How to calculate your break-even point
Presented by Chase for Business.
Quick insights
- A break-even point shows at what point a business’s revenue will cover its expenses and start generating a profit.
- To calculate a break-even point, you need to know your business’s fixed costs, variable costs and average selling price for products or services.
- Knowing your break-even point may help business owners make pricing, sales and budgeting decisions.
Understanding when your business becomes profitable is a key part of planning for growth and stability. Whether you are launching a new storefront, expanding a service business into retail or navigating rising supply chain costs, the break-even point can be a vital financial benchmark for many business owners. It helps you see exactly when your total income will match your costs, which may provide peace of mind regarding your business’s financial health and a roadmap for next steps.
This article explains what a break-even point is, reasons it matters and how to calculate it for your unique business situation.
What is a break-even point?
The break-even point is the level of sales or revenue at which your business covers all its expenses. At this point, your business is not making a profit or a loss — your income and costs are equal.
Businesses have both fixed and variable costs. Fixed costs are consistent expenses while variable costs change with your sales volume. The break-even point helps business owners identify how much they need to sell, or how much revenue they need to cover all business operating costs.
Reasons why knowing your break-even point matters
Understanding how to calculate a break-even point can help you make more informed business decisions. It may provide a solid foundation for planning as well as help you identify what needs to happen for your business to start making a profit. When you know your break-even point, you may be able to:
- Set realistic sales targets that cover your costs and move your business toward profitability
- Evaluate the impact of changing expenses (like inflation or rising shipping rates) on your profitability
- Test pricing strategies to see how raising or lowering prices affects the volume you need to sell
- Plan for growth by understanding how adding new products, services or employees might affect your bottom line
This information is helpful for businesses of all sizes, from new ventures to established companies looking to expand or pivot.
Numbers to know when calculating your break-even point
Calculating your break-even point involves a few key metrics:
- Fixed costs
- Variable cost per unit
- Average selling price
Let's look at each of these numbers more closely.
Fixed costs
Fixed costs are expenses that remain constant regardless of your sales volume or production level. These include items such as rent, utilities, salaries for permanent staff (including your own owner's draw or salary), insurance premiums and software subscriptions.
Fixed costs represent a baseline level of expenditure that your business needs to cover to remain operational, even if no products are sold. Understanding your fixed costs may help with budgeting and determining your break-even point.
Variable costs per unit
Variable costs per unit include the expenses that rise in direct proportion to the volume of production or sales. This includes the cost of raw materials, packaging, direct labor, shipping fees and even customer acquisition costs, like digital ads. These costs have the potential to significantly impact your profit margins as your business scales or as economic conditions change.
Average selling price
This is the price you charge for your product or service. If your business sells many different items at various price points—such as a bakery selling both coffees and custom cakes—you will need to calculate an average selling price or an average ticket size.
To find your average selling price, divide your total revenue over a specific period by the total number of units or transactions sold during that same time.
Is the break-even point the same for every business
While the concept of a break-even point is relevant across industries, how you calculate it can vary based on your business model.
For example, a manufacturing business may have high fixed costs for equipment, while an e-commerce brand might have lower fixed costs but fluctuating variable costs due to shipping and digital marketing. A business that blends services and retail—like a landscaping company that also sells garden supplies—may need to calculate a blended break-even point that accounts for multiple revenue streams.
Because costs fluctuate, it can be helpful to recalculate your break-even point regularly, especially in unpredictable markets or when expanding operations.
How to calculate a break-even point
The most common way to calculate your break-even point is by using this formula:
Break-even point (in units) = Fixed costs ÷ (Sales price per unit – Variable cost per unit)
For example, if your fixed costs are $10,000 per month, your product sells for $50 each and your variable cost per unit is $30, your break-even point would be 500 units:
$10,000 ÷ ($50 – $30) = 500
How does the margin of safety relate to your break-even point?
The margin of safety is another helpful metric that works alongside your break-even point. It shows you how much your sales can drop before you reach the break-even point, giving you a buffer against unexpected economic changes or seasonal dips.
To calculate the margin of safety:
Margin of safety = (Current sales – Break-even sales) ÷ Current sales
A higher margin of safety means your business has more room to absorb lower sales without losing money. Understanding this figure may help you manage risk and better plan for periods of uncertainty.
Using your break-even point for business decisions
Knowing how to calculate a break-even point provides business owners with a number that may help them make more informative decisions about their business and its growth. Knowing a break-even point may help with:
- Setting pricing strategies: Adjust prices with a better understanding of how changes may affect the volume you need to sell.
- Planning for new products or services: Estimate sales needed to cover additional overhead before launching something new.
- Evaluating cost-saving measures: See how negotiating better supplier rates might lower your break-even point and help you reach profitability sooner.
- Managing growth: Use the break-even point as a metric when considering hiring, expanding locations or increasing production.
Frequently Asked Questions
Should I include my own salary in my fixed costs?
Yes. Many new business owners forget to factor in their own compensation. If you plan to take a regular owner's draw or salary, you should include it in your fixed costs. This helps to ensure your break-even calculation reflects a truly sustainable business model that pays you for your time and effort.
How do I calculate my break-even point if I sell multiple products or services?
If you have a diverse product line, you can calculate a blended break-even point. You can do this by finding your average selling price and average variable cost per unit across all your offerings. Alternatively, you can calculate your break-even point in total sales dollars rather than individual units by using your overall profit margin.
Are marketing and advertising considered fixed or variable costs?
It depends on how you spend the money. A monthly retainer for a marketing agency, a billboard rental or a flat website hosting fee are fixed costs. However, pay-per-click digital ads, customer acquisition costs or affiliate commissions that scale directly with your sales volume are considered variable costs.
How often should I recalculate my break-even point?
It can be helpful to recalculate your break-even point anytime your business undergoes a significant financial change. This includes raising your prices, hiring new staff, signing a new lease or experiencing major shifts in supply chain and shipping costs. In highly inflationary markets, reviewing this metric quarterly may help better protect your profit margins.
