Break-Even Point: How Many Sales Do You Need?

Your break-even point is the level of sales at which you cover all your costs and make neither a profit nor a loss. Below it, every month loses money; above it, each extra sale adds profit. Knowing it tells you how much room you have before a slow month becomes a losing one.

The terms

• Fixed costs do not change with how much you sell in the short term: rent, salaried staff, insurance, software, loan repayments, your own drawings.
• Variable costs rise with each sale: materials, direct labour paid by the job, card fees, delivery.
• Contribution is what each sale leaves after its variable costs: price minus variable cost. It contributes to paying the fixed costs, and then to profit.
• Margin of safety is how far your expected sales are above break-even, as a percentage.

The formulas

Worked example

A small landscaping firm has fixed costs of £120,000 a year. Its average job is priced at £450, and the materials, plant hire and casual labour for an average job cost £270.

• Contribution per job: £450 − £270 = £180, or 40% of the price.
• Break-even: £120,000 ÷ £180 = 666.7, so 667 jobs.
• Break-even turnover: 667 × £450 = £300,150.
• Expected jobs this year: 800.
• Margin of safety: (800 − 667) ÷ 800 = 16.6%.
• Profit at 800 jobs: 800 × £180 − £120,000 = £24,000.

A 16.6% margin of safety means sales could fall by about a sixth before the business makes a loss.

Calculate your break-even point

If you sell many different things, use your average price and average variable cost, or work in turnover: enter £1 as the price and your variable costs as a share of £1.

Three ways to lower your break-even point

1. Raise prices. In the example, a 5% rise to £472.50 increases contribution to £202.50 and cuts break-even to 593 jobs. The price increase calculator shows how many sales you could lose and still be better off.
2. Cut variable costs. Buying better or wasting less raises the contribution from every sale.
3. Cut fixed costs. Every £1,000 off fixed costs lowers break-even by £1,000 ÷ contribution per unit.

Small changes to price or variable cost usually move break-even more than the same effort spent on fixed costs, because they affect every sale.