Every business owner wants to make a profit, but do you know exactly how much your business needs to sell before it starts making one?

That’s where the break-even point becomes useful.

Break-even analysis helps business owners understand the level of sales required to cover their costs. At the break-even point, the business has generated enough revenue to cover its fixed and variable costs, but it hasn’t yet generated a profit.

Knowing your break-even point can help you make more informed decisions about pricing, sales targets, expenses, hiring, and business growth.

What Is a Break-Even Point?

The break-even point is the point where your total revenue equals your total costs.

At this point:

Revenue = Total Costs

The business is not making a profit, but it isn’t making a loss either.

Once sales move beyond the break-even point, the additional contribution from those sales can begin generating profit, assuming the underlying costs and pricing remain consistent.

For a small business, understanding this number can answer important questions such as:

• How many products do I need to sell?
• How much revenue do I need each month?
• Can I afford to hire another employee?
• Is my current pricing sufficient?
• How much additional sales do I need to cover a new expense?
• What happens if my costs increase?

Why Is Break-Even Analysis Important?

Break-even analysis turns a business goal into a measurable financial target.

Instead of simply saying, “We need more sales,” you can determine exactly how much additional sales activity is required to cover your costs.

It can help business owners:

• Set realistic sales targets
• Evaluate pricing decisions
• Understand cost structures
• Assess new expenses
• Plan for hiring
• Evaluate new products or services
• Prepare budgets
• Identify financial risks
• Measure the impact of changes in costs

It can also help prevent decisions based purely on intuition.

Fixed Costs vs Variable Costs

To calculate your break-even point, you first need to understand the difference between fixed and variable costs.

What Are Fixed Costs?

Fixed costs generally remain relatively consistent regardless of how much the business sells.

Examples can include:

• Rent
• Insurance
• Accounting fees
• Software subscriptions
• Certain salaries
• Loan-related costs
• Office expenses

For example, if your business pays $4,000 a month in rent, that cost generally remains the same whether you sell $10,000 or $30,000 worth of products.

What Are Variable Costs?

Variable costs generally change as sales or production change.

Examples may include:

• Materials
• Product costs
• Packaging
• Sales commissions
• Transaction fees
• Delivery costs
• Direct production costs

If you sell more products, these costs may increase because more products need to be purchased or produced.

Understanding these two categories is essential for calculating break-even accurately.

How Do You Calculate the Break-Even Point?

There are two common ways to look at break-even: break-even units and break-even sales revenue.

For businesses selling individual products or services, the break-even point in units can be calculated using:

Break-Even Units = Fixed Costs ÷ (Selling Price Per Unit − Variable Cost Per Unit)

The amount left after the variable cost is deducted from the selling price is known as the contribution margin per unit.

For example, suppose a business has:

• Fixed costs: $10,000
• Selling price: $100 per unit
• Variable cost: $60 per unit

The contribution per unit is $40.

The business would therefore need to sell 250 units to cover its fixed costs.

Until those 250 units are sold, the business has not yet reached break-even.

After that point, additional contribution can begin generating profit, assuming the other assumptions remain unchanged.

What Is the Contribution Margin?

The contribution margin is an important part of break-even analysis.

It represents how much each sale contributes toward covering fixed costs and eventually generating profit.

For example:

Selling Price − Variable Cost = Contribution Margin

If a product sells for $200 and its variable cost is $120:

$200 − $120 = $80 contribution per unit

That $80 contributes toward the business’s fixed costs.

Once all fixed costs have been covered, further contribution can contribute to profit.

How to Calculate Break-Even Sales Revenue

You can also calculate break-even in terms of revenue rather than units.

A simplified formula is:

Break-Even Sales = Fixed Costs ÷ Contribution Margin Ratio

The contribution margin ratio represents the contribution margin as a percentage of sales.

For example, if:

• Fixed costs = $50,000
• Contribution margin ratio = 40%

Then:

$50,000 ÷ 40% = $125,000

The business would need approximately $125,000 in sales to reach break-even under those assumptions.

A Simple Small Business Example

Imagine a small business selling a service for $500.

The business has:

• Monthly fixed costs of $15,000
• Variable cost of $200 per service
• A selling price of $500 per service

The contribution margin per service is:

$500 − $200 = $300

The business therefore needs to complete:

$15,000 ÷ $300 = 50 services

At 50 services, the business has covered its monthly fixed costs.

If it completes fewer than 50 services, it may operate at a loss.

If it completes more than 50 services, the additional contribution can generate profit, assuming the underlying assumptions remain the same.

What Happens If Your Costs Increase?

Break-even analysis can show you the financial impact of rising costs.

Suppose your rent, wages, or other fixed costs increase.

Your break-even point will generally increase because the business now needs to generate more contribution to cover those costs.

Similarly, if the cost of materials or other variable expenses increases, your contribution margin per sale decreases.

That means you may need to sell more products or services to reach the same level of profitability.

This is why reviewing your break-even point when significant costs change can be valuable.

What Happens If You Increase Your Prices?

Increasing your selling price can potentially reduce the number of sales required to reach break-even, provided demand remains strong enough to support the higher price.

For example, if your selling price increases while variable costs remain unchanged, the contribution margin per sale increases.

This means each sale contributes more toward covering fixed costs.

However, pricing decisions shouldn’t be based solely on break-even calculations.

You also need to consider:

• Customer demand
• Competitor pricing
• Perceived value
• Market conditions
• Customer retention
• Overall profitability

A higher price isn’t useful if it results in a significant decline in sales.

How Break-Even Analysis Can Help With Hiring

Break-even analysis can also help business owners evaluate whether they can afford an additional employee.

