria’s break-even point tells her she needs to create eight quilts a month, right? But what if she knows she can create only six a month given her current time and resources? Well, per the equation, she might need to up her cost per unit to offset the decreased production. Or she could find a way to lower her total fixed costs—say, by scouting around for a better property insurance rate or fabric supplier.

The takeaway

Once you calculate your break-even point, you can determine how many products you need to manufacture and sell to make your business profitable.

Want software that can help you calculate your break-even point? Check out our piece on the best bookkeeping software for small-business owners.

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What Is Break-Even Analysis?

Break-even point formula.

• Calculating BEP and Contribution Margin

Who Calculates the BEP?

Why break-even analysis matters, the bottom line.

• Investing Basics

Break-Even Analysis: Formula and Calculation

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Break-even analysis compares income from sales to the fixed costs of doing business. Five components of break-even analysis include fixed costs, variable costs, revenue, contribution margin, and break-even point (BEP). When companies calculate the BEP, they identify the amount of sales required to cover all fixed costs to begin generating a profit. The break-even point formula can help find the BEP in units or sales dollars.

Key Takeaways:

• Using the break-even point formula, businesses can determine how many units or dollars of sales cover the fixed and variable production costs.
• The break-even point (BEP) is considered a measure of the margin of safety.
• Break-even analysis is used broadly, from stock and options trading to corporate budgeting for various projects.

Investopedia / Paige McLaughlin

Break-even analysis involves a calculation of the break-even point (BEP) . The break-even point formula divides the total fixed production costs by the price per individual unit, less the variable cost per unit.

BEP = Fixed Costs / (Price Per Unit - Variable Cost Per Unit)

Break-even analysis looks at the fixed costs relative to the profit earned by each additional unit produced and sold. A firm with lower fixed costs will have a lower break-even point of sale and $0 of fixed costs will automatically have broken even with the sale of the first product, assuming variable costs do not exceed sales revenue. Fixed costs remain the same regardless of how many units are sold. Examples of fixed and variable costs include:

Calculating the Break-Even Point and Contribution Margin

Break-even analysis and the BEP formula can provide firms with a product's contribution margin. The contribution margin is the difference between the selling price of the product and its variable costs. For example, if an item sells for $100, with fixed costs of $25 per unit, and variable costs of $60 per unit, the contribution margin is $40 ($100 - $60). This $40 reflects the revenue collected to cover the remaining fixed costs, which are excluded when figuring the contribution margin.

Contribution Margin = Item Price - Variable Cost Per Unit

To find the total units required to break even, divide the total fixed costs by the unit contribution margin. Assume total fixed costs are $20,000. With a contribution margin of $40 above, the break-even point is 500 units ($20,000 divided by $40). Upon selling 500 units, the payment of all fixed costs is complete, and the company will report a net profit or loss of $0.

BEP (Units) = Total Fixed Costs / Contribution Margin

To calculate the break-even point in sales dollars, divide the total fixed costs by the contribution margin ratio. The contribution margin ratio is the contribution margin per unit divided by the sale price.

Contribution Margin Ratio = Contribution Margin Per Unit / Item Price

BEP (Sales Dollars) = Total Fixed Costs / Contribution Margin Ratio

The contribution margin ratio is 40% ($40 contribution margin per item divided by $100 sale price per item). The break-even point in sales dollars is $50,000 ($20,000 total fixed costs divided by 40%).

In accounting, the margin of safety is the difference between actual sales and break-even sales. Managers utilize the margin of safety to know how much sales can decrease before the company or project becomes unprofitable.

• Entrepreneurs
• Financial Analysts
• Stock and Option Traders
• Government Agencies

Although investors are not interested in an individual company's break-even analysis on their production, they may use the calculation to determine at what price they will break even on a trade or investment. The calculation is useful when trading in or creating a strategy to buy options or a fixed-income security product.

• Pricing : Businesses get a comprehensible perspective on their cost structure with a break-even analysis, setting prices for their products that cover their fixed and variable costs and provide a reasonable profit margin.
• Decision-Making : When it comes to new products and services, operational expansion, or increased production, businesses can chart their profit to sales volume and use break-even analysis to help them make informed decisions surrounding those activities.
• Cost Reduction : Break-even analysis helps businesses find areas to reduce costs to increase profitability.
• Performance Metric: Break-even analysis is a financial performance tool that helps businesses ascertain where they are in achieving their goals.

What Are Some Limitations of Break-Even Analysis?

Break-even analysis assumes that the fixed and variable costs remain constant over time. Costs may change due to factors such as inflation, changes in technology, or changes in market conditions. It also assumes that there is a linear relationship between costs and production. Break-even analysis ignores external factors such as competition, market demand, and changes in consumer preferences.

What Are the Components of Break-Even Analysis?

There are five components of break-even analysis including fixed costs, variable costs, revenue, contribution margin, and the break-even point (BEP).

Why Is the Contribution Margin Important in Break-Even Analysis?

The contribution margin represents the revenue required to cover a business' fixed costs and contribute to its profit. Through the contribution margin calculation, a business can determine the break-even point and where it can begin earning a profit.

How Do Businesses Use the Break-Even Point in Break-Even Analysis?

The break-even point (BEP) helps businesses with pricing decisions, sales forecasting, cost management, and growth strategies. A business would not use break-even to measure its repayment of debt or how long that repayment will take to complete.

Break-even analysis is a tool used by businesses and stock and option traders. Break-even analysis is essential in determining the minimum sales volume required to cover total costs and break even. It helps businesses choose pricing strategies, and manage costs and operations. In stock and options trading, break-even analysis helps find the minimum price movements required to cover trading costs and make a profit. Traders can use break-even analysis to set realistic profit targets, manage risk, and make informed trading decisions.

U.S. Small Business Administration. " Break-Even Point ."

Professor Rosemary Nurre, College of San Mateo. " Accounting 131: Chapter 6, Cost-Volume-Profit Relationships ."

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Break-Even Analysis Explained—How to Find the Break-Even Point

Posted november 2, 2022 by kiara taylor.

Conducting a break-even analysis is a crucial tool for small business owners. If you’re planning on launching a business, writing a business plan , or just exploring a new product, knowing your break-even point can tell you whether or not a product or service is a good idea.

In this guide, we’ll cover what a break-even point is, why it’s critical to calculate, how to calculate it, and additional factors you should consider. 

What is the break-even point?

The break-even point is where an asset’s market price equals its original cost. Put another way; the break-even point is when the total revenues of a certain production level equal the total expenses of producing that product. For small business owners, it’s essentially the amount that you need to earn in order to cover your costs.  

Why you should know your break-even point

So, why is knowing your break-even point so important? Here are a few important reasons to consider.

Minimize risk

Risk comes in various forms , but break-even points can help you understand the viability of certain products before they’re even launched. 

For example, before even sending an order to a factory, you can already know how many units you need to sell and what expenses will go into making that product. Understanding this is key whether you’re launching a business for the first time or starting a new product line.

Identify unseen expenses

Running a break-even analysis forces you to outline all potential expenses associated with an initiative. Expenses that you’d otherwise miss without it. Usually, these expenses come from the fixed and variable costs of production. In this process, you can often identify unexpected expenses that you may not have considered before.

Appropriately price your products/services

Because your break-even point concerns the price relationship to your expenses, you can calculate different break-even points based on sold units or different pricing schemes. For example, you may find that your product is unprofitable at a certain price point except at extremely large scales. 

If that’s the case, you can explore higher price points. However, it’s important that you do not do this in isolation. Instead, use this exercise to understand potential pricing options and begin testing them with your target customers .

Prepare for funding

If you’re seeking funding for your business, this information is often expected or required by lenders and investors . It helps them gauge the viability of your idea and determine what level of funding is appropriate. For you as a business owner, it can help you determine how much funding you think you’ll need and even identify how you’ll use those funds.

