Break-Even Analysis: Know When You'll Start Making Money

Every business has a magic number: the point where revenue covers all costs and you start actually making money. Break-even analysis helps you find that number—and make smarter decisions about pricing, costs, and growth.

What Is Break-Even?

The break-even point is where your total revenue equals your total costs. Below it, you're losing money. Above it, you're profitable.

Revenue = Fixed Costs + Variable Costs

At break-even, profit is exactly $0

Why Break-Even Matters

Planning: Know how many sales you need before launching
Pricing: See how price changes affect profitability
Goal-setting: Set realistic sales targets
Risk assessment: Understand your cushion if sales drop
Investment decisions: Evaluate if new equipment/hires pay off

The Break-Even Formula

There are two ways to express break-even: in units sold or in dollars of revenue.

Break-Even in Units


Fixed Costs ÷ (Price - Variable Cost per Unit)

Answers: "How many units do I need to sell?"

Break-Even in Dollars


Fixed Costs ÷ Contribution Margin Ratio

Answers: "How much revenue do I need?"

Key Terms Explained

Fixed Costs

Costs that stay the same regardless of sales: rent, salaries, insurance, software subscriptions, loan payments. You pay these whether you sell 0 units or 1,000.

Variable Costs

Costs that change with each sale: materials, shipping, sales commissions, payment processing fees. Sell more = pay more in variable costs.

Contribution Margin

Price minus variable cost per unit. This is what each sale "contributes" toward covering fixed costs. Also expressed as a ratio: (Price - Variable Cost) ÷ Price.

Calculating Step by Step

Let's walk through a real calculation for a coffee shop.

Coffee Shop Example

Step 1: List Fixed Costs (monthly)

Rent: $3,000
Salaries: $8,000
Insurance: $400
Utilities: $600
Equipment loans: $500
Total Fixed: $12,500/month

Step 2: Calculate Variable Cost per Coffee

Coffee beans: $0.50
Cup, lid, sleeve: $0.25
Milk/cream: $0.30
Card processing (3%): $0.15
Total Variable: $1.20/coffee

Step 3: Determine Price

Average coffee price: $5.00

Step 4: Calculate Contribution Margin

$5.00 - $1.20 = $3.80 per coffee

Step 5: Calculate Break-Even

$12,500 ÷ $3.80 = 3,290 coffees/month
Or about 110 coffees per day (30 days)

Now the owner knows: sell fewer than 110 coffees daily and you're losing money. Sell more and you're profitable. Every coffee beyond 110 adds $3.80 to profit.

Real-World Examples

Business	Fixed/Mo	Price	Var Cost	Break-Even
Freelance Designer	$2,000	$100/hr	$5/hr	21 hours
E-commerce Store	$5,000	$40 avg	$18 avg	228 orders
Food Truck	$4,500	$12	$4	563 meals
SaaS Product	$15,000	$49/mo	$3/mo	326 customers

Using Break-Even for Decisions

Break-even analysis isn't just a one-time calculation. Use it to model different scenarios.

Scenario Analysis

"What if I raise prices 10%?"

Coffee shop at $5.50: new contribution margin = $4.30. New break-even = 2,907 coffees (down from 3,290). You need 12% fewer sales to break even.

"What if I hire another employee?"

Adding $3,000/month salary: new fixed costs = $15,500. New break-even = 4,079 coffees. You need 789 more sales just to cover the hire.

"What if I find a cheaper supplier?"

Reducing variable cost to $1.00: new contribution margin = $4.00. New break-even = 3,125 coffees. That $0.20 savings cuts break-even by 165 coffees.

Target Profit Analysis

You can also calculate how many sales you need to hit a specific profit target:

Units for Target Profit


(Fixed Costs + Target Profit) ÷ Contribution Margin

Coffee shop wants $5,000 profit: ($12,500 + $5,000) ÷ $3.80 = 4,605 coffees/month

Limitations to Know

Break-even analysis is useful, but it simplifies reality. Keep these limitations in mind:

Where Break-Even Falls Short

Assumes constant prices: In reality, you might discount for volume or adjust prices seasonally.
Assumes linear costs: Variable costs may decrease at scale (bulk discounts) or increase (overtime pay).
Ignores time value: Breaking even in 6 months is very different from breaking even in 3 years.
Single product focus: Most businesses sell multiple products with different margins. You need a blended analysis.
Doesn't account for growth costs: Scaling often requires stepped increases in fixed costs (new hires, bigger space).

Despite these limitations, break-even analysis gives you a concrete target to aim for. Use it as a starting point, not the final word.

Calculate Your Break-Even Point

Use our Break-Even Calculator to find your magic number in seconds.

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