The Single Most Useful Planning Number
Your break-even point is the revenue you must generate just to cover costs — no profit, no loss. Knowing it turns vague "am I doing okay?" anxiety into a concrete target. Below it you are bleeding cash; above it you are building a business.
Fixed vs Variable Costs
Break-even math depends on splitting costs into two buckets:
- Fixed costs — stay the same regardless of volume (rent, software subscriptions, insurance, base salary draw).
- Variable costs — rise with each unit or job (materials, contractor pay, payment processing, shipping).
The Formula (per unit)
Break-Even Units = Fixed Costs ÷ (Price per Unit − Variable Cost per Unit)
In dollars:
Break-Even Revenue = Fixed Costs ÷ Contribution Margin Ratio
where Contribution Margin Ratio = (Price − Variable Cost) ÷ Price.
Worked Example
Imagine a small product business:
| Input | Value |
|---|---|
| Fixed costs / month | $4,000 |
| Price per unit | $50 |
| Variable cost per unit | $30 |
| Contribution per unit | $20 |
| Contribution margin ratio | 40% |
Break-even units = $4,000 ÷ $20 = 200 units. Break-even revenue = $4,000 ÷ 0.40 = $10,000/month. Sell 201 units and you are profitable.
What Break-Even Tells You
- Pricing power: Raise price to $60 (variable cost still $30) and contribution jumps to $30 — break-even drops to ~134 units.
- Cost control: Cut fixed costs to $3,000 and break-even falls to 150 units.
- Risk: A high break-even means you need large volume just to survive — fragile if demand dips.
Apply It Monthly
Recompute break-even every time you change pricing, take on a lease, or add a fixed tool. It is the fastest way to answer "can I afford this?" before you commit.