To calculate your break-even point in units, divide your fixed costs by the contribution each sale makes: price minus variable cost per unit. For break-even in sales, divide fixed costs by your contribution margin ratio. At that point total revenue equals total costs, so you make neither a profit nor a loss. Every sale beyond it adds profit.
Break-even analysis is one of the most useful numbers a small business can know. It tells you whether a price works, how much a discount really costs, and how far sales can fall before you lose money. This guide walks through the formulas, worked examples for product and service businesses, and the mistakes that make the answer misleading.
Key takeaways
- Break-even units equal fixed costs divided by price minus variable cost per unit; break-even sales equal fixed costs divided by the contribution margin ratio.
- Service businesses can use hours or jobs as the unit, and multi-product businesses can use their overall gross margin percentage.
- To plan for profit, add the profit you want to fixed costs before dividing.
- Treat break-even as a range, test price and cost scenarios, and track your margin of safety each month.
What is a break-even point?
The U.S. Small Business Administration describes the break-even point as "the point at which total cost and total revenue are equal", meaning no loss or gain. Canada's BDC puts it the same way: "the level of sales where a business's total revenue equals its total expenses."
You can express it in two ways:
- Units: how many products, hours, jobs or covers you need to sell.
- Sales: how much revenue you need to bring in.
Both come from the same idea, contribution margin. Each sale brings in a price, part of which goes on the variable cost of making or delivering it. What is left over contributes towards your fixed costs and, once those are covered, profit.
The break-even formula
The SBA gives the formula as:
Break-even point in units = Fixed costs ÷ (Price − Variable cost per unit)
and, for sales:
Break-even point in sales = Fixed costs ÷ Contribution margin ratio
where the contribution margin ratio is (Price − Variable cost per unit) ÷ Price.
Fixed costs
Fixed costs stay the same over a period whatever you sell. The SBA describes them as costs "that do not change" with production or services. Typical examples are rent, salaries for permanent staff, insurance, software subscriptions, loan repayments, accounting fees and your website hosting.
Variable costs
Variable costs rise and fall with each sale: materials, stock, packaging, shipping, payment processing fees, sales commission and hourly labor tied directly to a job.
Some costs are a mix. A phone contract with a fixed monthly fee and per-minute charges, or staff who are salaried but paid overtime at busy times, can be split into their fixed and variable parts. Being roughly right here matters more than being precise.
Use prices without sales tax
Use your net price, excluding any sales tax, VAT or GST you collect and pass on to the government. That money was never yours, so including it overstates your contribution. Our guide to margin vs markup explains how tax fits into pricing. If you sell in the UK, our guide on how to calculate VAT shows how to strip 20% VAT out of a price.
Worked example: a product business
A small online shop sells one main product:
| Item | Amount |
|---|---|
| Fixed costs per month | $6,000 |
| Price per unit (net of tax) | $40 |
| Variable cost per unit | $16 |
| Contribution per unit | $24 |
| Contribution margin ratio | 60% |
Break-even in units: $6,000 ÷ $24 = 250 units a month.
Break-even in sales: $6,000 ÷ 0.60 = $10,000 a month, which is the same thing, because 250 units × $40 = $10,000.
What a price change does
Price changes move the break-even point more than most owners expect, because they change the contribution on every sale:
| Price | Contribution per unit | Break-even units |
|---|---|---|
| $36 (10% discount) | $20 | 300 |
| $40 (current) | $24 | 250 |
| $44 (10% increase) | $28 | 215 (214.3 rounded up) |
A 10% discount needs 20% more sales just to stand still. That is why a short promotion can feel busy and still lose money. Our free break-even calculator lets you test these scenarios in seconds.
Worked example: a service business
BDC notes that service businesses can use the same approach, measuring volume in hours or another unit of service.
Say a consultant or trades business has $4,500 a month in fixed costs, charges $90 an hour and spends $15 per billable hour on direct costs such as materials, travel or software charged per job.
- Contribution per hour: $90 − $15 = $75
- Break-even: $4,500 ÷ $75 = 60 billable hours a month
That number is a useful reality check. If you can only realistically bill 80 hours a month once quoting, admin and travel are taken out, you have very little room for a quiet month. Cutting that admin time is where automation helps; our coaches and consultants automation page shows which tasks can be handed off.
Businesses with many products
A café, a shop with hundreds of lines or an agency with different services cannot sensibly calculate a contribution per unit. Instead, use your average gross margin.
