For a business to be successful, it needs to make more than it spends. It needs to turn a profit by bringing in revenue that exceeds its costs. You can determine this threshold for success by using a break-even point formula.
What is the break-even point for a business?
The break-even point is the threshold where a business’s revenue is equal to their expenses. It’s the point when a business has no losses and no profit. Revenue and costs are exactly the same. A break-even point could be measured in units (how many items must be sold to break even) or dollars (how much revenue must come in to break even).
The break-even point is a key metric when you start a business as it indicates what you need to do to become profitable. If operating below the break-even point, a business will be in the red and losing money. When a company is above the break-even point, they will start making money and turning a profit.
To determine a break-even point, you can use two simple formulas.
Break-even point formula
There are two types of break-even point formulas. A unit break-even point formula tells you how many products you need to sell. A dollar break-even point formula tells you how much revenue you need to make.
A unit break-even point formula is useful if your business sells a specific product and you want to know how many units to sell to turn a profit.
Unit Break-Even Point = Fixed Costs / (Selling Price per Unit – Variable Costs per Unit)
A dollar break-even point formula is useful if your business has multiple products or provides services and you want to know the total revenue needed to become profitable.
Dollar Break-Even Point = Fixed Costs/(Sales Price Per Unit – Variable Costs Per Unit) / Sales Price Per Unit
Fixed and variable costs
To calculate a break-even point, you will need to understand the difference between fixed costs and variable costs at your business.
Fixed costs are consistent expenses that keep your business running. They are unlikely to change or may only change slightly and include rent, salaries, loan payments, subscription fees, marketing retainers, etc.
Variable costs are the expenses directly tied to the production of your products, such as the cost of raw materials, direct labor, packaging, shipping, credit card transaction fees, etc. Unlike fixed costs, variable costs can fluctuate. Costs may increase or decrease due to changes in labor costs, raw material pricing, scales of production, etc.
Break-even analysis examples
Whether you sell products, services, subscriptions, or memberships, you can use a break-even point formula. Let’s consider what a break-even analysis might look like for businesses in two different types of industries.
Subscription-based business
Say you run a small business that sells monthly subscription boxes of beauty products. Your fixed cost to run the business is $500 per month. The cost to produce and ship one box (your variable cost per unit) is $20. You sell a single box for $30.
You can determine how many boxes you need to sell to break even using a unit break-even point formula.
Unit Break-Even Point = Fixed Costs/ Sales Price Per Unit – Variable Costs Per Unit
Unit Break-Even Point = $500 / $30 – $20
The break-even point is 50 boxes. You need to sell at least 50 subscription boxes each month to cover your costs and start making a profit.
- Break-Even Point = $500 / ($30 – $20)
- Break-Even Point = $500 / $10
- Break-Even Point = 50 subscription boxes
Product-based business
Imagine you own a small online store that sells handmade candles. You spend $200 per month on fixed costs that include website hosting and marketing. It costs you $5 to make each candle, and you charge $10 per candle.
Using the unit break-even point formula, you can determine how many candles you need to sell to match expenses with profit.
Unit Break-Even Point = Fixed Costs / Sales Price Per Unit – Variable Costs Per Unit
Unit Break-Even Point= $200 / $10 – $5
You need to sell at least 40 candles each month to cover your costs and start making a profit.
- Break-Even Point = $200 / ($10 – $5)
- Break-Even Point = $200 / $5
- Break-Even Point = 40 candles
Knowing how to calculate break-even points is important for business owners as it allows you to make informed decisions about pricing, production, and sales strategies for your small business. Let’s look at how you can calculate break-even points for your business.
How to calculate your break-even point
To calculate your break-even point:
- Determine fixed costs. Calculate business expenses that don’t change with production (such as rent, salaries, etc.). Calculate the expenses over the time period you are measuring for your break-even point. For example, if you want to know how many products to sell in thirty days, calculate your fixed costs over a thirty-day period.
- Determine variable costs. Calculate the business expenses needed to produce a single product. To determine variable costs, add expenses for raw materials, direct labor, packaging, shipping, credit card transaction fees, and any other expenses tied to production and delivery.
