- A break-even analysis shows when your startup’s sales will cover all your costs.
- The formula for your break-even point is: Break-even Units = Fixed Costs / (Price per Unit − Variable Cost per Unit)
- Performing a break-even analysis helps you set smarter prices, decide if an idea is viable, and plan sales goals and funding needs.
- Revisit your break-even analysis whenever your costs, prices, or sales assumptions change.
What is a break-even analysis?
As a founder, one question probably lives rent-free in your head: “When will my business make a profit?”
A break-even analysis goes one step further to answer: “How much do I need to sell just to stop losing money?”
Use a break-even analysis to find when your total revenue (money coming in) will match your total costs (money going out).
When you hit your break-even point, you’re not making a profit yet, but you’re no longer operating at a loss. For a startup, this is a huge milestone.
4 Terms to know before you start
Get familiar with the following four terms before you run the numbers:
- Fixed costs
- Variable costs
- Selling price
- Contribution margin
1. Fixed costs
Fixed costs don’t change with your sales volume. You pay them whether you sell one unit or 1,000.
Examples of fixed costs include:
- Office or co-working rent
- Salaries for full-time staff
- Insurance
- Software subscriptions (e.g., payroll software)
- Loan payments
2. Variable costs
Variable costs change based on how much you sell. The more units you sell, the higher these costs.
Examples of variable costs include:
- Raw materials
- Packaging
- Shipping per order
- Payment processing fees (e.g., credit card fees)
- Sales commissions per sale
You’ll usually calculate variable cost per unit (or per service).
3. Selling price
Your selling price is the price per unit.
- For products: price per item.
- For services: price per hour, project, or package.
4. Contribution margin
Your contribution margin tells you how much each sale contributes to covering your fixed costs, followed by profit.
Contribution Margin = Selling Price Per Unit – Variable Cost Per Unit
What is the break-even formula? (Units and dollars)
There are two ways to express your break-even point:
- Break-even in units: how many units you must sell
- Break-even in sales dollars:how much revenue you must generate
Break-even point in units
The break-even point in units shows you how many units you must sell to break even. Use the following formula to calculate your break-even point in units:
Break-even Point in Units = Fixed Costs / (Price Per Unit – Variable Cost Per Unit)
Break-even point in sales dollars
You can also use the contribution margin ratio to find your break-even point in revenue instead of units:
Contribution Margin Ratio = (Price Per Unit – Variable Cost Per Unit) / Price Per Unit
Break-even Point in Sales Dollars = Fixed Costs / Contribution Margin Ratio
How to perform a break-even analysis
Let’s walk through a simple, practical process you can follow to calculate your startup’s break-even analysis.
- List all of your fixed costs
Start by listing all the costs you’ll pay no matter what. Think in monthly terms at first (you can adjust later).
List out fixed costs and the amount of each such as:
– Rent or co-working space: $X/month
– Founder salary (if you pay yourself): $X/month
– Employee salaries: $X/month
– Insurance: $X/month
– Accounting, legal, and professional services: $X/month
– Software tools (CRM, project management, payroll, accounting): $X/month
– Internet and utilities: $X/month
– Marketing retainers or flat-fee services: $X/month
– Loan or equipment lease payments: $X/month
Add up all fixed costs.
You can multiply your total monthly fixed costs by 12 to get your break-even point per year. - Estimate your variable cost per unit
Next, figure out what it costs each time you make a sale.
For a product-based startup, variable costs per unit might include:
– Materials and components
– Packaging
– Shipping and handling
– Payment processing fees
– Any per-unit labor (e.g., outsourced assembly)
For a service-based startup, variable costs per unit might include:
– Direct labor (billable staff time)
– Contractor payments for that service
– Software fees that scale with usage
– Travel or project-specific costs
Add up all variable costs per unit. Consider starting with one main product or service first to keep things simple. - Choose or confirm your selling price
Now, decide (or confirm) your price per unit.
If you haven’t set your pricing yet, consider:
– Market rates and competitor pricing
– Your positioning (premium, mid-range, budget)
– Your target profit margin
– The value you deliver to customers
You might test a few price points, but pick one to use in your initial break-even analysis. - Calculate your contribution margin
Now, calculate how much each unit contributes to fixed costs and profit.