BDC's version of the formula is:
Break-even sales = Indirect (fixed) costs ÷ Gross margin percentage
If a café has $12,000 a month in overheads and its gross margin after food, drink and packaging costs is 65%, it needs $12,000 ÷ 0.65 = about $18,462 in monthly sales to break even. Divide by your average spend per customer to turn that into covers or transactions per day.
The weakness is that your product mix changes. If customers shift to lower-margin items, the real break-even point rises even if sales look healthy, so recheck the margin from your accounts every few months. Our profit margin calculator helps you check individual product margins.
Planning for profit, not just break-even
Break-even is the minimum. To find the sales needed for a profit target, treat the profit you want like an extra fixed cost. OpenStax's managerial accounting text uses the same method, adding a target "as if it were a fixed cost".
Units for target profit = (Fixed costs + Target profit) ÷ Contribution per unit
In the shop example, a $3,000 monthly profit target means ($6,000 + $3,000) ÷ $24 = 375 units.
Margin of safety: how close to the edge are you?
The margin of safety tells you how far sales could fall before you start losing money. OpenStax defines it as "the difference between its current sales and its break-even sales":
- Margin of safety = Budgeted or actual sales − Break-even sales
- Margin of safety % = Margin of safety ÷ Budgeted or actual sales
If the shop expects $14,000 of sales a month against a $10,000 break-even, the margin of safety is $4,000, or about 28.6%. Sales could fall by just over a quarter before the business makes a loss.
Common mistakes
- Leaving out your own pay. If you need to draw a salary, include it in fixed costs, or the break-even point only tells you when the business covers everything except you.
- Including sales tax in the price. Use net prices.
- Forgetting payment and platform fees. Card fees, marketplace commission and shipping subsidies are variable costs, and online they add up quickly.
- Treating break-even as a single number. BDC says the break-even point "should be thought of as a range, rather than a specific number". Run a pessimistic and an optimistic case.
- Never updating it. Rent reviews, new staff, price rises from suppliers and new software subscriptions all move the number.
- Assuming more sales is the only fix. BDC points out that reducing indirect costs is one way to lower the break-even point, and on thin margins a small cost cut can matter more than a large rise in sales.
How to use break-even in practice
- Before launching a product or service, calculate how many sales it needs and whether that is realistic. BDC describes break-even analysis as a way to see when you should potentially abandon a new product or market.
- Before running a discount, work out the extra sales it needs to pay for itself.
- When setting prices, check the break-even volume at each price point against what you can realistically sell and deliver.
- Each month, compare actual sales with break-even and watch your margin of safety.
If pulling these numbers together from your accounting software and sales platform every month is the slow part, that is the kind of reporting Make It Flow can help automate, while you keep the decisions.
Frequently asked questions
What is a good break-even point?
There is no universal good number. What matters is how your break-even compares with the sales you can realistically achieve. A comfortable margin of safety, where expected sales sit well above break-even, gives you room for a slow month, a lost customer or an unexpected cost.
Should I include my own salary in fixed costs?
Yes, if you rely on the business to pay you. Leaving it out makes the break-even point look lower than it really is. Some owners calculate two numbers: break-even before their own pay, to know when the business stops losing money, and after it, to know when it is truly sustainable.
How do I calculate break-even for a service business?
Pick a unit you sell, such as an hour, a job or a monthly retainer. Subtract the direct cost of delivering one unit from its price to get contribution, then divide monthly fixed costs by that contribution. The result is the number of hours, jobs or clients you need each month.
How long should it take a new business to break even?
It varies widely by industry, startup costs and how quickly sales build, so be wary of any fixed rule. A better approach is to forecast monthly sales and costs, find the month where cumulative contribution covers cumulative fixed costs, and plan your funding to last beyond that point with a buffer.
What is the difference between break-even and profit margin?
Profit margin tells you what share of each sale is profit or gross profit. Break-even tells you how many sales you need before fixed costs are covered. They are linked: a higher contribution margin per sale means a lower break-even point, which is why pricing and margins matter so much.
Related reading
- Margin vs Markup: The Difference and How to Price With Both: Margin vs markup explained for small businesses: the formulas, a conversion table, how to price for a target margin, how VAT or sales tax fits and break-even.
- How to Calculate VAT in the UK: Add, Remove and Check 20%: How to calculate VAT in the UK: add 20% by multiplying by 1.2, remove it by dividing by 1.2, find the VAT with the 1/6 fraction, plus flat rate basics.
- Compound Interest Explained: Formula, AER and UK Examples: Compound interest explained simply: the formula, how often interest compounds, AER vs gross rate, regular saving, ISA and tax rules for 2026/27, and inflation.
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