How to calculate the break-even point

To calculate your break-even point, you’ll need to know the following: 

• Fixed costs: Expenses that remain consistent no matter your sales volume.
• Variable costs: Expenses that change depending on your sales/production volume.
• Sales price: The price that you intend to sell the product/service for.

Break-even point formula

The break-even point is calculated using your fixed costs and your contribution margin. The contribution margin is the selling price of the product minus the total variable costs. Your selling price is usually the amount you place on any customer invoices. 

The contribution margin formula is:

Contribution Margin = Selling Price – Total Variable Costs

Once you have the contribution margin, you then take the total fixed costs per unit and divide those costs by the contribution margin. This will give you the break-even number of units required to offset your costs.

The break-even point formula is:

Break-Even Point = Fixed Costs / Contribution Margin

Break-even point example

Now that you know the formula for calculating your break-even point let’s put it into practice.

Imagine you are the owner of a small paper company and considering adding a new line of paper to your available products. You expect to sell a ream of paper for $5.00. 

The variable costs of the ream of the paper include: 

• $1.00 for the paper itself
• $0.50 for the packaging of the ream
• $0.50 of costs to package each ream

According to this information, you have $2.00 in variable costs. Using the formula mentioned above, we can calculate the contribution margin for your paper ream:

$5.00 – $2.00 = $3.00

Next, we’ll incorporate fixed costs to determine how many units need to be sold. After holding an office meeting in the conference room, you determine that the following fixed costs are associated with producing reams of paper:

• $50.00 in salaries
• $50.00 in office rent
• $50.00 for monthly shipments from the paper factory

Your total fixed costs come to: $50.00 + $50.00 + $50.00 = $150.00.

Lastly, we’ll calculate the break-even point: $150.00 / $3.00 = 50 units. To break even, you would need to sell 50 reams of paper. 

Maximizing your break-even point formulas

You can also utilize this calculation to figure out your break-even point in dollars. This is done by dividing the total fixed costs by the contribution margin ratio. You can figure out your contribution margin ratio by taking the contribution margin per unit and dividing it by the sales price. 

Your contribution margin ratio using the data from the above example is:

$3.00 (your contribution margin) / $5.00 (price per one ream of paper) = 60%.

Finally, divide your total fixed costs ($150.00) by your contribution margin ratio (60%) to calculate the break-even point in dollars:

$150.00 / 60% = $250.00 in sales

You can confirm your findings by multiplying your break-even point in units (50) by the sales price ($5.00):

50 x $5.00 = $250.00

What is a standard break-even time period?

The standard break-even period is hard to predict and fully depends on your business. However, once you know your break-even point, you can gauge the time it will take to break even more accurately.

Your break-even period is the amount of time it takes you to sell enough units to break even. This means that the only thing holding back your ability to break even is how fast you sell your units.

The formula to calculate your break-even time period is:

Break-Even Time Period = Break-Even Units / Amount Sold per Period (Period)

If we return to the paper company example, we can estimate what the break-even period is. After reviewing your financials, you learn that the average number of reams you expect to sell daily is 5. Now, take your number of break-even units (50) and divide them by the amount sold in a given period (5):

50 / 5 = 10. Under this analysis, you would break even in approximately 10 days.

However, it’s important to remember that fixed costs, which are an important part of calculating your break-even point, may accumulate faster than you can sell your product. In that case, you’ll need to factor this into your analysis.

How to lower your break-even point

Everyone wants to lower their break-even point because it typically leads to greater profitability at a faster rate. But how do you lower your break-even point? The key thing to remember is that it’s a ratio of your fixed and variable costs. To reduce your break-even point, you’ll need to lower one or both.

One of the most efficient ways to reduce your break-even point is to start by reducing variable costs. Keep in mind that variable costs are associated with each unit. Other fixed costs, those that exist regardless, like the $20-$80 you pay for your employees’ no medical life insurance every month, can be more difficult to eliminate because they are essential.

What you can do with a break-even analysis

Conducting an initial break-even analysis is incredibly useful when starting a business. But, did you know that you can use it on an ongoing basis as part of your management process ? Here are a few key uses you can leverage.

Determine if your prices are correct

A break-even analysis can be used to continuously audit and fine-tune your pricing strategy. If you find sales are missing expectations, you can reference this calculation to easily understand what quantities must be sold if you decide to adjust the price. 

Explore current fixed and variable costs

You can also explore how different costs impact your bottom line. At the end of the day, your business needs to know what costs are impacting its ability to generate revenue. A break-even analysis can help you understand whether some products may be costing you more money than their worth. For example, products with low contribution margins or ratios might be too expensive to keep in production.

Narrow down financial scenarios

Finally, you can use your break-even analyses as part of any forecast scenarios that you explore. By changing numbers in your formula, you can test different types of prices and quantities based on perceived consumer interest. This can help inform a larger analysis of your sales, cash, and expenses based on how reasonable your price and volume adjustments are.

Other metrics to consider

Now that you understand break-even points and break-even analysis, you’ll be able to put them to work for your business. Remember, this is just a piece of measuring business performance and there are other valuable metrics you should be tracking. You can do this manually with spreadsheets, leverage budgeting and accounting software, or better explore future performance with LivePlan’s performance tracking and forecasting features .

Whatever option you choose, the important thing is that you are aware of these metrics and actively using them. It will help you better understand the health of your business, make more strategic decisions, and ultimately grow your business.

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Break-Even Analysis Explained - Full Guide With Examples

Did you know that 30% of operating small businesses are losing money? Running your own business is trickier than it sounds. You have to plan ahead carefully to break-even or be profitable in the long run.

Building your own small business is one of the most exciting, challenging, and fun things you can do in this generation.

To start and sustain a small business it is important to know financial terms and metrics like net sales, income statement and most importantly break-even point .

Performing break-even analysis is a crucial activity for making important business decisions and to be profitable in business.

So how do you do it? That is what we will go through in this article. Some of the key takeaways for you when you finish this guide would be:

• Understand what break-even point is
• Know why it is important
• Learn how to calculate break-even point
• Know how to do break-even analysis
• Understand the limitations of break-even analysis

So, if you are tired of your nine-to-five and want to start your own business, or are already living your dream, read on.

What is Break-Even Point?

Small businesses that succeeds are the ones that focus on business planning to cross the break-even point, and turn profitable .

In a small business, a  break-even point is a point at which total revenue equals total costs or expenses. At this point, there is no profit or loss — in other words, you 'break-even'.

Break-even as a term is used widely, from stock and options trading to corporate budgeting as a margin of safety measure.

On the other hand, break-even analysis lets you predict, or forecast your break-even point. This allows you to course your chart towards profitability.

Managers typically use break-even analysis to set a price to understand the economic impact of various price and sales volume calculations.

The total profit at the break-even point is zero. It is only possible for a small business to pass the break-even point when the dollar value of sales is greater than the fixed + variable cost per unit.

Every business must develop a break-even point calculation for their company. This will give visibility into the number of units to sell, or the sales revenue they need, to cover their variable and fixed costs.

Importance of Break-Even Analysis for Your Small Business

A business could be bringing in a lot of money; however, it could still be making a loss. Knowing the break-even point helps decide prices, set sales targets, and prepare a business plan.

The break-even point calculation is an essential tool to analyze critical profit drivers of your business, including sales volume, average production costs, and, as mentioned earlier, the average sales price. Using and understanding the break-even point, you can measure

• how profitable is your present product line
• how far sales drop before you start to make a loss
• how many units you need to sell before you make a profit
• how decreasing or increasing price and volume of product will affect profits
• how much of an increase in price or volume of sales you will need to meet the rise in fixed cost

How to Calculate Break-Even Point

There are multiple ways to calculate your break-even point.

Calculate Break-even Point based on Units

One way to calculate the break-even point is to determine the number of units to be produced for transitioning from loss to profit.

