What's the simplest way to calculate your break-even point?

1 What is a break-even point?

A break-even point is the point where your total revenue equals your total costs. At this point, you are not making a profit or a loss, but just covering your expenses. To find your break-even point, you need to know two things: your fixed costs and your contribution margin.

2 What are fixed and variable costs?

Fixed costs are the costs that do not change with the level of output or sales. They include rent, salaries, insurance, depreciation, and other overheads. Variable costs are the costs that vary with the level of output or sales. They include materials, labor, commissions, shipping, and other direct costs.

3 What is a contribution margin?

A contribution margin is the difference between your selling price and your variable cost per unit. It represents how much each unit contributes to covering your fixed costs and generating a profit. To calculate your contribution margin, you need to know your selling price and your variable cost per unit.

4 How to calculate your break-even point?

To calculate your break-even point, you need to use this simple formula:

Break-even point (in units) = Fixed costs / Contribution margin per unit

For example, suppose you run a small bakery and you sell cakes for $20 each. Your fixed costs are $2,000 per month and your variable cost per cake is $10. Your contribution margin per cake is $20 - $10 = $10. To find your break-even point, you need to divide your fixed costs by your contribution margin per unit:

Break-even point (in units) = $2,000 / $10 = 200

This means you need to sell 200 cakes per month to break even. If you sell more than 200 cakes, you will make a profit. If you sell less than 200 cakes, you will incur a loss.

5 How to calculate your break-even point (in dollars)?

You can also calculate your break-even point in dollars by multiplying your break-even point in units by your selling price. This will give you the amount of revenue you need to break even. For example, using the same numbers as above, you can find your break-even point in dollars by multiplying 200 by $20:

Break-even point (in dollars) = 200 x $20 = $4,000

This means you need to generate $4,000 in revenue per month to break even. You can also use this formula to calculate your break-even point in dollars:

Break-even point (in dollars) = Fixed costs / Contribution margin ratio

The contribution margin ratio is the percentage of your selling price that is your contribution margin. To calculate it, you need to divide your contribution margin per unit by your selling price. For example, using the same numbers as above, your contribution margin ratio is $10 / $20 = 0.5 or 50%. To find your break-even point in dollars, you need to divide your fixed costs by your contribution margin ratio:

Break-even point (in dollars) = $2,000 / 0.5 = $4,000

This will give you the same result as the previous method.

6 How to use your break-even point for decision making?

Your break-even point can help you make informed decisions about your pricing, sales, and expenses for your small business. For instance, you can use it to evaluate the effects of altering your selling price, variable cost, or fixed cost on your profitability. Additionally, it can help you determine the minimum sales volume or revenue needed to reach your target profit. You can also use it to compare the profitability of different products or services, set realistic goals and budgets for your business, and pinpoint areas where you can reduce costs or increase efficiency.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?