Break-Even Analysis: The One Number Every Small Business Owner Should Know

When it comes to financial strategy, one simple number can change the way you price, plan, and grow: the break-even point. It’s the level of sales where total revenue equals total costs—no loss, no profit. Knowing it gives you clarity on how many units to sell, how to set prices, and where to focus cost control.

Why break-even matters

• Sets realistic sales targets. You’ll know exactly what “covering cost” looks like.
• Guides pricing decisions. See how price changes affect the number of units you must sell.
• Improves cost management. Identify which expenses most influence profitability.
• Supports scenario planning. Model the effect of discounts, higher costs, or new products.

The basic formula

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

Where:

• Fixed costs = costs that don’t change with sales (rent, salaries, insurance, basic utilities)
• Variable cost per unit = costs that vary with each sale (materials, direct labor, shipping per order)
• Selling price per unit = the revenue you receive per unit sold

There’s also a dollars-based version:

Break-Even Sales ($) = Fixed Costs ÷ Contribution Margin Ratio

Where:

• Contribution Margin per Unit = Selling Price − Variable Cost
• Contribution Margin Ratio = Contribution Margin per Unit ÷ Selling Price

Quick numeric example

Imagine you sell a product for $50, with a variable cost of $30 per unit, and monthly fixed costs of $8,000.

• Contribution margin per unit = $50 − $30 = $20
• Break-even units = $8,000 ÷ $20 = 400 units
• Break-even sales ($) = 400 × $50 = $20,000

So you must sell 400 units (or generate $20,000 in revenue) each month to cover costs.

Practical steps to calculate your break-even

1. List fixed costs. Add rent, core salaries, insurance, loan payments, subscription base fees, etc.
2. Determine variable costs per unit. Include materials, direct labor, packaging, and shipping.
3. Decide your realistic selling price for the product or service.
4. Apply the formula to get units and dollar break-even points.
5. Run sensitivity checks: change price, variable cost, or fixed cost to see impact.
6. Update regularly — costs and prices change; recalculating quarterly is a good habit.

Questions to ask while using break-even

• Are all costs correctly classified as fixed or variable? (Some “semi-fixed” costs need careful handling.)
• Do seasonal fluctuations affect average selling price or variable costs?
• Is your sales capacity sufficient to reach the break-even volume? (If not, rethink pricing or channels.)
• What margin of safety do you want? (How much above break-even should you aim to cover uncertainties?)

Common mistakes to avoid

• Ignoring hidden variable costs (returns, payment fees, packaging).
• Using outdated or averaged figures that don’t reflect current supplier prices.
• Assuming break-even equals profitability strategy — it’s the baseline; profit targets require pushing beyond it.
• Not stress-testing scenarios (e.g., supplier cost increases, promotional pricing).

Tips to lower your break-even point

• Reduce fixed costs (renegotiate rent, move to a lower-cost plan, automate to reduce headcount needs).
• Lower variable costs (bulk purchasing, negotiate supplier discounts, optimize packaging).
• Increase price (improve perceived value, add services or bundles).
• Improve efficiency (reduce waste, speed up production, raise staff productivity).

Tools & templates

You can calculate break-even in a spreadsheet (Excel or Google Sheets) or use budgeting tools in QuickBooks, Xero, or a simple online calculator. Build a small sensitivity table showing break-even units for multiple price and cost scenarios to guide decisions.

Action checklist

• List and total current fixed costs.
• Calculate variable cost per unit (include all direct costs).
• Confirm your current selling price per unit.
• Compute break-even units and break-even revenue.
• Run 3 sensitivity scenarios: −10% price, +10% variable cost, +10% fixed costs.
• Set a realistic sales target: break-even + desired profit margin.
• Review and update quarterly.

Final thought

Break-even analysis is more than an accounting exercise — it’s a roadmap for pricing, cost control, and growth. Start with accurate numbers, test scenarios, and use the insights to make defensible decisions about pricing, promotions, and investments.

If you’d like a free break-even template or help modeling scenarios for your business, Peak Accounting can build a tailored analysis and action plan so you know exactly what to sell, at what price, and how to hit profitability faster.