For this method, simply use the formula below:

Break-Even Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

Fixed costs are those that do not change no matter how many units are sold. Don't worry, we will explain with examples below. Revenue is the income, or dollars made by selling one unit.

Variable costs include cost of goods sold, or the acquisition cost. This may include the purchase cost and other additional costs like labor and freight costs.

Calculate Break-Even Point by Sales Dollar - Contribution Margin Method

Divide the fixed costs by the contribution margin. The contribution margin is determined by subtracting the variable costs from the price of a product. This amount is then used to cover the fixed costs.

Break-Even Point (sales dollars) = Fixed Costs ÷ Contribution Margin

Contribution Margin = Price of Product – Variable Costs

Let’s take a deeper look at the some common terms we have encountered so far:

• Fixed costs: Fixed costs are not affected by the number of items sold, such as rent paid for storefronts or production facilities, office furniture, computer units, and software. Fixed costs also include payment for services like design, marketing, public relations, and advertising.
• Contribution margin:   Is calculated by subtracting the unit variable costs from its selling price. So if you’re selling a unit for $100 and the cost of materials is $30, then the contribution margin is $70. This $70 is then used to cover the fixed costs, and if there is any money left after that, it’s your net profit.
• Contribution margin ratio: is calculated by dividing your fixed costs from your contribution margin. It is expressed as a percentage. Using the contribution margin, you can determine what you need to do to break-even, like cutting fixed costs or raising your prices.
• Profit earned following your break-even: When your sales equal your fixed and variable costs, you have reached the break-even point. At this point, the company will report a net profit or loss of $0. The sales beyond this point contribute to your net profit.

Small Business Example for Calculating Break-even Point

To show how break-even works, let’s take the hypothetical example of a high-end dressmaker. Let's assume she must incur a fixed cost of $45,000 to produce and sell a dress.

These costs might cover the software and materials needed to design the dress and be sure it meets the requirement of the brand, the fee paid to a designer to design the look and feel of the dress, and the development of promotional materials used to advertise the dress.

These costs are fixed as they do not change per the number of dresses sold.

The variable costs would include the materials used to make each dress — embellishment’s for $30, the fabric for the body for $20, inner lining for $10 — and the labor required to assemble the dress, which amounted to one and a half hours for a worker earning $50 per hour.

Thus, the unit variable costs to make a single dress is $110 ($60 in materials and $50 in labor). If she sells the dress for $150, she’ll make a unit margin of $40.

Given the $40 unit margin she’ll receive for each dress sold, she will cover her $45,500 total fixed cost will be covered if she sells:

Break-Even Point (Units) = $45,000 ÷ $40 = 1,125 Units

You can see per the formula , on the right-hand side, that the Break-even is 1,125 dresses or units

In other words, if this dressmaker sells 1,125 units of this particular dress, then she will fully recover the $45,000 in fixed costs she invested in production and selling. If she sells fewer than 1,125 units, she will lose money. And if she sells more than 1,125 units, she will turn a profit. That’s the break-even point.

What if we change the price?

Suppose our dressmaker is worried about the current demand for dresses and has concerns about her firm’s sales and marketing capabilities, calling into question her ability to sell 1,125 units at a price of $150. What would be the effect of increasing the price to $200?

This would increase the unit margin to $90.Then the number of units to be sold would decline to 500 units. With this information, the dressmaker could assess whether she was better off trying to sell 1,125 dresses at $150 or 500 dresses at $200, and priced accordingly.

What if we want to make an investment and increase the fixed costs?

Break-even analysis also can be used to assess how sales volume would need to change to justify other potential investments. For instance, consider the possibility of keeping the price at $150, but having a celebrity endorse the dress (think Madonna!) for a fee of $20,000.

This would be worthwhile if the dressmaker believed that the endorsement would result in total sales of $66,000 (the original fixed cost plus the $20,000 for Ms. Madonna).

With the Fixed Costs at $66,000 we see, it would only be worthwhile if the dressmaker believed that the endorsement would result in total sales of 1,650 units.

In other words, if the endorsement led to incremental sales of 525 dress units, the endorsement would break-even. If it led to incremental sales of greater than 525 dresses, it would increase profits.

What if we change the variable cost of producing a good?

Break-even also can be used to examine the impact of a potential change to the variable cost of producing a good.

Imagine that our dressmaker could switch from using a rather plain $20 fabric for the dress to a higher-end $40 fabric, thereby increasing the variable cost of the dress from $110 to $130 and decreasing the unit margin from $40 to $20. How much would your sales need to increase to compensate for the extra cost?

Suppose the Variable Cost is $130 (and the Fixed Cost is $45,000 – our dressmaker can’t afford to have nice fabric plus get Ms. Madonna). It would make better sense to switch to the nicer fabric if the dressmaker thought it would result in sales of 2,250 units, an additional 1125 dresses, which is double the number of initial sale numbers.

You likely aren’t a dressmaker or able to get a celebrity endorsement from Ms. Madonna, but you can use break-even analysis to understand how the various changes of your product, from revenue, costs, sales, impact your small business’s profitability .

What Are the Benefits of Doing a Break-even Analysis?

Smart Pricing : Finding your break-even point will help you price your products better. A lot of effort and understanding goes into effective pricing, but knowing how it will affect your profitability is just as important. You need to make sure you can pay all your bills.

Cover Fixed Costs : When most people think about pricing, they think about how much their product costs to create. Those are considered variable costs. You will still need to cover your fixed costs like insurance or web development fees. Doing a break-even analysis helps you do that.

Avoid Missing Expenses : When you do a break-even analysis, you have to lay out all your financial commitments to figure out your break-even point. It’s easy to forget about expenses when you’re thinking through a business idea.  This will limit the number of surprises down the road.

Setting Revenue Targets : After completing a break-even analysis, you know exactly how much you need to sell to be profitable. This will help you set better sales goals for you and your team.

Decision Making : Usually, business decisions are based on emotion. How you feel is important, but it’s not enough. Successful entrepreneurs make their decisions based on facts. It will be a lot easier to decide when you’ve put in the work and have useful data in front of you.

Manage Financial Strain : Doing a break-even analysis will help you avoid failures and limit the financial toll that bad decisions can have on your business. Instead, you can be realistic about the potential outcomes by being aware of the risks and knowing when to avoid a business idea.

Business Funding : For any funding or investment, a break-even analysis is a key component of any business plan. You have to prove your plan is viable. It’s usually a requirement if you want to take on investors or other debt to fund your business.

When to Use Break-even Analysis

Starting a new business.

If you’re thinking about a small online business or e-commerce, a break-even analysis is a must. Not only does it help you decide if your business idea is viable, but it makes you research and be realistic about costs, as well as think through your pricing strategy.

Creating a new product

Especially for a small business, you should still do a break-even analysis before starting or adding on a new product in case that product is going to add to your expenses. There will be a need to work out the variable costs related to your new product and set prices before you start selling.

Adding a new sales channel

If you add a new sales channel, your costs will change. Let's say you have been selling online, and you’re thinking about opening an offline store; you’ll want to make sure you at least break-even with the brick and mortar costs added in. Adding additional marketing channels or expanding social media spends usually increases daily expenses. These costs need to be part of your break-even analysis.

Changing the business model

Let's say you are thinking about changing your business model; for example, switching from buying inventory to doing drop shipping or vice-versa, you should do a break-even analysis. Your costs might vary significantly, and this will help you figure out if your prices need to change too.

Limitations of Break-even Analysis

• The Break-even analysis focuses mostly on the supply-side (i.e., costs only) analysis. It doesn't tell us what sales are actually likely to be for the product at various prices.
• It assumes that fixed costs are constant. However, an increase in the scale of production is likely to lead to an increase in fixed costs.
• It assumes average variable costs are constant per unit of output, per the range of the number of sales
• It assumes that the number of goods produced is equal to the number of goods sold. It believes that there is no change in the number of goods held in inventory at the beginning of the period and the number of goods held in inventory at the end of the period
• In multi-product companies,  the relative proportions of each product sold and produced are fixed or constant.

