Break-Even Analysis: The One Number Every Owner Should Know

Break-even is the least glamorous figure in business and the most useful. It converts a vague worry about money into a target you can check against a sales report on a Friday afternoon.

The calculation

Separate costs into fixed — rent, insurance, salaries, software, anything you pay whether or not you sell — and variable, meaning costs that occur per sale, such as materials, delivery and card fees. Then: contribution margin = price − variable cost per unit. Break-even units = fixed costs ÷ contribution margin.

Using it weekly

Divide the monthly figure by working weeks to get a weekly target — in the example, seven sales a week. Compare Friday's actual number to it. Two consecutive weeks below target is a signal to act while there is still time in the month, rather than discovering the shortfall in a management account six weeks later.

What it reveals about pricing

• A 10% price rise usually cuts break-even volume far more than a 10% cost cut, because it flows entirely into contribution.
• Discounting looks cheap and is not: at 40% contribution, a 10% discount requires a 33% volume increase to stand still.
• A new fixed cost — a van, a hire, an office — should always be converted into 'how many extra sales per month does this need?' before it is committed.

Break-even is not the goal

It is the floor. Set a second target — break-even plus your intended profit — and treat that as the real number. Then use the margin of safety, the gap between your actual revenue and break-even, as a simple measure of how much bad luck the business can absorb.

The break-even calculator in our tools section will do this with your figures, including a weekly target and margin of safety.