Break-Even Analysis: How to Calculate Your Break-Even Point

What Is Break-Even Analysis?

Break-even analysis determines the point at which total revenue equals total costs — the moment your business stops losing money and starts making profit. It is one of the most important calculations for any business.

The Break-Even Formula

Break-even point (units) = Fixed Costs / (Selling Price - Variable Cost per Unit)

Break-even point (revenue) = Fixed Costs / Contribution Margin Ratio

Where Contribution Margin Ratio = (Selling Price - Variable Cost) / Selling Price

Fixed vs Variable Costs

Fixed costs remain constant regardless of sales volume: rent, salaries, insurance, loan payments, software subscriptions.

Variable costs change with each unit sold: raw materials, packaging, shipping, sales commissions, payment processing fees.

Example Calculation

A coffee shop with £5,000/month fixed costs selling coffee at £3.50 with £1.00 variable cost per cup:

Break-even = £5,000 / (£3.50 - £1.00) = 2,000 cups per month, or roughly 67 cups per day.

Using Break-Even for Better Decisions

Pricing decisions: See how price changes affect the break-even point. A 10% price increase might reduce the required volume significantly. New product launch: Calculate minimum sales needed before committing resources. Cost reduction: Understand the impact of reducing fixed or variable costs. Investment decisions: Determine how quickly a capital investment will pay for itself.

Limitations

Break-even analysis assumes constant prices and costs, which rarely holds perfectly. It works best for single-product businesses or as a rough guide for multi-product businesses. Revisit your analysis regularly as costs and prices change.