What is a break-even point and how do you calculate it?

This guide explains how to calculate the break-even point and what it can communicate about your business’s health.

What is a break-even point?

The break-even point in business is when you are making enough money to cover your expenses. Essentially, your total costs and total revenue are equal. Your business is not yet profitable, but it’s not running at a loss.

Let’s illustrate with an example. Say you spend $10,000 a month on rent, products, and employee wages. If you bring in $8,000 a month, your business is operating at a loss of $2,000. If you bring in $12,000 a month, your business is operating at a profit of $2,000. If you earn $10,000 a month, you have officially broken even.

Components of the break-even formula

The break-even point is easy to understand. Knowing how to do break-even analysis is a bit more complicated, but it isn’t that time-consuming. It involves gathering data on your business and crunching the numbers using a specific formula.

Before you can calculate the break-even point, you will need these numbers:

Fixed costs

These are all the fixed or unchanging costs of your business. For example, your rent is a fixed cost for the duration of the lease term. For an eCommerce business, the website is a fixed cost because you pay a set price for web hosting.

Variable costs

These are costs that fluctuate from month to month. Business utilities, such as heat and electricity, fall under variable costs due to factors outside of your control, such as colder weather or shorter day length. Variable costs also include things like the cost of your products or inventory, which can fluctuate based on supplier.

Contribution margin

The contribution margin, or the gross margin, is the money left over after you subtract all variable costs from total sales.

Revenue per unit (products/services)

The revenue per unit is an expression of how much revenue the business earns from selling a single unit of product or service.

How to calculate the break-even point

Business owners can calculate the break-even point by unit or sales dollar using these formulas and figures from your point of sale reporting:

Break-even point in units

Subtract the variable costs per unit from the sales price per unit to get the net profit. Then divide the fixed costs by this figure.

sales price per unit – variable cost per unit = net profit

fixed cost per unit/net profit per unit = break-even point by unit

Break-even point in sales dollars

Tally all fixed costs. Then, add all variable costs. Subtract variable costs from total profit in dollars, then divide the fixed costs by this figure.

total profit in dollars – total variable costs = net profit in dollars

fixed costs total/net profit in dollars = break-even point by sales

How to do break-even analysis

A break-even analysis can help you understand your costs in perspective and enable you to make the best decision for your business.

You might think of using the break-even formula after opening a new shop, so you can gauge your financial performance. While this is one time to consider a break-even analysis, it’s certainly not the only one.

You can also do a break-even analysis for situations like these:

• Understanding the price you need for a new product or service to be profitable
• Calculating the price versus opportunity of a new sales channel, such as a physical store
• Changing your business model or structure
• Adding new employees to the business model

For all of these situations, the process of a break-even analysis is the same. Gather the numbers and use the above formulas to understand the break-even point.

Understanding your break-even point is only one part of monitoring your business’s financial health. Discover other business numbers to watch here. Then, find out how Clover’s POS systems and small business management solutions can help your business grow.

This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.

Editorial Team

Accounting, Money management, Reporting

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