So that's a wrap. Hope you found this article interesting and informative. Feel free to subscribe to our blog to get updates on awesome new content we publish for small business owners.

Key Takeaways

Break-even analysis is infinitely valuable as it sets the framework for pricing structures, operations, hiring employees, and obtaining future financial support.

• You can identify how much, or how many, you have to sell  to be profitable.
• Identify costs inside your business that should be alleviated or eliminated.

Remember, any break-even analysis is only as strong as its underlying assumptions.

Like many forecasting metrics, break-even point is subject to it's limitations; however it can be a powerful and simple tool to provide a small business owner with an idea of what their sales need to be in order to start being profitable as quickly as possible.

Lastly, please understand that break-even analysis is not a predictor of demand .

If you go to market with the wrong product or the wrong price, it may be tough to ever hit the break-even point. To avoid this, make sure you have done the groundwork before setting up your business.

Head over to our small business guide on setting up a new business if you want to know more.

Want to calculate break even point quickly? Use our handy break-even point calculator.

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What is a Break-Even Point and How to Calculate

Brendan Tuytel

Reviewed by

December 4, 2020

This article is Tax Professional approved

"When will we actually make money?" is the burning question for new businesses. Fortunately, you can answer this question by calculating your break-even point.

I am the text that will be copied.

What is the break-even point?

The break-even point (BEP) is the amount of product or service sales a business needs to make to begin earning more than you spend. You measure the break-even point in units of product or sales of services.

You can use the break-even point to find the number of sales you need to make to completely cover your expenses and start making profit. If you sell more than your break-even point, you’re making a profit. But if you sell less, your sales revenue won’t cover your expenses and you’ll operate at a loss.

How to calculate the break-even point

The break-even point is calculated using three values.

Your fixed costs (or fixed expenses) are the expenses that don’t change with your sales volume. Some common fixed costs are your rent payments, insurance payments and money spent on equipment. These costs will stay the same regardless of whether you sell one unit or a million units.

Your variable costs (or variable expenses) are the expenses that do change with your sales volume. This is the price of raw materials, labor, and distribution for the goods or service you sell. For a coffee shop, the variable costs would be the beans, cups, sleeves, and labor used to produce one cup of coffee.

Your sales price is just the price that you sell your product or service for.

Break-even point formula

The break-even point formula is:

Break-even point = Total fixed costs / (Sales Price Per Unit - Variable costs per unit)

Sales price per unit minus the variable costs per unit is also known as the contribution margin.

You can find your fixed costs and variable costs using your income statement .

For your fixed costs, simply add up your monthly recurring costs (like rent, web hosting, and salaries).

To find your variable costs per unit, start by finding your total cost of goods sold in a month. If you have any other costs tied to the products you sell—like payments to a contractor to complete a job—add them to your cost of goods sold to find your total variable costs. Then divide that number by the units you’ve sold that month.

Break-even point example

Maggie’s Mugs sells artisanal mugs out of a brick and mortar store. The selling price of her mugs is $20. Maggie pays artists to paint mugs for $10 a piece. Maggie buys mugs for $5 a piece. This makes her variable costs $15 a mug.

Maggie also pays $800 a month on rent, $200 in utilities, and collects a monthly salary of $1,500. This makes her fixed costs $2,500 a month.

With her shop opening next month, Maggie wants to know how many mugs she needs to sell in order to be profitable. Let’s put her price and costs into the break-even point formula:

Break-even point = Total fixed costs / (Selling Price Per Unit - Variable costs per unit)

Break-even point = $2,500 / ($20 - $15)

Break-even point = $2,500 / 5 = 500 units

Now Maggie knows she needs to sell 500 mugs to break even. If she sells more than that, she will have a profitable month.

Decisions you can make from break-even analysis

If you’re having trouble hitting your break-even point or it seems unreachable, it’s time to make a change.

There are three components to calculating your break-even point. By looking at each component individually, you can start to ask yourself critical questions about your pricing and costs.

Here are three questions you can start with.

Is your sales price right?

As you increase your sales price, your break-even point decreases. If your sales price is too low, you might have to sell too many units to break even. And as much as we think a lower price means more buyers, studies actually show that consumers rely on price to determine the quality of a product or service.

If your price is too high, you might be falling short of your break-even point because customers won’t buy at that price. Lowering your selling price will increase the sales needed to break even. But this can be offset by the increased volume of purchases from new customers.

Are your fixed costs too high?

Having high fixed costs puts a lot of pressure on a business to make up those expenses with sales revenue. If you find yourself falling short of your break-even point month over month and feel like you can’t change your prices, lowering your fixed costs can be a solution.

Here are some common ways to reduce your fixed costs:

• Relocate to an area with cheaper rent or property taxes
• Negotiate lower lease payments with your landlord
• Sub-lease a portion of your space
• Look for lower cost insurance plans
• Refinance and reduce debt to reduce your interest costs

For more cost cutting ideas, check out our guide of 25 ways to cut costs.

Is my cost per unit sustainable?

The higher the variable costs, the greater the total sales needed to break even.

For the example of Maggie’s Mugs, she paid $5 per mug and $10 for them to be painted. If she keeps falling short of the 500 units needed to break even, she could potentially find a cheaper mug supplier or painters who are willing to take a lesser payment. By reducing her variable costs, Maggie would reduce the break-even point and she wouldn’t need to sell so many units to break even.

Here are some common ways to reduce your variable costs:

• Spend less on raw materials: Try finding vendors with lower prices or discounts for buying in bulk. If your order will be too small for bulk discounts, look for other businesses you can form a buying group with.
• Spend less on labor: Consider switching to contractors that you pay per job or per unit—that way you can guarantee the variable costs
• Reduce your cost of distribution: Make sure you’re using the cheapest shipping option and the cheapest packaging.

Additional resources

• Starting a Business in 2022 - The Resources Your Startup Needs
• FIFO: The First In First Out Inventory Method
• Working Capital: What It Is and How to Calculate It
• How to Make the Most of Your Bookkeeping Solution

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Accounting | How To

Breakeven Point Analysis: A Small Business Guide

Published January 24, 2024

Published Jan 24, 2024

REVIEWED BY: Tim Yoder, Ph.D., CPA

WRITTEN BY: Eric Gerard Ruiz, CPA

This article is part of a larger series on Bookkeeping .

• 1 Calculating BEP in Units
• 2 Calculating BEP in Dollars
• 3 BEP Chart
• 4 Assumptions & Limitations
• 5 How To Reduce the BEP
• 7 Bottom Line

The breakeven point (BEP) is the sales point at which total revenue is equal to total costs. At breakeven point, you neither earn a profit nor incur a loss. Knowing how to calculate the breakeven point is an advantage since it can help you determine the right level of sales needed to break even and, subsequently, earn profit. For small businesses, the breakeven point is a business milestone and knowing your progress toward it is a good measure of your success and performance.

Key takeaways

• BEP can be computed in two ways: BEP in sales units and BEP in sales dollars.
• The higher the BEP, the more effort you need to reach it. You should compare the BEP to forecasted sales to determine if it’s attainable.
• Reducing the BEP can be done by reducing fixed costs, reducing variable costs, or increasing selling prices.

How To Calculate the Breakeven Point in Sales Units

The breakeven point in units shows the number of units that needs to be sold to break even. You can use this figure as the reference point for your unit sales goal and as a base figure for evaluating sales efficiency and effectiveness.

The breakeven point formula for BEP in units is:

The sales price less the variable cost—shown in the denominator—often is referred to as the Contribution Margin. It represents the amount contributed toward fixed cost and eventually profit for every unit sold.

