How to Calculate Your Break-Even Point

Your break-even point is the level of sales at which total revenue equals total costs. At that point the business makes no profit and no loss. The US Small Business Administration (SBA) gives the core formula: break-even point in units = fixed costs ÷ (sales price per unit − variable cost per unit). To find break-even in money terms, divide fixed costs by the contribution margin ratio.

The formula is short, but the answer is only as good as the costs you put in. This guide shows how to sort real costs such as rent, airtime and data, transport and stock. It then works through examples for a bakery, a salon and a freelancer. All the figures are illustrative round numbers, not real businesses, so you can check every step.

What break-even means

The SBA describes the break-even point as the point at which total cost and total revenue are equal. Below it, you make a loss. Above it, each extra sale adds profit.

Break-even is a planning tool. It helps you set prices and sales targets, spot expenses you have missed, and explain your plans to a lender or investor. The SBA notes that existing businesses can also use it to test profits at different sales volumes.

Step 1: Sort your costs into fixed and variable

Fixed costs stay the same in a period whether you sell a lot or a little. The SBA's examples include rent or lease payments, salaries, property taxes, insurance, interest and depreciation.

Variable costs rise and fall with each sale. Examples include ingredients, stock bought for resale, packaging, delivery fees and card or platform fees charged per sale.

Some costs are mixed, or semi-variable. They have a fixed part and a variable part. The SBA suggests splitting these where you can. Here is how common costs usually sort:

Marketing can go either way. A flat monthly fee is fixed. Ads or commissions that grow with sales are variable.

Monthly figures are easiest to work with, and the SBA's break-even calculator uses them. If you pay a cost once a year, such as a licence, divide it by 12. The SBA also suggests adding about 10% for unexpected expenses.

Step 2: Find your contribution margin

The contribution margin per unit is what each sale leaves after its variable costs:

Contribution margin per unit = selling price − variable cost per unit

That money "contributes" to paying fixed costs first. Once fixed costs are covered, it becomes profit.

The contribution margin ratio shows the same thing as a share of the price:

Contribution margin ratio = (selling price − variable cost per unit) ÷ selling price

The SBA calls this ratio the "contribution margin". Some textbooks keep the two terms apart, so watch which one a source means.

Step 3: Calculate break-even in units and in sales value

• Break-even in units = fixed costs ÷ contribution margin per unit
• Break-even in sales value = fixed costs ÷ contribution margin ratio

Round units up to the next whole number. You cannot sell part of a loaf.

Worked example: a small bakery (USD)

A home bakery sells loaves. These are illustrative monthly figures:

• Fixed costs: $1,500 (rent, owner's pay, a part-time helper, the data bundle, loan interest)
• Selling price per loaf: $2.00
• Variable cost per loaf: $1.20 (flour, yeast, gas for baking, packaging)

1. Contribution margin per loaf: $2.00 − $1.20 = $0.80
2. Contribution margin ratio: $0.80 ÷ $2.00 = 0.40, or 40%
3. Break-even in units: $1,500 ÷ $0.80 = 1,875 loaves a month
4. Break-even in sales value: $1,500 ÷ 0.40 = $3,750 a month

Check: 1,875 loaves × $2.00 = $3,750. If the bakery opens 26 days a month, that is 1,875 ÷ 26 = 72.1, so about 73 loaves a day.

The same maths in any currency

The formula does not care about the currency. Here are the same proportions in rand, as an illustration only. These are not exchange-rate conversions.

• Fixed costs R27,000, price R36, variable cost R21.60
• Contribution margin: R36 − R21.60 = R14.40
• Break-even: R27,000 ÷ R14.40 = 1,875 loaves

It works the same way in ZiG, naira or shillings. Just keep every figure in the same currency and the same month.

Break-even for service businesses and freelancers

If you sell time, your "unit" is an hour. Your fixed costs must include the pay you need to live on. Otherwise break-even only tells you when the business covers its own bills, not you.