- Decide if you want to calculate your break-even point with units or dollars. A unit break-even point formula will determine the number of products you need to sell to break even. A dollar break-even point will determine the amount of revenue you need to make to break even.
Break-event point in units
To determine the number of products you need to sell, use the unit break-even point formula.
Unit Break-Even Point = Fixed Costs / Sales Price Per Unit – Variable Costs Per Unit
- Enter the fixed costs for the period of time you are measuring. For example, your business may spend $5,000 per month on fixed costs.
Unit Break-Even Point = 5,000 / Sales Price Per Unit – Variable Costs Per Unit
- Enter the sales price you are currently charging for each product. For example, you may sell handmade journals for $50 each.
Unit Break-Even Point = 5,000 / 50 – Variable Costs Per Unit
- Enter the variable cost per unit. This is the cost it takes to produce one product. In the example, it costs $25 to produce one journal.
Unit Break-Even Point = 5,000 / 50 – 25
- Subtract your variable costs per unit from the sales price per unit.
Unit Break-Even Point = 5,000/25
- Divide the fixed costs by the difference between sales price per unit and the variable cost per unit to get the unit break-even point. The company would need to sell 200 journals each month to break even.
Unit Break-Even Point = 200
Break-event point in dollars
Use a dollar break-even point to determine how much revenue you need to bring in to break even.
Dollar Break-Even Point = Fixed Costs/(Sales Price Per Unit – Variable Costs Per Unit) / Sales Price Per Unit
- Enter the fixed costs for the period of time you are measuring. For example, the business may spend $5,000 per month on fixed costs.
Dollar Break-Even Point = 5,000/ (Sales Price Per Unit – Variable Costs Per Unit) / Sales Price Per Unit
- Enter the sales price you are currently charging for each product in two places in the formula. For example, the business sells handmade journals for $50 each.
Dollar Break-Even Point = 5,000 /(50 – Variable Costs Per Unit) / 50
- Enter the variable cost per unit. This is the cost to produce one product. In the example, it costs $25 to produce one journal.
Dollar Break-Even Point = 5,000/ (50 – 25) / 50
- Subtract the variable costs per unit from the sales price per unit.
Dollar Break-Even Point = 5,000/ 25 / 50
- Divide the sale price per unit by the difference between sales price per unit and the variable cost per unit to get the contribution margin.
Dollar Break-Even Point = 5,000 /.5
- Divide the fixed costs by the contribution margin to get the dollar break-even point. In this example, the company would need to make $10,000 each month to break even.
Dollar Break-Even Point = 10,000
How to use your break-even analysis
A break-even point is a valuable metric that can guide business strategy at every stage. Whether you are in the planning phase of your business and determining its viability or you are decades into your business and planning for growth or long-term stability, a break-even point can inform many aspects of your decision-making.
A break-even analysis can inform:
- Pricing strategy: A break-even point will help you determine if you are charging enough for your products.
- Goal setting: Break-even points give you a benchmark to aim for in goal planning. Use a break-even point to set starting sales and revenue goals.
- Growth management: Increasing production increases costs. You can use a break-even point before scaling to determine if you can afford to produce more products.
- Product planning/viability: Using a break-even point formula when you’re writing your business plan will help you determine if your idea can turn a profit and if not, what you must change to move toward profitability.
- Risk management: A break-even point represents the minimum level of business activity needed to keep your business running. It creates a threshold for success that can guide your business and keep it on track.
Keep it updated
A break-even point is only useful if it is up-to-date and accurate. Calculating a break-even point is not a one-time job. Because metrics will change, you must consistently update your formula to keep a valid estimate of your expenses and profits.
Break-even points may change over time due to:
- Changes in fixed and variable costs
- Shifts in markets and trends
- Fluctuanting customer demand
- Business growth and product scaling
Plan to review your break-even point quarterly or biannually. Also, return to your formula anytime there is a major shift that impacts your business, such as pricing changes and market shifts.
Put your break-even point formula to use
For your business to be successful, it needs to bring in more money than it spends. The break-even point helps you identify that threshold for success. As you start and scale your business, continue to refer to the break-even point to inform your business strategies and keep your business on the path toward long-term success.