To illustrate, let’s assume our total fixed costs is $3,000. We sell our products at $16, and the variable cost to produce each unit is $10. How many units do we need to sell to reach BEP?

BEP u = $3,000 ÷ $6 per unit

BEP u = 500 units

Therefore, we need to sell 500 units to break even. In other words, we will fully recover total fixed costs of $3,000 if we sell 500 units, and more sales beyond that 500 units would yield a profit.

In a small business perspective, you can use BEP in units to know the minimum number of units that you need to produce and sell to reach breakeven. That also means that unit sales below 500 will always be at a loss and unit sales above 500 will always be at a profit.

Ideally, we want to have a lower BEP in units. A high BEP in units means that we’ll have a harder time reaching breakeven, especially if sales are slow.

How To Calculate the Breakeven Point in Sales Dollars

Another variation of the breakeven point formula is to compute it in dollars, not in units. BEP in dollars is useful for service-based businesses that don’t count revenues per unit sold. The BEP in dollars formula should look like this:

The denominator can also be called the contribution margin ratio (CMR). Total sales less total variable cost is the contribution margin, and if you divide further with total sales, you get the CMR.

To illustrate, let’s assume our total fixed costs is $20,000. Total sales and variable costs are $80,000 and $48,000. How much level of sales is needed to reach BEP?

BEP $ = $20,000 ÷ 40%

BEP $ = $50,000

Therefore, we need to reach total sales of $50,000 to break even.

The Breakeven Point Chart

The best way to understand the BEP is to illustrate it using the BEP chart. This chart illustrates the relationships of profit, revenue, costs, and the BEP.

Breakeven Chart

• The red line represents total fixed costs , and it remains constant in dollar value regardless of the number of units sold.
• The orange line represents total revenue , and it always starts at zero.
• The blue line represents total costs , which includes both the fixed and variable costs.

Notice that the total cost line starts at the fixed cost line. This line increases due to variable costs because variable costs increase at the same rate as sales.

The point at which the revenue line and total cost line intersect is the breakeven point:

• The area below the BEP will always be at loss as shown in the area shaded in red.
• The area above the BEP represents profit, shaded in green.
• The green lines represent the dollar value and quantities at BEP.

Another great use for the breakeven point is to compute the margin of safety. The margin of safety is the difference between actual and breakeven sales. It serves as “cushion” so that you’ll know if current sales level is far or near breakeven sales. For instance, if actual sales is $20,000 and breakeven sales is $8,000, our margin of safety is $12,000.

Assumptions & Limitations of Breakeven Point Analysis

Breakeven point analysis is part of managerial accounting . It is a tool businesses can use to determine the required level of sales before a product becomes profitable and can be compared against forecasts to ensure budgets are within reasonable amounts.

When performing BEP analysis, it’s important that we follow certain assumptions. These assumptions serve as the rules that make the results of BEP analysis true but, unfortunately, these same assumptions are also its limitations.

How To Reduce the Breakeven Point

A low breakeven point means that you’ll have to sell fewer products and services to reach breakeven, which means faster recovery of fixed costs. Here are several ways to reduce BEP:

• Review fixed costs : You can start by reviewing all fixed costs and removing those that can be removed. Some fixed costs are controllable while others aren’t. It’s best to focus on controllable fixed costs and determine if you can reduce them or eliminate them.
• Reassess variable costs : If fixed costs can’t be reduced, you can reassess variable costs by looking at the direct costs and overhead. It is relatively easier to control variable costs than fixed costs since most variable costs are directly related to products and services. For instance, you can reduce variable cost by looking for a cheaper raw material or replacing manual labor with machines and automations.
• Increase selling price : Increasing the selling price can effectively reduce the BEP. We don’t recommend this method since it can backfire instantly—unless you can explain to customers why you need to increase prices. You may even lose clients, especially if they find a competitor that sells a similar product at a lower price.

Frequently Asked Questions (FAQs)

When should you perform breakeven analysis.

You may perform it as often as you need. Since BEP analysis is for internal use, there’s no requirement as to when it should be regularly performed. However, conducting breakeven point analysis before introducing a new product can help you assess if it’s feasible to sell given its BEP and the business’ ability to market it.

Is the breakeven point important?

Yes, because it is the point where you start earning a profit. Moreover, it is also your reference point for setting sales and profit goals.

Bottom Line

Breakeven point analysis is a good tool that small businesses can use to determine the required unit or dollar sales to reach breakeven. It can also be a basis for budgeting and goal-setting as it provides businesses with a snapshot of its fixed costs, total costs, and revenue.

About the Author

Find Eric Gerard On LinkedIn

Eric Gerard Ruiz, CPA

Eric is an accounting and bookkeeping expert for Fit Small Business. He has a CPA license in the Philippines and a BS in Accountancy graduate at Silliman University. Since joining FSB, Eric has used his expertise and authority in curating and writing content about small business accounting and bookkeeping, accounting software, financial accounting and reporting, managerial accounting, and financial management.

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What Is a Break-Even Analysis?

3 min. read

Updated October 27, 2023

The break-even analysis lets you determine what you need to sell, monthly or annually, to cover your costs of doing business—your break-even point.

• Understanding break-even analysis

The break-even analysis is not our favorite analysis because:

• It is frequently mistaken for the payback period, the time it takes to recover an investment. There are variations on break even that make some people think we have it wrong. The one we do use is the most common, the most universally accepted, but not the only one possible.
• It depends on the concept of fixed costs, a hard idea to swallow. Technically, a break-even analysis defines fixed costs as those costs that would continue even if you went broke. Instead, you may want to use your regular running fixed costs, including payroll and normal expenses. This will give you a better insight on financial realities. We call that “burn rate” these post-Internet days.
• It depends on averaging your per-unit variable cost and per-unit revenue over the whole business.

Over the past few years, the break-even analysis has fallen out of favor with financial analysts. It is okay when done right, can be useful, but not for all businesses and not for all situations. And, to add to the confusion, the term “break-even” is often used to refer to “payback” or “payback period.”  And there are several ways to do the analysis. But what is shown here is the most common.

• Three assumptions of the break-even analysis

The break-even analysis depends on three key assumptions:

1. Average per-unit sales price (per-unit revenue):

This is the price that you receive per unit of sales. Take into account sales discounts and special offers. Get this number from your sales forecast.

For non-unit based businesses, make the per-unit revenue one dollar and enter your costs as a percent of a dollar. The most common questions about this input relate to averaging many different products into a single estimate.

The analysis requires a single number, and if you build your sales forecast first, then you will have this number. You are not alone in this, the vast majority of businesses sell more than one item, and have to average for their break-even analysis.

2. Average per-unit cost:

This is the incremental cost, or variable cost, of each unit of sales. If you buy goods for resale, this is what you paid, on average, for the goods you sell. If you sell a service, this is what it costs you, per dollar of revenue or unit of service delivered, to deliver that service.

If you are using a units-based sales forecast table (for manufacturing and mixed business types), you can project unit costs from the sales forecast table. If you are using the basic sales forecast table for retail, service and distribution businesses, use a percentage estimate, e.g., a retail store running a 50 percent margin would have a per-unit cost of .5, and a per-unit revenue of 1.

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3. Monthly fixed costs:

Technically, a break-even analysis defines fixed costs as costs that would continue even if you went broke. Instead, we recommend that you use your regular running fixed costs, including payroll and normal expenses (total monthly operating expenses). This will give you a better insight on financial realities.

If averaging and estimating is difficult, use your profit and loss table to calculate a working fixed cost estimate—it will be a rough estimate, but it will provide a useful input for a conservative break-even analysis. As sales increase, the profit line passes through the zero or break-even line at the break-even point. This is a classic business chart that helps you consider your bottom-line financial realities. Can you sell enough to make your break-even volume?

The break-even analysis depends on assumptions made for average per-unit revenue, average per-unit cost, and fixed costs. These are rarely exact. We recommend that you do the break-even table twice; first, with educated guesses for assumptions, as part of the initial assessment, and later on, using your detailed sales forecast and profit and loss numbers. Both are valid uses.