An illustrative freelancer has these monthly figures:

• Fixed costs: $1,200 (owner's pay $800, workspace $200, transport pass $100, data $50, software $50)
• Hourly rate: $25
• Variable cost per hour worked: $5 (extra data, travel to clients, fees)

1. Contribution margin per hour: $25 − $5 = $20
2. Break-even hours: $1,200 ÷ $20 = 60 billable hours a month

That is about 14 billable hours a week (60 ÷ 4.33 weeks). Remember that admin, sales and travel time are not billable. If 60 hours looks hard to reach, the rate may be too low. See the freelance hourly rate formula to set a rate from the bottom up.

Target profit: how many sales to earn what you want

Break-even is the floor. To plan a profit, treat the profit you want like an extra fixed cost. The OpenStax managerial accounting textbook gives these formulas:

• Units for target profit = (fixed costs + target profit) ÷ contribution margin per unit
• Sales for target profit = (fixed costs + target profit) ÷ contribution margin ratio

For the bakery, with a target profit of $500 a month:

• ($1,500 + $500) ÷ $0.80 = 2,500 loaves
• ($1,500 + $500) ÷ 0.40 = $5,000 in sales

If you want a profit after tax, OpenStax shows how to gross it up first: pre-tax profit = after-tax profit ÷ (1 − tax rate). With an illustrative 25% rate, an after-tax goal of $375 needs $375 ÷ 0.75 = $500 before tax. Use your own country's actual rate.

Margin of safety: how far sales can fall

The margin of safety shows how much your sales can drop before you reach break-even. OpenStax notes that a higher margin of safety means a lower risk of making a loss.

• Margin of safety (value) = actual or budgeted sales − break-even sales
• Margin of safety (%) = margin of safety ÷ actual or budgeted sales

Say the bakery actually sells 2,250 loaves, which is $4,500:

1. $4,500 − $3,750 = $750 (or 2,250 − 1,875 = 375 loaves)
2. $750 ÷ $4,500 = 16.7%

Sales could fall by about 17% before the bakery stops covering its costs. A thin margin of safety is a signal to act early.

How price and cost changes move break-even

OpenStax summarises the direction of each change. A higher price lowers break-even. A higher variable cost or a higher fixed cost raises it. Here is the bakery again, changing one thing at a time:

A 20 cent rise in variable cost lifts break-even by a third. This is why cost increases need a quick price review. Use the markup pricing calculator and how to price products for profit to test new prices.

More than one product: a simple sales mix method

Most businesses sell several things. OpenStax uses a "composite unit": a bundle of products in the proportion you usually sell them. It assumes the mix stays the same.

An illustrative salon sells haircuts and braiding:

• Haircut: price $10, variable cost $2, contribution margin $8
• Braiding: price $40, variable cost $10, contribution margin $30
• Usual mix: 3 haircuts for every 1 braiding session
• Fixed costs: $1,620 a month

1. Composite price: (3 × $10) + $40 = $70
2. Composite variable cost: (3 × $2) + $10 = $16
3. Composite contribution margin: $70 − $16 = $54
4. Break-even: $1,620 ÷ $54 = 30 composite units
5. That means 30 × 3 = 90 haircuts and 30 braiding sessions, or 30 × $70 = $2,100 in sales

If the mix shifts towards haircuts, the salon needs more appointments to break even, because each haircut contributes only $8 against $30 for braiding. OpenStax notes that when the sales mix changes, the break-even point changes. The SBA also suggests working out each product or service separately if their sales vary from month to month.

