Quick answer
Your break-even point is the sales level at which revenue exactly covers all costs. Divide your fixed costs by your contribution margin (the share of each sales dollar left after variable costs). If fixed costs are $20k a month and 40% of each sale is left over, break-even is $50k of monthly sales. Sell above that and you make a profit; below it, a loss.
Key points
- Break-even sales = fixed costs ÷ contribution margin, where contribution margin is revenue less variable costs, as a percentage of revenue
- A new loan repayment is a fixed cost, so borrowing raises your break-even point by the repayment divided by your margin
- Margin of safety, the gap between actual sales and break-even, matters more than break-even alone
- A price cut raises break-even sales sharply because it shrinks the margin on every sale
- Break-even tells you about profit, not cash, so check it alongside your cash flow forecast
Picture a baker who sells 400 loaves and pastries on a good Saturday and feels sure the shop is thriving because the queue runs out the door. Then the year-end accounts arrive: the shop barely covered its costs. The queue was real. The margin was thin, and the fixed costs behind the counter absorbed almost everything the queue earned.
Break-even analysis is the habit of asking, before a decision rather than after it: how much do I have to sell for this business to stop losing money, and how far above that am I? It takes one formula and a notepad. It also turns out to be the quickest way to test a price cut, a new hire, a second shift or a loan.
What is break-even, and why should I care?
Your break-even point is the level of sales at which total revenue equals total costs. Below it you lose money. Above it you make a profit. Every dollar of sales above break-even contributes its margin directly to profit, and that is why the point matters so much.
It is also a risk measure. A business whose break-even sits at 90% of normal sales has almost no room for a quiet month. One that breaks even at 60% has a lot. Lenders think the same way: they want to know how much trading could fall before repayments are under threat.
How do I calculate it?
Three steps, using figures from your profit and loss statement.
Step 1: split costs into fixed and variable.
- Fixed costs don’t change with a normal month’s sales: rent, insurance, salaried wages, software, accounting, loan repayments.
- Variable costs rise and fall with sales: ingredients or stock, packaging, card fees, casual wages, delivery, commissions.
Some costs are mixed, and wages are the usual one. Put the permanent core in fixed and the roster flex in variable, and keep the same rule next year so comparisons hold.
Step 2: find your contribution margin ratio.
(Sales − variable costs) ÷ sales
If $100 of sales carries $60 of variable costs, the ratio is 40%. That 40 cents is what each sales dollar contributes towards fixed costs and then profit.
Step 3: divide.
Break-even sales = fixed costs ÷ contribution margin ratio
The ATO’s small business benchmarks for cost of sales to turnover can help with step 2: if your cost of sales is outside the usual range for your industry, the margin you’re working with may itself be the problem. The margin and markup calculator will check your percentages, and the break-even calculator does the final sum.
A worked example: the bakery
An illustrative neighbourhood bakery with these monthly figures:
| Item | Monthly |
|---|---|
| Rent and outgoings | $6,500 |
| Permanent wages and super | $14,000 |
| Insurance, utilities (base), software, accounting | $3,500 |
| Loan repayments (oven finance) | $1,800 |
| Fixed costs | $25,800 |
| Typical sales | $48,000 |
| Ingredients, packaging, card fees, casual wages | $24,000 |
| Variable costs | $24,000 (50% of sales) |
Contribution margin ratio = (48,000 − 24,000) ÷ 48,000 = 50%.
Break-even sales = 25,800 ÷ 0.50 = $51,600 a month.
The bakery sells $48k, so it is $3,600 a month below break-even and losing money, even with the queue. Annually, that is a loss of $21,600 on a 50% contribution margin ($43,200 in sales shortfall × 0.5). Whatever the bakery does next, it has to move one of three levers: sell more, lift the margin or cut fixed costs.
What happens if I change one thing?
This is where the formula earns its keep. Test each change on paper before you pay for it.
Raise prices by 5%. Variable costs per sale stay the same, so on a $100 sale the bakery’s margin goes from $50 to $55. New contribution margin ratio is 55 ÷ 105 = about 52.4%. New break-even = 25,800 ÷ 0.524 = roughly $49,200 in (new-price) sales. Even if some customers leave, a small rise helps. Our guide on raising prices without losing customers covers how.
Cut prices by 10%. On a $100 sale you now get $90 against the same $50 variable cost, so the margin is $40 or 44.4%. Break-even rises to 25,800 ÷ 0.444 = about $58,100 at the new prices. The bakery would need to sell about 25% more units than before (645 a month instead of 516 at a $100 average sale) just to cover the same fixed costs. Discounts have to bring in a lot of volume to pay for themselves.