Do you have any questions about running a break-even analysis? 

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

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A Quick Guide to Breakeven Analysis

It’s a simple calculation, but do you know how to use it?

In a world of Excel spreadsheets and online tools, we take a lot of calculations for granted. Take breakeven analysis. You’ve probably heard of it. Maybe even used the term before, or said: “At what point do we break even?” But because you may not entirely understand the math — and because understanding the formula can only deepen your understanding of the concept — here’s a closer look at how the concept works in reality.

• Amy Gallo is a contributing editor at Harvard Business Review, cohost of the Women at Work podcast , and the author of two books: Getting Along: How to Work with Anyone (Even Difficult People) and the HBR Guide to Dealing with Conflict . She writes and speaks about workplace dynamics. Watch her TEDx talk on conflict and follow her on LinkedIn . amyegallo

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What Is Break-Even Analysis and How to Calculate It for Your Business?

You may have an idea that spurs you to open a business or launch a new product on little more than a hope and a dream. Or, you might just be thinking about expanding a product offering or hiring additional personnel. It’s wise, however, to limit your risk before jumping in. A break-even analysis will reveal the point at which your endeavor will become profitable—so you can know where you’re headed before you invest your money and time.

A break-even analysis will provide fodder for considerations such as price and cost adjustments. It can tell you whether you may need to borrow money to keep your business afloat until you’re pocketing profits, or whether the endeavor is worth pursuing at all.

What Is Break-Even Analysis?

A break-even analysis is a financial calculation that weighs the costs of a new business, service or product against the unit sell price to determine the point at which you will break even. In other words, it reveals the point at which you will have sold enough units to cover all of your costs. At that point, you will have neither lost money nor made a profit.

Key Takeaways

• A break-even analysis reveals when your investment is returned dollar for dollar, no more and no less, so that you have neither gained nor lost money on the venture.
• A break-even analysis is a financial calculation used to determine a company’s break-even point (BEP). In general, lower fixed costs lead to a lower break-even point.
• A business will want to use a break-even analysis anytime it considers adding costs—remember that a break-even analysis does not consider market demand.
• There are two basic ways to lower your break-even point: lower costs and raise prices.

How Break-Even Analysis Works

A break-even analysis is a financial calculation used to determine a company’s break-even point (BEP). It is an internal management tool, not a computation, that is normally shared with outsiders such as investors or regulators. However, financial institutions may ask for it as part of your financial projections on a bank loan application.

The formula takes into account both fixed and variable costs relative to unit price and profit. Fixed costs are those that remain the same no matter how much product or service is sold. Examples of fixed costs include facility rent or mortgage, equipment costs, salaries, interest paid on capital, property taxes and insurance premiums.

Variable costs rise and fall according to changes in sales. Examples of variable costs include direct hourly labor payroll costs, sales commissions and costs for raw material, utilities and shipping. Variable costs are the sum of the labor and material costs it takes to produce one unit of your product.

Total variable cost is calculated by multiplying the cost to produce one unit by the number of units you produced. For example, if it costs $10 to produce one unit and you made 30 of them, then the total variable cost would be 10 x 30 = $300.

What is Contribution Margin?

The contribution margin is the difference (more than zero) between the product’s selling price and its total variable cost. For example, if a suitcase sells at $125 and its variable cost is $15, then the contribution margin is $110. This margin contributes to offsetting fixed costs.

Unit Contribution Margin = Sales Price – Variable Costs

The average variable cost is calculated as your total variable cost divided by the number of units produced.

In general, lower fixed costs lead to a lower break-even point—but only if variable costs are not higher than sales revenue.

Why Does Your Business Need to Perform Break-Even Analysis?

A break-even analysis has broad uses on its own merit. But it’s also a critical element of financial projections for startups and new or expanded product lines. Use it to determine how much seed money or startup capital you’ll need, and whether you’ll need a bank loan.

More mature businesses use break-even analyses to evaluate their risks in a variety of activities such as moving innovative ideas to production, adding or deleting products from the product mix and other scenarios. One example is in budgeting the addition of a new employee. A break-even analysis will reveal how many additional sales it will take to break even on expenses associated with the new hire.

What Is a Standard Break-Even Time Period?

An acceptable break-even window is six to 18 months. If your calculation determines a break-even point will take longer to reach, you likely need to change your plan to reduce costs, increase pricing or both. A break-even point more than 18 months in the future is a strong risk signal.

When to Use a Break-Even Analysis

Basically, a business will want to use a break-even analysis anytime it considers adding costs. These additional costs could come from starting a business, a merger or acquisition, adding or deleting products from the product mix, or adding locations or employees.

In other words, you should use a break-even analysis to determine the risk and value of any business investment, especially when one of these three events occurs:

1. Expanding a business

Break-even points (BEP) will help business owners/CFOs get a reality check on how long it will take an investment to become profitable. For example, calculating or modeling the minimum sales required to cover the costs of a new location or entering a new market.

2. Lowering pricing

Sometime businesses need to lower their pricing strategy to beat competitors in a specific market segment or product. So, when lowering pricing, businesses need to figure out how many more units they need to sell to offset or makeup a price decrease.

3. Narrowing down business scenarios

When making changes to the business, there are various scenarios and what-ifs on the table that complicate decisions about which scenario to go with. BEP will help business leaders reduce decision-making to a series of yes or no questions.

How Do You Calculate the Break-Even Point?

ERP and accounting software with managerial accounting features will typically calculate your BEP for you, but you may want to understand what goes into that equation.

Break-even analysis formula

Break-even quantity = Fixed costs / (Sales price per unit – Variable cost per unit)

You can also use our break-even analysis template.

Use Our Break-Even Analysis Template

Find your break-even point by using this break-even analysis template, customizable to your business.

Get the template

Break-even analysis example

Beth has dreams of opening a gourmet cupcake store. She does a break-even analysis to determine how many cupcakes she’ll have to sell to break even on her investment. She’s done the math, so she knows her fixed costs for one year are $10,000 and her variable cost per unit is $.50. She’s done a competitor study and some other calculations and determined her unit price to be $6.00.

$10,000 / ($6 – $0.50) = 1,819 cupcakes that Beth must sell in one year to break even

The Limitations of a Break-Even Analysis

The most important thing to remember is that break-even analysis does not consider market demand. Knowing that you need to sell 500 units to break even does not tell you if or when you can sell those 500 units. Don’t let your passion for the business idea or new product cause you to lose sight of that basic truth.

On the flip side, you’ll need to decide how much effort and time you’re willing to expend to reach the break-even point. For example, are you willing to invest a substantial percentage of your sales team’s time and effort over several months to reach the break-even point? Or, is producing and selling something else a better and more profitable use of time and effort?

If you find demand for the product is soft, consider changing your pricing strategy to move product faster. However, discounted pricing can actually raise your break-even point. If you’re not careful, you’ll move product faster at the lower price but will incur more variable costs to produce more units in order to reach your break-even point.

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How to Lower Your Break-Even Point

There are two basic ways to lower your break-even point: lower costs and raise prices. But neither should be done in a vacuum. Weigh your options carefully in pricing methods and consumer psychology to make sure you don’t sell more product but lose money in the bargain.

Further, consider all elements of costs, such as the associated quality and delivery, before slashing them to prevent damage to your brand. Outsourcing products or service can also reduce costs when demand or volume increase.

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How to Calculate Your Business’s Break Even Point [Video Included]

Published: August 07, 2019

You've heard the term "break even." It's a popular way to describe a time when you spent exactly as much money as you made. "We gambled $200 at the casino and won $200, so we broke even."

But in a business context, it's not that simple.

Your break even point doesn't just happen in Vegas, and needs to be constantly recalculated for you to turn a profit in the long term. Here's how to find it.