Your contribution margin is:
Contribution Margin = Selling Price Per Unit – Variable Cost Per Unit
And your contribution margin ratio (if you want to think about things in dollars instead of units) is:
Contribution Margin Ratio = (Price Per Unit – Variable Cost Per Unit) / Price Per Unit - Compute your break-even point
Again, you can calculate your break-even point in units or in sales dollars.
Break-even Point in Units = Fixed Costs / (Price Per Unit – Variable Cost Per Unit)
Break-even Sales Dollars = Fixed Costs / Contribution Margin Ratio - Use your break-even point analysis
Your break-even number doesn’t mean much unless you use it.
Ask yourself:
– How many units do I need to sell per month?
– How many units is that per week?
– How many leads or customers do I need, given my conversion rate?
– Is that volume realistic based on my market and capacity?
If the numbers look unrealistic, you can reduce variable or fixed costs, narrow your focus to higher-margin products or services, and/or increase your prices.
Break-even point example
Let’s run through a quick, realistic example for a product-based startup. You’re launching a subscription box for office coffee.
Monthly fixed costs:
- Co-working space: $500
- Software tools: $150
- Insurance: $100
- Marketing (flat monthly budget): $750
- Miscellaneous overhead: $200
- Total fixed costs = $1,700 per month
Variable costs per box:
- Coffee and packaging: $12
- Shipping: $4
- Payment processing fees: $1
- Total variable costs per unit = $17
Price per box:
- You charge customers $35 per box.
First, find your contribution margin:
- Contribution Margin Per Unit = Price − Variable Cost
- Contribution Margin Per Unit = $35 – $17
- Contribution Margin Per Unit = $18
Next, calculate your break-even unit:
- Break-even Point in Units = Fixed Costs / Contribution Margin Per Unit
- Break-even Point in Units = $1,700 / $18
- Break-even Point in Units = 94.4
- You need to sell 95 boxes per month to break even.
You can put your break-even point in terms of sales dollars:
- Break-even Point in Sales Dollars = Fixed Costs / Contribution Margin Ratio
- Break-even Point in Sales Dollars = $1,700 / (18 / $35)
- Break-even Point in Sales Dollars = $3,307.40
Last but not least, use the information to come up with a plan. You can make it your goal to sell 95 boxes per month to break even. This translates to roughly 24 boxes per week (95 / 4).
How to use your break-even analysis
Your break-even point is a powerful number that guides decision-making. You can (and should!) use your break-even analysis before and after you launch your business.
| How to Use Before You Launch | How to Use After You Launch |
|---|---|
| Validate your business model | Adjust in real time |
| Plan for cash needs | Test pricing strategies |
How to use your break-even analysis before you launch
You don’t have to wait until your startup is live. Break-even analysis is powerful in the planning stage.
Your break-even analysis can help you do the following.
1. Validate your business model
Use break-even analysis to answer:
- Does this idea require unrealistic sales volume to break even?
- Can I reach the break-even point with the marketing channels I can afford?
- How long might it take to get there?
If your break-even volume looks extremely high, you may need to:
- Narrow your target market
- Raise prices
- Cut back on early fixed costs
- Start smaller and scale later
2. Plan for cash needs
Break-even analysis also helps you estimate how much cash you need to survive until you break even. This information is important when talking with investors and lenders about your startup, if applicable.
Ask yourself:
- How many months until I realistically hit break-even sales?
- What will my total losses be up to that point?
- Do I have the funding or savings to cover that period?
How to use your break-even analysis after you launch
Once your startup is running, conducting a break-even analysis becomes based on numbers in real-time rather than a projection tool.
After launching, your break-even analysis can help you do the following.
1. Adjust in real time
As you operate:
- Update your fixed costs (rent changes, new hires, tools).
- Refine your variable costs (supplier deals, shipping changes).
- Adjust your price based on customer feedback and competition.
2. Test pricing scenarios
You can use break-even analysis to test “what if” scenarios:
- What if I raise prices by 10%?
- What if I negotiate lower material costs?
- What if I switch to a cheaper shipping for small business option?
