Break-even point: Calculation, examples & why it’s important

Starting a business can be both exciting and daunting, especially when you start crunching the numbers. In the beginning, you’ll most likely be spending more than you’re making, and that’s totally normal.

One helpful metric to figure out is your business’s break-even point, where your total revenue equals your total expenses—essentially, where your earnings finally catch up to your spending. Calculating this early on can help you make better decisions for the future and understand what steps to take so you can start seeing a profit.

Read on to learn more about the break-even point and how to calculate it.

What you’ll learn:

• The break-even point for a business occurs when the company’s total revenue is equal to its total costs—there is no profit or loss. 

• You can calculate the break-even point by dividing the business’s fixed costs by the sales price per unit minus variable costs.

• Performing a break-even analysis benefits a business because it provides valuable insights into pricing, profitability and how to plan for the future.

• The break-even point can increase or decrease based on factors like changes in sales, product prices or production costs.

A business’s break-even point is the moment when the total revenue matches total costs, meaning there’s no profit or loss. At this stage, all fixed and variable expenses are fully covered—but no profit has been generated yet. Once your business hits its break-even point, you’ll understand what your prices should be to ensure you’re generating enough revenue to cover costs and start making a profit.

When you know what your business’s break-even point is, you can make smarter decisions about expanding your business. For instance, you might need to purchase new equipment or hire more staff to speed up processes. The break-even point helps you better determine the revenue you need in order to ensure your business grows—and stays—profitable.

To calculate your break-even point, you’ll start with your fixed costs like rent, insurance and employee salaries. Then you’ll divide that number by the contribution margin per unit, which is the selling price per unit of your product minus the variable costs to make or sell each unit. Variable costs, like materials and shipping costs, can fluctuate based on production levels.

This calculation determines how many units you need to sell to cover fixed costs and start making a profit.

Here’s how to find the break-even point for your business:

Break-even point (units) = fixed costs / (sales price per unit − variable cost per unit)

The break-even formula can also be conveyed as:

Break-even point (sales dollars) = fixed costs / contribution margin

Here are a couple of real-world examples of break-even points for different types of businesses. The first is for a product-based business.

A sandwich shop has fixed costs that total $10,000 monthly. The business sells a sandwich for $15, with variable costs totaling $5 per sandwich for the bread, meat, veggies, condiments, packaging, etc. Here’s how that business would calculate its break-even point:

Break-even point (units) = 10,000 / (15 − 5) = 1,000 sandwiches

Using the break-even formula, the sandwich shop owner knows she needs to sell 1,000 sandwiches each month to cover all of the shop’s costs.

Here’s an example of a service-based business, which might have fewer variable costs but higher fixed costs:

A freelance IT consultant has fixed costs that include internet fees, software and marketing totaling $600 per month. The average cost to complete a consulting project is $300, with additional variable costs of $100 per project for new technology and travel. Here’s how the freelancer would calculate his break-even point:

Break-even point (projects) = 600 / (300 − 100) = 3 projects

Using the break-even formula, the IT consultant knows he needs to complete three consulting projects each month to break even.

Performing a break-even analysis is essential because you’ll gain valuable insights into your profitability and learn how to better plan for your financial future. Here are a few benefits of understanding the break-even point for your business:

A break-even analysis helps reveal how much you need to sell to become and stay profitable. Knowing how much revenue you need to generate helps avoid losses that could affect your overall profit.

Knowing your break-even point ensures that you understand how to price your products or services appropriately to cover your costs.

It’s possible to miss certain expenses when creating your business plan, which could lead to financial surprises down the road. A break-even analysis can help identify these unplanned expenses, minimizing the potential for surprises.

A break-even analysis helps you avoid making business decisions based on your emotions. Instead, you’ll have the data right in front of you, allowing you to set fact-based goals that support your business plan, making them easier to attain in the future.

A break-even analysis can help identify risks before investing in a business idea. You’ll better understand what the potential outcomes of an investment could mean for your business, helping you avoid potential losses.

The break-even point doesn’t come without some limitations. While a break-even analysis is a great starting point for your business, it’s important to consider additional financial metrics, such as gross profit and how to properly calculate cash flow, to improve your company’s profitability.

Here are some key drawbacks of the break-even point:

Fixed costs like rent, utilities and employee salaries can increase over time and variable costs may increase due to economic factors like inflation or disruptions in the supply chain. The break-even point can sometimes overlook these changes.

Other factors could cause sales to fluctuate throughout the year, such as changes in competitor pricing, customer demand, economic conditions and industry purchasing trends. For example, an economic downturn might lead to decreased customer spending and make it challenging to break even. And while you might have an idea of how much you need to sell to break even, there’s no guarantee that customers will purchase that amount.

Your business’s fixed costs and variable costs don’t always fit neatly into these two buckets. You may encounter some semi-variable costs, which include components of both fixed and variable costs, potentially leading to discrepancies in the break-even point calculation.

Your business’s break-even point could fluctuate throughout the year for various reasons. It could increase due to:

• Growing customer sales. More sales means more demand for your product. As production speeds up, unexpected expenses may arise, potentially increasing the break-even point.
• Repairing equipment. Outdated machinery breaking down can disrupt production. You may miss deadlines and encounter higher operating costs to repair equipment, leading to a higher break-even point.
• Climbing production costs. Increased costs for materials or labor can decrease the contribution margin, meaning each unit sold contributes less toward your fixed costs.

Keep in mind that a higher break-even point means your business has to sell more to cover costs, which can make it more difficult to become profitable.

A lower break-even point, on the other hand, means your business needs fewer sales to cover costs and could make profitability easier to achieve. The break-even point may decrease due to:

• Selling products at a higher price. While it might not be ideal to raise your selling price, higher prices mean you need fewer sales to break even—as long as you aren’t losing customers in the process.
• Reducing manufacturing cost by outsourcing. As your production volume increases, there may be an opportunity to outsource some of your manufacturing processes. This can help lower some of your manufacturing expenses and increase profitability.
• Lowering fixed costs. It may be possible to reduce some fixed costs. For example, perhaps you find a location for your business with a lower monthly rent payment or shift to a remote workforce. Lower fixed costs can lead to a decreased break-even point.

Understanding how to calculate the break-even point for your business—when your total expenses and total revenue are equal—helps you determine the minimum sales your company needs in order to cover all its costs, ensure its financial stability and maintain profitability. 

As your business continues to grow, Capital One is here as your financial partner with a variety of business credit cards designed to meet your needs. Compare business cards today and see if you’re pre-approved with no impact on your personal credit score.