Break-Even Point: How Much Must You Sell to Cover Your Costs?

Every business starts each month in the red. Rent is due, salaries wait, and electricity bills arrive whether or not a single customer shows up. Only after you have sold enough to cover all your costs does the first shilling of profit appear. The sales level where you stop losing and start earning is called the break-even point. Knowing it turns vague hopes into a clear target.

What break-even means

At the break-even point, your total income equals your total costs. You have not made a profit, but you have not made a loss either. Every sale beyond that point adds to profit. Every sale below it leaves you short.

Know your two kinds of cost

To find the break-even point, separate your costs into two groups:

Fixed costs: these stay about the same however much you sell. Examples are rent, a monthly licence, a worker's fixed salary and loan repayments.
Variable costs: these rise and fall with sales. Examples are stock you buy to resell, ingredients, packaging and delivery per order.

Be honest and complete. Include your own pay as a fixed cost if you want to make sure the business supports you.

A simple way to calculate

First work out how much each sale contributes toward your fixed costs. That is the selling price minus the variable cost of one unit. Call it the contribution per unit.

Then:

Break-even units = Fixed costs divided by contribution per unit.

An example: Mama Rose runs a small juice stand in Arusha. Her monthly fixed costs (rent of the spot, a helper and licence) total 300,000. Each glass sells for 2,000, and the fruit, sugar and cup cost 800. Contribution per glass is 1,200. Break-even is 300,000 divided by 1,200, which is 250 glasses a month, or roughly eight a day.

Now she has a target. Fewer than eight glasses a day on average means she is losing. Anything above brings profit.

Using break-even in decisions

This number helps with many choices:

Setting targets. You know the minimum you need to sell.
Testing a price change. If you lower the price, the contribution drops and the break-even number rises. Can you really sell that many more?
Deciding on new costs. Before renting a bigger place, see how much your break-even grows.
Judging a new product. Will it sell enough to justify the effort?

Know the number you must beat before you celebrate a busy day.

Reduce your break-even

If your break-even looks too high, you have three levers:

Cut fixed costs, for example by negotiating rent or sharing space.
Lower variable costs, by finding cheaper suppliers or reducing waste.
Raise the price, if the market allows it, or improve the mix toward higher-margin items.

Even small changes can move the number significantly.

Be careful with assumptions

Your break-even is only as good as your cost numbers. If you forget a cost, the number will be too low and you will feel profitable when you are not. Review your figures from time to time, and use real records instead of memory.

Let a tool do the maths

If you prefer not to calculate by hand, LiberLite Record Keeping has a simple break-even calculator along with profit margin and selling price calculators. You enter your costs and price and see how many sales you need.

Your next step

List your fixed costs for a normal month and add them up. Then pick your best-selling product, find its price and variable cost, and calculate the contribution. Divide, and write the result on a card near your till. Each day, compare your sales with it and watch your progress.