Common mistakes

1. Leaving out your own pay. If you take a regular salary or drawings, include it in fixed costs. Otherwise "break-even" can still leave you with nothing to live on.
2. Mixing up loan repayments and interest. A loan payment has two parts. Interest is a cost of borrowing. The principal reduces what you owe and is not a cost in the profit sense. For profit break-even, include the interest only. Then run the sum again with the whole repayment to check you can cover the cash going out. See profit vs cash flow for why both matter.
3. Using prices that include VAT. If you are VAT-registered, part of each price is tax you pass on. UK government guidance, for example, says that if you charge more VAT than you pay, you pay the difference to HMRC. Use prices and costs without VAT, and check the rules with your own tax authority.
4. Confusing markup with margin. AccountingTools gives an example: a $70 cost sold at $100 is a 42.9% markup but a 30% margin. Break-even needs the margin. Suppose a 50% markup on a $1.20 cost gives a $1.80 price. The contribution margin ratio is $0.60 ÷ $1.80 = 33.3%, not 50%. With $1,500 of fixed costs, using 50% would show break-even sales of $3,000. The true figure is $4,500. Read how to calculate profit margin or use the profit margin calculator.
5. Forgetting irregular costs. Annual licences, repairs and equipment replacement are easy to miss. Spread them across 12 months.
6. Assuming the model is exact. OpenStax lists the usual assumptions: costs can be split cleanly into fixed and variable and behave in a straight line, the selling price stays the same, everything you make is sold, and the sales mix stays steady. Real life is messier, so treat the answer as a guide.

What to do if break-even is too high

If the number looks out of reach, the formula shows where to push:

• Raise the price. Even a small rise can lower break-even a lot. Test demand first with how to test if people will pay.
• Lower variable costs. Buy in bulk, cut waste, or change packaging or delivery.
• Cut fixed costs. Review rent, subscriptions and bundles you do not use.
• Sell more of your higher-margin products. Shift the mix towards items that contribute more.
• Rethink the plan. If no realistic mix of price and volume works, the idea may need changing before you commit more money.

How often to recalculate

Recalculate whenever a price or cost changes noticeably, such as new rent, a supplier increase or a change to your own prices. Chase suggests reviewing it at any significant financial change, and quarterly in highly inflationary markets. Where prices move fast, monthly checks may suit you better. For managing money when prices move, read cash flow when prices change. You can run the numbers quickly with the break-even calculator.

Frequently asked questions

What is the basic break-even point formula?

Break-even in units equals fixed costs divided by the selling price minus the variable cost per unit. Break-even in sales value equals fixed costs divided by the contribution margin ratio. Both formulas are given by the SBA.

Should break-even be calculated monthly or yearly?

Either works, as long as every figure covers the same period. The SBA's break-even calculator works in monthly figures, and monthly figures are easier to compare with your actual sales.

Is my salary a fixed cost?

If you take a regular salary or drawings, include it in fixed costs. Many owners leave it out and end up with a break-even point that does not pay them.

What if my contribution margin is zero or negative?

Then there is no break-even point. Each sale loses money or makes nothing towards fixed costs, so selling more makes things worse. Raise the price or cut variable costs first.

How is break-even different from profit margin?

Break-even tells you how much you must sell to cover all costs. Profit margin tells you what share of your sales is profit. They use similar inputs but answer different questions.

Does break-even mean I have enough cash?

Not always. Break-even is a profit measure. Loan principal, stock bought in advance and customers paying late can all leave you short of cash even when you are at or above break-even.

Sources

• US Small Business Administration, Break-even point (page modified October 2026)
• OpenStax, Principles of Managerial Accounting, 3.2 Calculate a Break-Even Point in Units and Dollars
• OpenStax, 3.3 Break-Even Sensitivity Analysis for a Single Product
• OpenStax, 3.4 Break-Even Sensitivity Analysis for a Multi-Product Environment
• OpenStax, 3.5 Margin of Safety and Operating Leverage
• Ontario Tech University Student Learning Centre, Break-even and CVP analysis tip sheet
• GOV.UK, How VAT works (last updated 24 October 2024)
• AccountingTools, The difference between margin and markup (July 2026)
• AccountingTools, Loan payable definition (August 2026)
• Chase for Business, How to calculate your break-even point

This article is general information, not personal financial, tax or accounting advice. The examples use illustrative numbers. Tax and VAT rules differ by country, so check current official figures and guidance, or speak to a qualified accountant, before you act.