What is the break-even point?
The break-even point is the level of sales at which total income exactly covers total costs, so the business makes neither a profit nor a loss.
What break-even point means
Every sale earns a contribution: the selling price less the variable costs of making that sale. Contributions first pay for fixed costs. The point at which they have paid for all of them is break-even. Below it, the business loses money; above it, each extra sale adds its contribution to profit.
Break-even units = fixed costs ÷ (price per unit − variable cost per unit)
Break-even sales = fixed costs ÷ contribution margin percentage
Example
A coffee van has fixed costs of £3,600 a month: van finance, insurance, pitch fees and the owner's drawings. A coffee sells for £3.50 excluding VAT. Beans, milk, cups and card fees cost £1.10.
| Amount | |
|---|---|
| Contribution per coffee | £2.40 |
| Fixed costs per month | £3,600 |
| Break-even | 1,500 coffees a month |
| Per trading day (22 days) | about 68 coffees |
If the owner raises the price to £3.80, contribution rises to £2.70 and break-even falls to about 1,334 coffees: roughly 8 fewer cups a day.
Why it matters for your business
Break-even turns your costs into a concrete sales target. It tells you whether a new business idea is realistic, how much a new hire or a bigger premises really needs to earn, and how far sales can fall before you start losing money. That last figure, your margin of safety, is a simple measure of risk.
How to lower your break-even point
- Raise prices, which increases contribution per sale
- Reduce variable costs through better supplier terms or less waste
- Cut or delay fixed overheads
- Shift the sales mix towards products with higher margins
Remember that VAT is not part of your income. Work out break-even on prices excluding VAT if you are registered.
Margin of safety
Once you know break-even, compare it with your actual or forecast sales. The gap is your margin of safety. If the coffee van sells 2,000 coffees a month against a break-even of 1,500, sales can fall by 25% before it starts losing money. A business whose sales sit only just above break-even has little room for a wet month, a price rise from a supplier or the loss of a key customer, and should either build reserves or work to lower its break-even.
Common questions
It should, if you want a realistic target. For a sole trader, include the drawings you need to live on as a fixed cost. For a company, include directors' salaries. Otherwise the business can reach break-even while you are working for nothing.
Accounting break-even uses costs including depreciation. Cash break-even looks at actual cash going out, including loan repayments and excluding non-cash costs. A business with large loan repayments can be profitable but still short of cash at the accounting break-even level.