Hire one more full-time baker at $5,200 a month. Fixed costs rise to $31,000. Break-even = 31,000 ÷ 0.50 = $62,000. The new baker needs to enable about $10,400 a month of extra sales before the hire pays for itself.
Take out a $60k loan for a second oven. If repayments are $1,500 a month, fixed costs rise by that amount and break-even rises by $3,000 a month ($1,500 ÷ 0.50). The question for a lender, and for you, is whether the oven creates more than $3,000 a month in additional sales. That is the real test of a loan, and it fits neatly alongside the debt service coverage ratio calculator.
Want a second pair of eyes on a decision like this? A quick enquiry puts a person on it.
What is margin of safety, and why is it better than break-even alone?
Margin of safety = (actual sales − break-even sales) ÷ actual sales.
A café selling $90k a month with break-even at $72k has a margin of safety of 20%. Sales can fall 20% before it loses money. If a quiet month is 25% down, as plenty are, the café needs a plan for that gap: a reserve, a standby facility, or flexible costs. Our guide to planning for a quiet month shows how.
Tracking margin of safety each quarter tells you whether the business is getting sturdier or more fragile, even when profit looks fine.
Where does break-even go wrong?
A few traps are worth knowing.
- It ignores timing. Break-even is a profit measure. A business can be above it and still short of cash because customers pay late or stock was bought in a lump. Pair it with a cash flow forecast.
- It includes non-cash items. Depreciation sits in fixed costs but isn’t a payment. Loan principal is the opposite: it’s cash going out that doesn’t appear as an expense.
- One margin hides several products. If your high-margin items sell less than your low-margin ones, the blended ratio moves. Work it by product line if the margins vary widely.
- Costs aren’t perfectly fixed. A big enough jump in volume needs another person or another site. Treat break-even as reliable within your normal range.
- Owner pay is often left out. If you aren’t paying yourself a fair wage in the fixed costs, your break-even is flattering.
How do lenders use break-even thinking?
Lenders don’t always call it break-even, but they ask the same question: if sales fall, can the business still make its repayments? That is why the business plan section of an application often asks for a downside case, and why a margin of safety is persuasive. If you can say “our break-even including the new repayment is $62k a month, and we have averaged $78k for 18 months”, the conversation changes. See our guide on writing a business plan lenders will read.
For the profit-and-loss side of the same numbers, how to read your profit and loss statement shows where each figure comes from.
Putting your break-even to work
Once you know your break-even and your margin of safety, borrowing decisions stop being guesses. You can say how much extra revenue a loan has to generate, and whether that is plausible.
If a decision is already on the table, a short enquiry with us takes about a minute, and nothing is checked on your credit file when you ask. We keep your details with us rather than sending them to a crowd of lenders, and a real person looks at your numbers and calls. Please give us honest figures for sales, costs and what you want to fund, because that is how we get to the right option sooner.
Frequently asked questions
What is the break-even formula?
Break-even sales equal fixed costs divided by the contribution margin ratio. The contribution margin ratio is (sales minus variable costs) divided by sales. In units, break-even equals fixed costs divided by the price per unit minus the variable cost per unit. Both give the point where profit is zero.
What counts as a fixed cost and what is variable?
Fixed costs stay roughly the same whatever you sell in a month: rent, insurance, salaried wages, software, loan repayments. Variable costs move with sales: materials, stock, packaging, card fees, casual wages and sales commissions. Some costs, such as wages, are mixed, so split them sensibly and be consistent.
How does a business loan change my break-even point?
Loan repayments are a fixed cost, so they raise the break-even level. If a new loan adds $3k a month in repayments and your contribution margin is 40%, you need an extra $7,500 a month in sales to cover it. Check the new break-even against realistic sales before you borrow.
What is margin of safety?
It is how far sales can fall before you hit break-even, usually shown as a percentage. If you sell $80k a month and break-even is $60k, the margin of safety is $20k, or 25%. A larger cushion makes the business more resilient to quiet months and unexpected costs.
Is break-even the same as cash break-even?
No. Break-even uses profit-and-loss logic, so it may include depreciation, which is not a cash cost, and ignores timing, such as customers paying late. Cash break-even leaves out non-cash costs and adds items like loan principal. A business can pass profit break-even and still be short of cash.
How often should I recalculate break-even?
Whenever something material changes: a rent review, a wage rise, new equipment, a supplier price increase, a price change or a new loan. Otherwise, once or twice a year is sensible. It takes less than an hour with last year's numbers.