How to calculate your break-even point
Working out the point at which your new business becomes sustainable
Your break-even point is the point at which your business is producing enough revenue each month to cover all your fixed and variable costs.
Once you reach this point, any additional income generated each month is profit.
Estimating as accurately as you can when you will reach this point is an expected part of your business plan. In other words, you need to work out exactly how much you will need to sell each month, and at what price, to break even.
✅Break-even point = The point at which your revenue is equal to your total costs.
?Unit sales price = The amount your business is charging for a product or service [the unit].
?Unit variable cost = The amount it costs your business to produce/create the product or service. This is a variable because it will change depending on how much you sell.
?Total fixed costs = Your business expenses that are fixed; this could include your monthly office rent, staff salaries, product leases etc.
Before you can calculate your break-even point you need to determine your start-up costs and monthly running costs, taking into account any fixed costs, such as repayments on loans, salaries, etc. as well as variable costs (costs which will vary depending on how much you sell, such as manufacturing costs, freelance costs, etc).
You then need to build in your projections of how many products you will sell, or how much demand you will have for your service, per month.
By comparing your projected monthly revenues against your total monthly costs, you should be able to come up with a point at which you start to move into profit, that is, your break-even point.
Calculating the break-even point will give you an excellent idea of the costs involved in your business and the level of sales you will need to generate to cover your costs, which in turn will affect your overall business strategy.
Formula for calculating your break-even point
How much business you have to generate, either number of products or units of service, in a given time to break even can be calculated using the equation below.
You will break even when your total revenue per month = total costs per month.
The formula to calculate break-even point is:
Unit sale price × Unit sales = Total monthly fixed costs + (Unit variable cost × Unit sales)
If there are elements of this equation that you don't know, for instance you're not sure of your total fixed costs, or perhaps you're a new business trying to calculate unit sales, use the following equations first:
To calculate your unit sales per month:
Unit sales per month = Total fixed costs ÷ (Unit sale price – Unit variable cost)
To calculate your total fixed costs:
Use one of the following two equations:
(Unit sale price × Unit sales) – (Unit variable cost × Unit sales) = Total fixed costs
(Unit sale price – Unit variable cost) × Unit sales = Total fixed costs
How to calculate your break-even point: A business example
Using the calculations above, you can accurately understand how much revenue you need to cover your business' costs.
Here's a good example of finding the break-even point.
Meet Shane, Shane runs a craft beer business called BeerX:
- It costs Shane £5 to produce a crate of eight beers – This is the unit variable cost
- Shane sells each crate of beer for £25 – This is the unit sales price
- BeerX has monthly fixed costs of £15,000 – This includes renting out its brewery and employee salaries.
First, Shane needs to calculate his unit sales per month to know how many crates of beer BeerX needs to sell each month to reach the break-even point:
Unit sales per month = £15,000 fixed cost ÷ (£25 unit sales price – £5 unit cost)
By using this formula, Shane now knows that he needs to sell 750 crates of beer to break-even.
Next, Shane can multiply BeerX's unit sales by its unit sales price to calculate how much money BeerX would need to generate in sales each month to break-even.
So, in this case, the formula is:
£25 unit sales price x 750 unit sales = £15,000 fixed cost +(£5 unit cost x 750 unit sales)
BeerX's total revenue per month will need to equal £18,750 and its total costs per month will need equal £18,750 before it can reach break-even point and realise any profits.
Next steps once you've calculated your break-even point
Once you know how much you need to sell in one month to break-even, you can work out from your sales projections how long it will take for your business to reach this point.