How to work out your break-even point

Why it matters

Break-even shows the lowest sales you need to cover costs. Below it you lose money. Above it you make a profit.

It is the quickest test of a price change, a new hire or a new product.

The steps

1. List fixed costs. Rent, salaries, insurance, loan repayments and software. They stay the same if you sell more or less.
2. List variable costs per unit. Materials, freight, packaging, card fees and commissions for one unit.
3. Set the price. Use the price ex GST. GST is not your revenue.
4. Work out the contribution per unit. Price minus variable cost per unit.
5. Work out break-even units. Fixed costs divided by contribution per unit.
6. Work out break-even sales. Break-even units times price.
7. Add a profit target. Add the profit you want to the fixed costs and divide again.
8. Work out the margin of safety. Expected sales minus break-even sales, as a share of expected sales.

Worked example

Example Distribution Pty Ltd has monthly fixed costs of A$18,000. It sells a product at A$50.00 ex GST with a variable cost of A$30.00.

Item	Working	Result
Contribution per unit	50 - 30	A$20.00
Break-even units	18,000 / 20	900 units
Break-even sales	900 x 50	A$45,000
Units for a A$4,000 profit	(18,000 + 4,000) / 20	1,100 units
Margin of safety at 1,200 units	(1,200 - 900) / 1,200	25%

The business needs 900 units a month to break even and 1,100 to make A$4,000. If it sells 1,200 units, sales can fall 25% before it makes a loss.

Common mistakes

• Putting a mix of products in one calculation.
• Treating wages as variable when they are fixed.
• Using GST-inclusive prices.
• Forgetting that fixed costs step up with growth.

Next step

Use the Break-even calculator first. Then see Pulsify for finance leaders.