Find Your Contribution Margin

Recently, I explained how a business calculates its contribution margin -- the amount (ideally in the form of a percentage) that your revenue from sales exceeds your variable costs to develop the product. There are two reasons you should care about this figure.

First, your contribution margin deliberately leaves out your operating costs so you can see exactly how profitable your product is. For example, while software and website costs to an ecommerce clothing business don't directly contribute to the business's product (the clothing), the cost its thread vendor charges does. The business omits the first cost because it only wants to see how profitable its clothing is against what it pays to produce it.

The second reason contribution margin is so important? You need it to calculate your break even point .

Although operating costs are irrelevant when assessing a product's profitability, they're critical when assessing your business's profitability. These costs, also called fixed costs, factor back into your books when calculating your profit margin -- your total profitability after all business expenses paid. And in order to achieve a high profit margin, you first need to know when you'll break even.

Break Even Point

A business's break even point indicates when total revenue from sales will be equal to total costs to the business. As a formula, your break even point is your fixed costs divided by your contribution margin, and the final number can be used as a recurring metric by the business to predict profitability.

Keep in mind that a break even point isn't a finish line. Breaking even is an exciting milestone for a growing business, but the break even point indicates when the business's revenue will be equal to its costs -- not when it is. Businesses run the equation described above multiple times a year, eventually surpassing their break even point and (hopefully) becoming profitable.

So why is this number recalculated all the time? Once you "break even," aren't you officially on the road to profitability? Yes and no. If you were to calculate your break even point according to yearly revenue, yearly fixed costs, and yearly contribution margin, then yes, you'd get a number that is more representative of the business's profitability since you're considering a full year of activity. And once you break even, you wouldn't have to track your break even point as often.

But there are shorter-term break even points that reset on a weekly, monthly, or quarterly basis to guide you as you strive to reach your end-of-year (EOY) break even point.

For example, if fixed costs such as your monthly office rent total $3000, and your product has a contribution margin of $250 per unit, you'd have to sell 12 units of your product by the end of the month to break even for that month. See how I came up with this number below:

The following month, you're back to square one, as you're on the hook for $3000 worth of bills for next month and need to sell another 12 products to, once again, break even for that period of time.

Set Goals to Become Profitable

Luckily, as a business grows, it won't have to meet these incremental break even points in order to declare itself profitable by EOY. The business's monthly revenue can even come up short of a month's fixed costs, but break even or declare the business profitable at the end of the year.

How? With seasonal fluctuations in sales, you might fall short one month but become super busy during a holiday and make up for it. Perhaps you host a flash sale that reduces revenue in the short term but develops brand loyalty that brings in long-term customers, and a more steady revenue stream. Just be sure you calculate your break even point first before running a sale or discount so you can set appropriate goals for the sale itself. Houston, we have a profit.

Now it's time for you to calculate your business's break even point … How'd you do? Did you plug your sales figures into the formula above and get a scary number? Don't sweat it -- that's why these incremental break even points are so helpful to a growing business.

If you're discouraged by how much work you'd have to do to break even by the end of the year, shorten the time period of your break even point. By setting a goal to break even every week or month right now, you can set yourself up to break even after larger stretches of time later.  

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How to Calculate a Breakeven Point

The Breakeven Point

• Calculation
• Considering Changes in Sales
• The Effect of Cutting Costs
• Other Considerations

Calculating the breakeven point is a key financial analysis tool used by business owners. Once you know the fixed and variable costs for the product your business produces or a good approximation of them, you can use that information to calculate your company's breakeven point. Small business owners can use the calculation to determine how many product units they need to sell at a given price point  to break even.

Key Takeaways

• A company's breakeven point is the point at which its sales exactly cover its expenses.

• Fixed Costs ÷ (Price - Variable Costs) = Breakeven Point in Units.

• Pricing a product, the costs incurred in a business, and sales volume are interrelated.

A company's breakeven point is the point at which its sales exactly cover its expenses. To compute a company's breakeven point in sales volume, you need to know the values of three variables:

• Fixed costs: Costs that are independent of sales volume, such as rent
• Variable costs : Costs that are dependent on sales volume, such as the cost of manufacturing the product
• The selling price of the product

How to Calculate the Breakeven Point

To calculate your company's breakeven point, use the following formula:

Fixed Costs ÷  (Price - Variable Costs) = Breakeven Point in Units

In other words, the breakeven point is equal to the total fixed costs divided by the difference between the unit price and variable costs. Note that in this formula, fixed costs are stated as a total of all overhead for the firm, whereas Price and Variable Costs are stated as per unit costs—​​the price for each product unit sold.

The denominator  of the equation, price minus variable costs, is called the contribution margin . After unit variable costs are deducted from the price, whatever is left—​​​the contribution margin—​is available to pay the company's fixed costs.

An Example of Finding the Breakeven Point

XYZ Corporation has calculated that it has fixed costs that consist of its lease, depreciation of its assets, executive salaries, and property taxes. Those fixed costs add up to $60,000. Their product is the widget. Their variable costs associated with producing the widget are raw material, factory labor, and sales commissions. Variable costs have been calculated to be $0.80 per unit. The widget is priced at $2.00 each.

Given this information, we can calculate the breakeven point for XYZ Corporation's product, the widget, using our formula above:

$60,000  ÷ ( $2.00 - $0.80) = 50,000 units

What this answer means is that XYZ Corporation has to produce and sell 50,000 widgets to cover their total expenses, fixed and variable. At this level of sales, they will make no profit but will just break even.

What Happens to the Breakeven Point If Sales Change

What if your sales change? For example, if the economy is in a recession, your sales might drop. If sales drop, then you may risk not selling enough to meet your breakeven point. In the example of XYZ Corporation, you might not sell the 50,000 units necessary to break even.

In that case, you would not be able to pay all your expenses. What can you do in this situation? If you look at the breakeven formula, you can see that there are two solutions to this problem: you can either raise the price of your product or you can find ways to cut your costs, both fixed and variable.

How Cutting Costs Affects the Breakeven Point

Let's say you find a way to cut the cost of your overhead or fixed costs by reducing your salary by $10,000. That makes your fixed costs drop from $60,000 to $50,000. Using the same formula and holding all other variables the same, the breakeven point would be:

$50,000 ÷ ( $2.00-$0.80) = 41,666 units

Predictably, cutting your fixed costs drops your breakeven point. If you reduce your variable costs by cutting your costs of goods sold to $0.60 per unit, on the other hand, then your breakeven point, holding other variables the same, becomes:

$60,000 ÷ ( $2.00-$0.60) = 42,857 units

From this analysis, you can see that if you can reduce the cost variables, you can lower your breakeven point without having to raise your price.

Relationships Between Fixed Costs, Variable Costs, Price, and Volume

As the owner of a small business, you can see that any decision you make about pricing your product, the costs you incur in your business, and sales volume are interrelated. Calculating the breakeven point is just one component of cost-volume-profit analysis, but it's often an essential first step in establishing a sales price point that ensures a profit.

Michael Cafferky. "Breakeven Analysis: The Definitive Guide to Cost-Volume-Profit Analysis," Pages 11-12. Business Expert Press, 2010.

Corporate Finance Institute. " Contribution Margin ."

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Financial Futures Analysis: How Do You Calculate Break-Even Point?

Profits, losses, revenues, oh my! As a business, you really want one thing: to bring money into your company. But business success takes both hard work and time to build, and you’re already chomping at the bit. So aim for a short-term goal as you continue to grow: your break-even point. How do you calculate your break-even point? Let’s take a closer look at what a break-even point is, how to calculate the figure, and why it’s such a major benchmark for growing businesses like yours.

What is a break-even point (BEP)?

From an accounting perspective, a break-even point is the sweet spot where your total revenues are equal to your total expenses during a specific period. That is to say, break-even sits just outside the red and is the threshold where your company hasn’t quite made money yet on sales compared to its expenses but is just on the cusp of doing so.