Suppose hiring an employee increases your annual fixed costs by $100,000.

You can calculate how much additional contribution the business needs to generate to cover that cost.

This doesn’t necessarily mean the employee must personally generate $100,000 in revenue.

They may create additional capacity that allows the business owner or existing employees to generate more revenue.

The important question is:

What additional contribution or financial value needs to be created to justify the additional cost?

Break-Even Point vs Profit Target

Break-even isn’t necessarily the target you should aim for.

Breaking even means the business is covering its costs but generating no profit.

Business owners should often go one step further and establish a target profit.

For example, instead of asking:

“How much do I need to sell to break even?”

you could ask:

“How much do I need to sell to generate my desired level of profit?”

This provides a more useful sales target for business planning.

What Can Make Break-Even Analysis Less Accurate?

Break-even analysis is useful, but it relies on assumptions.

The calculation can become less reliable when:

• Selling prices vary significantly
• Variable costs change frequently
• The business sells many different products
• Sales volumes fluctuate significantly
• Fixed costs change regularly
• Customer discounts are common
• Revenue is highly seasonal

For businesses with multiple products or services, it may be necessary to analyse the contribution margin of different offerings rather than relying on one simple break-even calculation.

How Can You Use Break-Even Analysis in Your Business?

Once you know your break-even point, don’t simply calculate it once and forget about it.

Use it as part of your ongoing financial planning.

Set Monthly Sales Targets

Knowing your break-even revenue can give your team a minimum financial target.

You can then set a higher target based on your desired profit.

Review Pricing

If your break-even point is too high, examine whether your pricing and variable costs are appropriate.

Evaluate New Expenses

Before taking on a major expense, calculate how much additional revenue or contribution it will require.

Plan for Growth

Break-even analysis can help you model the financial impact of hiring, expanding premises, launching a new product or increasing marketing expenditure.

Monitor Changes

Review the calculation when major costs, prices or business conditions change.

Break-Even Analysis Is Only One Part of Financial Planning

Break-even analysis can provide valuable insight, but it shouldn’t be viewed in isolation.

A business owner should also understand:

• Profit margins
• Cash flow
• Working capital
• Revenue trends
• Operating expenses
• Customer profitability
• Debt commitments
• Tax obligations

A business can be above its break-even point and still experience cash-flow problems.

Likewise, a business can have strong revenue growth while its break-even point is increasing because costs are rising.

Using break-even analysis alongside regular financial reporting gives business owners a much clearer view of their financial position.

When Should You Recalculate Your Break-Even Point?

Consider reviewing your break-even point when:

• Prices change
• Supplier costs increase
• Rent changes
• Payroll increases
• You hire employees
• You add new products or services
• You take on significant debt
• Your business model changes
• You open another location
• Your fixed costs increase significantly

Regular reviews help ensure that your sales targets remain realistic.

How Can an Accountant Help With Break-Even Analysis?

Calculating a basic break-even point can be relatively straightforward, but applying it to a real business can be more complicated.

An accountant or business adviser can help you identify the appropriate fixed and variable costs, assess different scenarios and incorporate break-even analysis into your broader financial planning.

At Latitude Accountants, we help Australian business owners understand their numbers and use financial information to make more informed decisions.

Whether you’re considering hiring, changing prices, launching a new service, or planning for growth, understanding your break-even point can help you evaluate the financial impact before making the decision.

Frequently Asked Questions About Break-Even Points for Small Businesses

What is a break-even point in business?

A break-even point is the level of sales where a business’s total revenue equals its total costs. At this point, the business has neither made a profit nor a loss.

What is the simplest break-even formula?

For a business selling individual products or services, break-even units can be calculated by dividing fixed costs by the contribution margin per unit. The contribution margin is the selling price minus the variable cost per unit.

Why is break-even analysis important for a small business?

It helps business owners understand the minimum sales required to cover costs and can support decisions about pricing, hiring, expenses, sales targets, and growth.

What is the difference between fixed and variable costs?

Fixed costs generally remain relatively consistent regardless of sales volume, while variable costs tend to change as production or sales increase.

Can break-even analysis help with pricing?

Yes. Break-even analysis can show how different selling prices affect the number of sales required to cover costs. However, pricing should also consider customer demand, competition and the value of the product or service.

Can a business be profitable but still have cash-flow problems?

Yes. Break-even analysis focuses on revenue and costs, while cash flow focuses on the timing of money entering and leaving the business. A profitable business can still experience cash shortages.

How often should a business calculate its break-even point?

There is no universal schedule, but it is sensible to review break-even when significant changes occur in pricing, costs, staffing, products, services or the business model.

Talk to Latitude Accountants About Your Business Numbers

Understanding your break-even point can help turn financial information into a practical business target.

Whether you’re reviewing your pricing, considering a new employee, planning an expansion or simply trying to understand how much your business needs to sell to remain profitable, break-even analysis can provide valuable insight.

Latitude Accountants helps Australian business owners understand their numbers through accounting, budgeting, forecasting, tax planning and business advisory services.

If you’re unsure about your break-even point or want to understand how a proposed business decision could affect your financial position, our team can help you work through the numbers.

Latitude Accountants

📍 Sydney Olympic Park | Marrickville | Melbourne | Loxton
📞 1300 706 597
📧 info@latitudeaccountants.com.au

Want tailored business advice? Let’s chat.

Disclaimer

This article provides general information only and does not constitute financial, tax, accounting or business advice. Break-even calculations rely on assumptions about costs, pricing and sales and may not reflect the circumstances of every business. You should seek professional advice from a suitably qualified adviser before making financial or business decisions based on break-even analysis.