Break-Even Analysis: A Simple Guide for Small Businesses
Learn what break-even analysis is, how to calculate your break-even point, and how to use it to make smarter pricing and business decisions.
Before you price a product, hire staff, or take on a lease, you need to answer one question: how much do I need to sell to at least not lose money? Break-even analysis answers that question with math instead of guesswork.
What Is the Break-Even Point?
The break-even point is the exact sales volume at which your total revenue equals your total costs. Below it, you're losing money. Above it, every unit sold generates pure profit.
It's not a goal — it's a threshold. Once you know where it is, you can set sales targets, evaluate pricing changes, and decide whether a business idea is viable before you invest in it.
Fixed Costs vs Variable Costs
Break-even analysis requires separating your costs into two categories:
Fixed costs
Costs that don't change with sales volume. You pay them whether you sell 1 unit or 10,000.
- Rent and utilities
- Salaries (your own or employees')
- Insurance premiums
- Software subscriptions
- Loan repayments
Variable costs
Costs that increase directly with each unit sold.
- Raw materials and components
- Packaging and shipping per order
- Payment processing fees (e.g. 2.9% per transaction)
- Sales commissions
- Direct labour per unit
The Break-Even Formula
Once you know your fixed costs, variable cost per unit, and selling price, the calculation is straightforward:
Break-Even Units = Fixed Costs ÷ Contribution Margin
Break-Even Revenue = Break-Even Units × Selling Price
Example
Suppose you run an online store selling handmade candles:
- Fixed costs: $3,000/month (rent, your salary, tools)
- Variable cost per candle: $8 (wax, wick, jar, packaging, shipping)
- Selling price: $28
Contribution margin = $28 − $8 = $20 per candle
Break-even units = $3,000 ÷ $20 = 150 candles per month
Break-even revenue = 150 × $28 = $4,200/month
If you can realistically sell 150 candles per month, the business is viable at this price. If not, you need to reduce costs or raise your price.
Contribution Margin Ratio
The contribution margin ratio (CMR) expresses your contribution margin as a percentage of selling price:
In the candle example: $20 ÷ $28 = 71.4%. This means 71.4 cents of every dollar of revenue goes toward covering fixed costs and profit.
A higher CMR means you reach break-even faster and generate more profit above it. Low CMR businesses (e.g. grocery retail at 20–30%) need very high volume to be profitable.
How to Use Break-Even Analysis in Practice
Before launching a product
Run the numbers before you invest. If the break-even volume is higher than what you can realistically sell in your market, revise the model — raise price, reduce costs, or don't launch.
When evaluating a price change
A price increase raises your contribution margin and lowers your break-even point. A price cut does the opposite. Use the calculator to model different pricing scenarios before deciding.
When considering a new fixed cost
Thinking about hiring, getting a larger space, or adding a tool subscription? Add that cost to your fixed costs and recalculate. By how many units does your break-even point increase? Is that achievable?
Setting sales targets
If your break-even is 150 units and you want 20% profit margin above that, you need to sell 150 + (fixed costs × 0.20 ÷ contribution margin) = 180 units. That's your target.
Limitations of Break-Even Analysis
Break-even analysis is a snapshot, not a forecast. It assumes:
- Selling price is constant (no discounts or volume pricing)
- Variable costs are truly linear (no bulk purchase savings)
- All units produced are sold (no waste or unsold inventory)
- Your fixed costs are stable (no step-changes as you scale)
For most small businesses making day-to-day decisions, these assumptions are close enough to be useful. For major capital investments, use a full financial model alongside break-even analysis.