Why is BEP important for businesses?

Your break-even point is a scalable analysis that informs your business plan. Your investors want to know two things when they support you: the potential ROI and the time frame to expect it. New businesses take months—and often years—to become profitable, so it’s helpful to be able to forecast for investors when yours will turn a corner. 

But it’s not just a gauge for emerging businesses; a break-even point helps existing businesses plan and pivot to reach their goals and:

• Adjust prices.
• Highlight overlooked expenses.
• Set revenue goals.

Determine your break-even point to get a broad view of your cash flow and create goals to set your business up for financial success.

What do you need to calculate BEP?

“OK, Ignite Spot, I’m ready to dive in. How do you calculate a break-even point already?!” Just a few more details to remember—we promise. With all of the expenses that come along with running your business, it can be intimidating, but you only need three things to calculate your break-even point: gross margin, overhead costs, and balance sheet payments. 

1. Gross Margin

Your gross margin —or gross profit margin—is your company's net sales minus the costs of producing your goods and services. It includes how much profit you make before you subtract selling, general, and administrative costs.

Example: Pretend your gross margin is 89 percent. This means that for every dollar you sell in products or services, you get to keep 89 cents to go toward your company’s overhead costs.  

2. Overhead Costs

Overhead costs are the operational costs that you incur within your business regardless of how successful you are. Rent, insurance, administrative payroll, and marketing all fall under overhead. Add up every dollar that you spend each month to see your total overhead costs.

Pro tip: Most people cut out marketing, which is a big no-no. They do this because if things get bad, marketing is often one of the first things to go in order to save money. That’s a big mistake! Calculate your break-even point with the marketing budget built in so your company can grow.  

Example: Let's pretend that you have $25,000 in overhead costs.

3. Balance Sheet Payments

Balance sheet payments are monthly expenses that are not classified as an expense in typical accounting terms. The principal portion of loan payments, payments to investors and shareholders, and owner draws are all examples of balance sheet payments.

Example: Let's pretend you take a $5,000 owner's draw from your company each month and an additional $2,000 you need to pay in principal payments on debt. As a result, your balance sheet payments are $7,000.

What’s the break-even formula?

In accounting, the break-even point formula is determined by adding your overhead expenses to your balance sheet payments and dividing by gross margin percentage. Break-even point is a tricky concept for many entrepreneurs, with blunders resulting from: 

• Selling many products or services, all with different cost structures
• Confusing the cost of goods sold with overhead costs
• Inaccurate financial data

But calculating the break-even point for your business is simple once you have the right data. Use the following equation to calculate your break-even point:

(Overhead Expenses + Balance Sheet Payments) / Gross Margin = Break-Even Point 

Figuring out how much you have to sell to keep the doors open seems like a no-brainer, but it takes a little bit of everyone’s favorite four-letter word (No, not that one): Math. Get that groan out of your system, take a breath, and watch our quick video on how to calculate the break-even point for your business:

Remember all the little examples we sprinkled throughout this post? All those figures link back to what we’ve illustrated in the video. So your calculation looks like this: 

(25,000 + 7,000) / .89 = $35,955

To break even, your business needs to sell $35,955 in products and services.

Get a handle on your break-even point to find financial success.

To get (and keep!) your business in the black, remember the answer to this question, “How do you calculate break even point?” Your break-even point reflects when your total revenues are equal to your total expenses, helping you plan for your future, whether that means forecasting how many units to sell or adjusting your prices. 

While it’s a valuable tool, your break-even point shouldn’t be the only way you determine your budget. You should also take a close look at your static versus actual numbers all year round to plan for the long term. Need a little help along the way? Get in touch with us with any questions or to sign up for expert accounting services.

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How to Calculate the Break-Even Point for Your Business

Keep reading to learn how to calculate your break-even point in units or sales dollars for your various products and services.

When starting a business, it’s recommended to plan for 12 to 15 months of cash flow to keep your business afloat as it gains traction. Part of that planning will consist of knowing the amount of business you need to avoid being in the red and cover your overhead costs. 

Even if you’ve been running your business for a few years, knowing when you’ll break even at various sales volumes for different products or services can help you better prepare for unprecedented situations like a pandemic or natural disaster. It will also come in handy when presenting your business to potential investors or business partners.

For a step-by-step guide on how to calculate your break-even point (BEP), keep reading.

What is the Break-Even Point?

The break-even point is the point in which your company’s costs equal its revenue. When this happens, your business is neither losing nor gaining money. If your revenue is under your costs, you’re operating at a loss. If your revenue is higher than your costs, you’re making a profit. 

BEP Formula Elements

There are two common ways to calculate your break-even point—in units or sales dollars. But before we go over those formulas, here’s a breakdown of the different components you’ll need to know before you start your analysis. 

Single product or service sold. 

Although you can estimate your break-even point by adding up the monthly, quarterly, or yearly totals of fixed costs, variable costs, and sales prices, you can also calculate the BEP for each product or service sold. This is usually recommended if the cost of your products or services varies significantly or the services you provide vary by season. 

Sales Price Per Unit

How much in sales dollars you will charge your customers for the product or service sold. Be sure to enter the sales price for the product or service you’re calculating your BEP for or using an average sales price for your products and services. 

Fixed Costs

Costs that do not change over a period of time despite an increase or decrease in sales. These are usually recurring weekly, monthly, quarterly, or yearly costs. 

This can include: 

• Utilities 
• Property taxes
• Loans and interest

Variable Costs

Costs that change over a period of time depending on the volume of sales. 

• Production and manufacturing
• Materials and supplies
• Commissions

Contribution Margin

Contribution margin is the difference between the price of a product or service and the cost to make that product or perform the service. 

Formula: 

• Contribution margin = (sale price per unit – variable cost per unit) ÷ sale price per unit

Calculate Your BEP in Units

Divide your monthly, quarterly, or yearly fixed costs by the difference between your sales price per unit and your variable cost per unit. Again, if you’re calculating each break-even point for your different products or services, be sure to enter the fixed costs, variable costs, and sales price for that particular product or service. 

• Break-even point in units = fixed costs ÷ (sales price per unit – variable cost per unit)

Sally owns a beauty salon and she’s trying to determine the monthly volume of haircuts she’ll need to make to break even. A haircut at Sally’s is priced at $50 with a $5 variable cost per client. Her monthly fixed costs are $15,000. 

Here’s how she calculated her BEP: 

• $15,000 ÷ ($50 - $5) = ~333 units (haircuts) per month

Calculate Your BEP in Sales Dollars

Divide your monthly, quarterly, or yearly fixed costs by the contribution margin. Again, your contribution margin is obtained by subtracting your variable cost per unit from the sales price per unit and dividing that total by the sales price per unit. 

• Break-even point in sales dollars = fixed costs ÷ contribution margin

Joe owns a landscaping business and he’s trying to figure out how much money he needs to make to break even during his first quarter. Joe’s average lawn care visit is priced at $60 with a variable cost of $10 per visit. His quarterly fixed costs are $24,000. 

He first calculated his contribution margin: 

• ($60 - $10) ÷ $60 = 0.83

He then calculated his BEP in sales: 

• $24,000 ÷ 0.83 = $28,915

Benefits of a Break-Even Analysis

Again, a break-even analysis is a helpful tool to use when preparing for unexpected circumstances or when presenting your business plan to a potential investor. 

However, there are many more benefits to knowing your BEP. Here are a few: 

• Better business decisions: Knowing your BEP can help you determine the pros and cons of certain options and business ideas. 
• Informed product or service launches: Calculate your BEP to predict when your business can expect a profit from a new service or product. 
• Profitable pricing: Use your BEP point to price your products and services fairly and favorably for your business.
• Reduced spending:  Having your BEP in mind can help you and your team reduce unnecessary or excess spending. 

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