The break-even formula
The calculation takes three steps, all on figures before sales tax:
- Contribution margin = revenue − variable costs.
- Contribution margin ratio = contribution margin ÷ revenue.
- Break-even revenue = fixed costs ÷ contribution margin ratio.
In units, the U.S. Small Business Administration gives the equivalent formula: fixed costs ÷ (price − variable cost per unit). The break-even date turns the amount into a day of the year: break-even revenue ÷ annual revenue × 365. The calculator assumes 365 days and sales spread evenly over the year. A seasonal business reaches break-even earlier or later: in that case, add up your sales month by month and find the month when the running total passes the break-even revenue.
A worked example
A small agency forecasts $80,000 of revenue. Its variable costs (subcontractors, licenses billed per project) come to $10,000, its fixed costs (rent, software, insurance, accountant, owner's salary) to $20,000.
| Step | Calculation | Result |
|---|---|---|
| Contribution margin | 80,000 − 10,000 | $70,000 |
| Contribution margin ratio | 70,000 ÷ 80,000 | 87.5% |
| Break-even revenue | 20,000 ÷ 0.875 | $22,857 |
| Break-even date | 22,857 ÷ 80,000 × 365 | 104.3 days, so day 105 (mid-April) |
| Margin of safety | 80,000 − 22,857 | $57,143, or 71% of revenue |
That last figure means revenue could drop by 71% before the agency loses money. A retailer whose inventory costs 60% of its sales would have a break-even point much closer to its revenue for the same fixed costs.
What break-even analysis is for
Before launching, the break-even point tells you whether the revenue in your business plan is realistic: if you need to sell more than the market can absorb, the plan needs rework (prices, costs, location). Once you are up and running, it helps you judge a new fixed cost: a $40,000 hire at a 40% contribution margin ratio needs $100,000 of extra revenue to pay for itself.
Break-even says nothing about cash: a client who pays in 60 days can put a business that is profitable on paper in trouble. Nor does it replace a forecast built with your accountant.
Frequently asked questions
How do I calculate the break-even point?
Break-even revenue = fixed costs ÷ contribution margin ratio, where the contribution margin ratio is (revenue − variable costs) ÷ revenue. With $80,000 of revenue, $10,000 of variable costs and $20,000 of fixed costs, the ratio is 87.5% and the break-even point is $22,857.
How do I calculate break-even in units?
Divide fixed costs by the contribution margin per unit, which is the selling price minus the variable cost of one unit. A product sold for $25 that costs $10 in variable costs leaves $15 per unit: with $30,000 of fixed costs, you need to sell 2,000 units, or $50,000 of revenue.
Which costs are fixed and which are variable?
Variable costs move with sales: inventory and raw materials, subcontracting, sales commissions, shipping, payment fees. Fixed costs stay the same whatever you sell: rent, insurance, software subscriptions, salaried staff, accounting, loan payments. Some costs are mixed: put each one where most of it belongs.
What is the margin of safety?
It is the gap between your actual or forecast revenue and your break-even revenue. Expressed as a percentage of revenue, it tells you how far sales can fall before the business starts losing money. A 25% margin of safety means that a drop of a quarter in revenue brings profit down to zero.