Break-even point: how to calculate it step by step, with an example

The calculation takes just a few lines. We walk through it below, step by step, with a fictional business. Then we look at what it doesn't tell you.

What is your break-even point for?

It answers a simple question: how much do you need to sell to pay all your expenses? Below that amount, you lose money. Above it, every sale earns you a profit.

It's the level of sales at which your revenue equals your expenses. You can also see it as the minimum amount of sales that covers your fixed costs, with neither a loss nor a profit.

The break-even date turns this amount into a date. It's the day of the year when your cumulative sales reach your break-even point.

These two numbers tell you when you stop losing money. They don't tell you whether you're making enough. For that, also track your margins: see the numbers to check every month to judge your profitability.

How do you calculate your break-even point?

Fictional example. The amounts are here to show the method. They aren't a benchmark for any industry.

A small commercial cleaning business charges $50 an hour, before tax. It expects to bill 6,000 hours in the year. Its projected revenue, meaning its total sales before tax, is therefore $300,000. Its cleaners are paid for the hours they work at clients' sites. To keep things simple, every hour paid is an hour billed.

Step 1: Add up your fixed costs

Your fixed costs, which accountants also call fixed expenses, are the ones you pay even if you sell nothing that month. They also include amortization: the portion of the price of your equipment that you record as an expense each year.

Step 2: Calculate what you keep on each sale

Your variable costs go up and down with your sales. Here: the cleaners' pay, cleaning products and travel.

What's left after these costs is called the contribution margin. It's the money that pays your fixed costs, then becomes your profit.

• Per hour: $50 − $27.50 = $22.50.
• For the year: $300,000 − $165,000 = $135,000.
• As a percentage: $22.50 ÷ $50 = 45%. On every dollar you sell, you keep 45 cents.

Watch out for the "gross margin" on your financial statements. The standard calculation uses a gross margin. That works if the margin is calculated after all your variable costs, and only those. That isn't always the case: it may include a fixed cost, like the amortization of a machine, or leave out a variable cost, like a commission or delivery fees. Reclassify these lines before you calculate.

Step 3: Divide your fixed costs by this percentage

The formula: break-even point = fixed costs ÷ contribution margin ratio.

• In dollars: $108,000 ÷ 45% = $240,000.
• In hours: $108,000 ÷ $22.50 = 4,800 hours.

The proof, at the break-even point:

Brought down to a month, the benchmark is simple: $9,000 of fixed costs per month ÷ 45% = $20,000 of sales per month.

Step 4: Find your break-even date

The formula: break-even date = break-even point ÷ sales for the year × 365 days.

Here: $240,000 ÷ $300,000 × 365 = 292 days, or 9.6 months. If the fiscal year starts on January 1 (not a leap year), the break-even point is reached at the end of October 19. From October 20 on, every hour billed adds $22.50 to profit before tax.

Some people use 360 days instead of 365 (288 days here). Pick one approach and stick with it.

This calculation assumes steady sales all year. If your business is seasonal, add up your sales month by month: your break-even date falls in the month when the total passes your annual break-even point. It can come much earlier, or much later, than the average would suggest.

Step 5: Measure your margin of safety

The margin of safety is the gap between your projected sales and your break-even point. It tells you how far your sales can drop before you lose money.

• Here: $300,000 − $240,000 = $60,000, or 20% of projected sales.
• Projected profit before tax is $135,000 − $108,000 = $27,000. That's also $60,000 × 45%.

The formulas at a glance

Self-employed: how much do you need to bill?

If you work for yourself without a corporation, your business's profit is your income. Reaching your break-even point only means your sales pay your expenses. You've worked without earning anything.

So add the income you're aiming for to your fixed costs:

The formula: sales target = (fixed costs + target income) ÷ contribution margin ratio.

Fictional example. A consultant expects $18,000 of fixed costs per year: software, liability insurance, equipment, training, phone. Her variable costs, mostly occasional subcontracting and platform fees, represent 10% of her sales. So she keeps 90% of each sale.

• Her break-even point: $18,000 ÷ 90% = $20,000.
• To pay herself $54,000 before tax and contributions: ($18,000 + $54,000) ÷ 90% = $80,000 in sales.
• At $100 an hour, that's 800 billed hours in the year. Over 48 weeks, about 17 hours a week. Prospecting, administration and training come on top of that time, and they aren't paid.

This target income is calculated before tax and contributions. So also plan for the share that tax and contributions will take.

What happens if you change your prices or your expenses?

Let's go back to the fictional cleaning business. We'll change one thing at a time.

• A 5% rate increase cuts the number of hours you need to sell by 10%, or 480 fewer hours. As long as you keep your clients.
• A new fixed cost of $9,000 a year means selling 400 more hours, or $20,000, just to get back to zero.

The levers come down to four moves: cut your fixed costs, sell more, raise your selling price, or reduce what each sale costs you.

What doesn't this calculation tell you?

• Some expenses are partly fixed, partly variable. A phone plan with overage charges, overtime. Classify them by what dominates and write down your choices, so you can compare from one year to the next.
• Your fixed costs rise in steps. If you reach full capacity, a second vehicle or a new hire pushes them up all at once. Then redo the calculation.
• The calculation assumes stable prices and costs. A volume discount, a salary increase or a new supplier changes your percentage, and therefore your break-even point.
• With several services, the result depends on the mix. If you sell more of your lower-paying services, your break-even point goes up, even with the same sales. Only the margin on each service shows you where to act.
• The break-even point doesn't follow the money coming in and going out. Amortization ($6,000 in the example) doesn't leave your account that year. A loan repayment does leave it, without counting as an expense. And your customers don't pay on the day you invoice. For that other view, see how to track your cash flow every month.
• It says nothing about your customers. Knowing how much you need to sell doesn't tell you whether your market will buy that volume, at that price.

What to do

1. Pull your expenses for the last 12 months from your books, before tax.
2. Classify each line: fixed or variable. Note the borderline cases and the choice you made.
3. Calculate what you keep on each sale, in dollars and as a percentage.
4. Calculate your annual and monthly break-even point, then your break-even date and your margin of safety.
5. Every month, compare your sales with your monthly break-even point.
6. Redo the calculation after every lasting change: lease, new hire, price increase, new supplier.
7. If you sell several services, calculate the margin on each one. That's where the gaps hide; our Cost and profitability analysis is there to find them.