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Your break-even point is the amount you need to sell to cover all of your costs for a period, usually a month. Below it, the business loses money. Above it, the business starts to make a profit. Knowing the number turns a vague worry, "am I selling enough?", into a target you can check every week. This guide explains the parts in plain words, works through one example, and shows how to find your own number.
Fixed costs and variable costs
Break-even starts by splitting your costs into two groups.
Fixed costs are the bills that stay about the same each month whether you make ten sales or a hundred. Common examples:
- Rent
- Salaries for staff who are paid the same each month
- What you pay yourself
- Insurance
- Software and subscriptions
- Loan payments
Variable costs go up with every sale. Materials and supplies, card processing fees, and commissions from delivery apps are typical ones. If you sell more, you pay more of them.
For many service and retail businesses, it is easier to think of variable cost as a percentage of sales instead of a dollar amount per sale. Card fees and app commissions already work that way. If those costs come to 40 cents of every dollar you sell, your variable cost is 40% of sales.
Some costs do not fit neatly in one group, such as an employee whose hours change with how busy you are. That is normal. Put each cost where it behaves most of the time.
How much each sale leaves you
Each sale brings in its price, but part of that money goes straight to the variable costs of that sale. What is left is called the contribution: the amount each sale contributes toward paying your fixed costs. Once enough sales have covered the fixed costs, the contribution from every sale after that is profit.
The formula is short: fixed costs divided by contribution per sale equals the number of sales you need.
Here is an example. These are hypothetical figures, not a real client.
Say a business has $3,000 a month in fixed costs. Its average sale is $50, and the variable cost of each sale is $20. Each sale contributes $50 minus $20, which is $30.
To cover $3,000, the business needs $3,000 divided by $30, which is 100 sales a month. At $50 each, that is $5,000 in sales a month.
If the business is open 20 days a month, that is $250 a day, or 5 sales a day. A daily target like that is much easier to keep in mind than a monthly total.
In percentage terms, the variable cost is 40% of the price, so each dollar of sales contributes 60 cents. $3,000 divided by 0.60 also gives $5,000.
What changes the number
Break-even is not fixed. Small changes in price or costs move it, and seeing how much helps you decide where to put your effort. Using the same example:
- Price up 5%, from $50 to $52.50. Each sale now contributes $32.50. Break-even drops to a little over 92 sales, so 93 in practice, or about $4,850 a month.
- Variable cost down 5%, from $20 to $19. Each sale contributes $31. Break-even drops to a little under 97 sales, or about $4,840 a month.
- Fixed costs down $500, from $3,000 to $2,500. Each sale still contributes $30. Break-even drops to a little over 83 sales, so 84 in practice, or about $4,170 a month.
In this example, cutting $500 of fixed costs moves the target the most. With other numbers, the order can be different, which is why it helps to run your own.
There is one case with no break-even point at all. If the variable cost of a sale is equal to or higher than the price, each sale contributes nothing or loses money, and selling more will never cover the fixed costs. The fix is in the price or the cost of each sale, not in the number of sales.
Where your numbers come from
You do not have to guess. Your monthly profit and loss statement lists your sales and expenses. Most of the fixed costs are in the operating expenses. Materials, card fees and app commissions usually show up in cost of goods sold or in their own expense lines. Averaging a few months gives a steadier picture than a single month.
For your average sale, divide a month's sales by the number of sales or tickets in that month. Your point-of-sale system or invoicing software can usually tell you both.
When the books are up to date, these numbers are ready when you need them. With monthly bookkeeping, your profit and loss gives you these numbers every month.
Our free break-even calculator does the math for you. Enter your monthly fixed costs, your average sale, your variable cost per sale or as a percentage of sales, and your working days. It shows the sales you need per month, per week and per day, and a small what-if row with a price increase, a lower variable cost and lower fixed costs. The calculation happens in your browser, and nothing you enter is stored. It is a calculation from your numbers, not financial advice.
Let's look at your numbers together
If you have run the numbers and are not sure what to make of them, or you are not sure which costs are fixed and which are variable, we are happy to go over them with you. Send us a message in English or Spanish.
Questions about this topic
Does break-even include paying myself?
It should. If you leave your own pay out, break-even only tells you when the business covers its other bills, not when it covers you. Add what you pay yourself each month to your fixed costs.
What if my sales change a lot by season?
Your fixed costs usually stay about the same all year, so the monthly target stays the same too. What changes is how hard it is to reach. Comparing your break-even with each month's sales shows which months carry the slower ones, and how much you need to set aside in the busy season.
Is break-even the same as being profitable?
No. At break-even, the business covers its costs and has nothing left over. Profit starts with the sales above that point. It also does not mean cash in the bank, since things like unpaid invoices or inventory purchases affect cash differently.
I sell services at different prices. Can I still use this?
Yes. Use your average sale, which is a month's sales divided by the number of sales or jobs. If your variable costs are mostly fees and supplies that grow with each dollar sold, entering them as a percentage of sales is often simpler.
Written by the team at Choice Business Advisors, a bookkeeping, tax, and advisory firm based in Utah serving small businesses across the United States in English and Spanish.