Common break-even analysis mistakes
A break-even analysis is a great tool for predicting when you stop operating at a loss. But, it’s not a guaranteed number.
Watch out for the following mistakes that can skew your break-even point:
- Underestimating fixed costs
- Over-projecting volume
- Failing to revisit your break-even analysis
How your break-even analysis connects to profit
Break-even analysis tells you when you stop losing money. Profitability goes one step further to determine when you earn more than your total costs.
Once you know your break-even units, you can map out profit goals.
Let’s go back to our coffee box subscription example:
- Break-even point: 95 boxes/month
- You want $2,000 in monthly profit.
Each box contributes $18 after variable costs. After you cover fixed costs, each additional box adds $18 to profit.
Divide your $2,000 profit goal by $18:
$2,000 / $18 = 111.1 boxes (112 when rounded up)
You’ll need to sell 112 additional boxes after breaking even to make $2,000. In total, you need to sell 207 boxes (95 break-even + 112 for profit) per month to make $2,000.
How to organize your break-even numbers
As your startup grows, you’ll have more expenses to track, products or services to analyze, and scenarios to test (e.g., pricing, discounts, etc.).
You can use accounting software to easily organize your numbers.
With accounting software, you can:
- Track fixed and variable costs
- See real-time revenue and expense trends
- Export data to run updated break-even analyses
- Make decisions based on actual numbers, not guesswork
When your books are clean and up-to-date, break-even analysis becomes a quick check-in, not a weekend project.
Quick-reference break-even analysis checklist
- List all fixed costs (monthly or yearly).
- Estimate variable cost per unit for each main product or service.
- Set or confirm your price per unit.
- Calculate your contribution margin (per unit and ratio).
- Calculate break-even units and break-even sales dollars.
- Compare the required volume to how much you can realistically sell.
- Adjust pricing, costs, or strategy if the break-even point looks unrealistic.
- Revisit your analysis whenever your numbers or assumptions change.
Break-even point definitions [Chart]
| Item | What It Is | Example Value |
|---|---|---|
| Fixed costs (per month) | Costs that don’t change with sales | $1,700 |
| Variable cost per unit | Cost for each unit sold | $17 |
| Price per unit | Selling price for each unit | $35 |
| Contribution margin per unit | Price − Variable Cost | $18 |
| Contribution margin ratio | Margin / Price | 0.514 (51.4%) |
| Break-even point in units | Fixed Costs / Margin per Unit | 95 units |
| Break-even point in sales dollars | Fixed Costs / Contribution Margin Ratio | ~ $3,307 |
Frequently asked questions
Compare your break-even volume to the size of your target market, your marketing budget, and your sales capacity (e.g., time, staff, production).
If you’d need an unrealistically high number of customers or units, you may need to raise prices, cut costs, or rethink your business model.
Consider reviewing your break-even point analysis annually or semi-annually. Revisit your break-even analysis when:
– You change your prices
– Your fixed costs jump (or drop) significantly
– Your variable costs change (new suppliers, shipping, etc.)
– You add or remove major products or services
Yes. Treat your service package or hour of work like a “unit.”
– Fixed costs: overhead, salaries, office, tools
– Variable costs: direct labor for each project, contractor costs, travel, usage-based software
– Price per unit: hourly rate, project fee, or retainer
A low contribution margin means each sale only covers a small portion of your fixed costs. You’ll need high volume to break even.
To improve your margin, you can raise prices, reduce variable costs, and focus on selling higher-margin products or services.
Your break-even analysis shows how price changes affect:
– The number of units you must sell
– How quickly you can cover fixed costs
– How much room you have for discounts or promotions
You can run scenarios (e.g., “What if I increase price 10%?”) to see how your break-even point moves.
Yes. For each idea:
– Estimate fixed and variable costs.
– Set a realistic price.
– Calculate the break-even point.
– Consider how realistic it is to reach that level of sales.
You might decide to go with the idea with the more achievable break-even (and better profit potential).
No, but using accounting software makes it much easier to track actual costs and see trends over time.
Get the numbers you need to calculate your break-even point with Patriot’s accounting software. Generate profit and loss reports with a few clicks to see your expenses and revenue. Start your free trial today!
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