How to Calculate Break-Even Point for a Small Business
Break-even analysis tells you when your business starts making money. Get it wrong and you're guessing when you'll turn profitable. Get it right and you know exactly how many sales you need to cover costs.
Two formulas matter. Both are simple. Most small business owners only use one.
The two formulas
- Break-even in units = Fixed Costs ÷ (Price per Unit − Variable Cost per Unit)
- Break-even in revenue = Fixed Costs ÷ Contribution Margin Ratio
The first tells you how many products or services you need to sell. The second tells you how much total revenue you need to generate.
Skip the spreadsheet
Plug your numbers into the free break-even calculator. Enter costs and prices, get your break-even point instantly.
A worked example
Say you run a coffee cart with these monthly numbers:
- Fixed costs (rent, insurance, permits): $2,500
- Variable cost per coffee (beans, cup, milk): $1.25
- Selling price per coffee: $4.50
Break-even in units:
$2,500 ÷ ($4.50 − $1.25) = $2,500 ÷ $3.25 = 770 coffees/month
Break-even in revenue:
Contribution margin ratio = ($4.50 − $1.25) ÷ $4.50 = 0.722 (72.2%)
$2,500 ÷ 0.722 = $3,463/month revenue
You need to sell 770 coffees at $4.50 each ($3,463 total) to cover all costs.
Fixed vs variable costs
Classifying costs correctly is critical. Get this wrong and your break-even point will be off.
Fixed costs stay the same regardless of sales volume:
- Rent
- Salaries (fixed portion)
- Insurance
- Software subscriptions
- Loan payments
Variable costs scale with each unit sold:
- Materials
- Packaging
- Payment processing fees
- Commission-based labor
- Shipping
The U.S. Bureau of Labor Statistics publishes detailed cost breakdowns by industry. The SBA's startup cost guide provides typical ranges for common small business types.
5 common pitfalls that distort break-even analysis
- Miscounting semi-variable costs. Some costs have both fixed and variable components (e.g. electricity for a bakery). Split them correctly.
- Using averages instead of actuals. If your variable cost per unit varies significantly, use a weighted average.
- Forgetting owner compensation. If you don't pay yourself market rate, your "profit" is subsidized by your labor.
- Ignoring seasonality. Calculate break-even separately for peak and off-peak periods.
- Assuming static prices. Inflation and supplier price changes require quarterly updates to your numbers.
Industry benchmarks
Break-even timelines vary by sector (typical ranges, not authoritative — your number depends on capital structure, location, and stage):
- Service businesses (consulting, cleaning): often break even within 3-6 months
- Retail stores: typically 6-18 months
- Manufacturing: 1-3 years due to equipment costs
- Restaurants: notoriously difficult, often 12-24 months
The Census Bureau Economic Census provides detailed financial data by industry, including typical cost structures.
Run your numbers now
Our break-even calculator handles all the math instantly. Enter your fixed costs, variable costs, and prices to see exactly when you'll turn profitable.
FAQ
Should I include owner salary in fixed costs?
Yes. Treat your market-rate salary as a fixed cost. If you're not paying yourself, your break-even point is artificially low.
How often should I recalculate my break-even point?
Quarterly at minimum. Any significant change in costs, prices, or sales mix warrants an update. Many businesses recalculate monthly during the first year.
What's the difference between break-even in units vs revenue?
Units tell you how many products/services to sell. Revenue tells you the dollar amount needed. Both are useful — units for operational planning, revenue for financial projections.