Break-Even Analysis for Founders: A Practical Guide
Break-even is the sales volume where revenue covers all fixed and variable costs. Fixed costs divided by contribution margin gives the number of units or the revenue you must reach.
- Break-even units
- Fixed costs ÷ (price − variable cost per unit)
- Break-even revenue
- Fixed costs ÷ contribution margin %
- Main use
- Pricing, budgeting and hiring decisions
15+ years in finance: 100+ financial models built, €40m+ raised for clients, Forbes contributor and lecturer.
Short answer: break-even is the sales level at which revenue covers all your costs. Divide fixed costs by the contribution margin per unit, and you get the number of units you must sell.
The formulas
- Contribution margin per unit = price − variable cost per unit
- Break-even units = fixed costs ÷ contribution margin per unit
- Break-even revenue = fixed costs ÷ contribution margin %
Fixed costs do not change with volume in the short term, such as rent, core salaries and software. Variable costs rise with each sale, such as materials, delivery, payment fees and commissions.
A worked example
A business sells a product for 50. Variable cost is 30 per unit. Fixed costs are 20,000 per month.
- Contribution margin: 50 − 30 = 20 per unit (40%)
- Break-even units: 20,000 ÷ 20 = 1,000 units per month
- Break-even revenue: 20,000 ÷ 0.40 = 50,000 per month
At 1,200 units, the business earns 200 × 20 = 4,000 of profit. At 800 units, it loses 4,000.
What you can do with the number
| Question | How break-even helps |
|---|---|
| Can we afford a new hire? | Add the cost to fixed costs and see how many more sales you need |
| Should we change the price? | A higher price raises the margin and lowers the units required |
| Is a discount safe? | A smaller margin can sharply raise the units needed |
| Is the plan realistic? | Compare break-even with what you can actually sell |
Discounts are the classic trap. Cutting the price in the example from 50 to 45 reduces the margin from 20 to 15, so break-even rises from 1,000 to about 1,333 units. A 10% discount needs about a third more sales to stand still.
Common mistakes
- Putting semi-variable costs in the wrong place. Split costs honestly, even if the split is approximate.
- Ignoring step costs. Fixed costs jump when you add a warehouse or a team.
- Using one blended margin. Different products or channels have different margins. Calculate break-even per product line where it matters.
- Confusing break-even with cash break-even. You can be profitable on paper and still short of cash. Read why revenue can grow while profit does not and build a payment calendar.
How to build it in an hour
- List last month's costs and mark each as fixed or variable.
- Calculate the average price and variable cost per unit.
- Work out contribution margin and break-even units.
- Compare with your actual sales and your forecast.
- Test two scenarios: price up 5% and sales down 10%.
If you want to go deeper, a financial model lets you run these scenarios in minutes.
This article is general information, not financial advice, and outcomes depend on your own numbers.
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Related questions
What is break-even analysis?
It finds the sales level at which total revenue equals total costs, so you make neither profit nor loss.
What is contribution margin?
Contribution margin is the price minus the variable cost per unit. It is the amount each sale contributes to covering fixed costs.
Does break-even include cash timing?
No. Break-even is based on profit. You also need a cash forecast, because inventory, payment terms and loan repayments affect when cash arrives.
