How to Calculate Your Break-Even Point and Why It Matters
Whether you’re launching a new product, reviewing your pricing strategy, or seeking funding, knowing the moment your business starts to cover its costs is essential.
In this guide, we explain what the break-even point is, how to calculate it, and why it’s a valuable tool for pricing, budgeting, and strategic decision-making.
What Is a Break-Even Point?
The break-even point is the moment at which your total revenue equals your total costs. At this point, your business is not making a profit, but it’s also not making a loss.
Everything you earn beyond the break-even point becomes profit, while anything below it is a loss. It’s a vital benchmark for any small business and is used to:
- Determine pricing
- Control fixed and variable costs
- Forecast sales targets
- Support business planning and funding
Why the Break-Even Point Matters
Calculating and regularly reviewing your break-even point can help with:
- Pricing Strategy
Understanding how much you need to sell to cover costs helps inform pricing decisions. It ensures you don’t underprice your product or service and fall short of profitability.
- Cost Control
By breaking down fixed and variable costs, you gain better insight into which areas you can optimise, reducing your break-even point and improving profitability.
- Sales Forecasting
Knowing your break-even sales volume helps set realistic sales targets and performance expectations, especially during growth or new product launches.
- Financial Planning
If you’re applying for funding or creating a business plan, lenders and investors will often ask for a break-even analysis to assess the risk and scalability of your business.
Key Terms to Know
Before calculating your break-even point, it’s important to understand the two types of costs:
Fixed Costs
These are costs that stay the same regardless of how much you sell. Examples include:
- Rent or mortgage for your office or premises
- Staff salaries (excluding bonuses or commissions)
- Business insurance
- Subscriptions (e.g. software tools)
- Depreciation
Variable Costs
These change in direct proportion to your level of output or sales. Examples include:
- Materials or product stock
- Shipping and packaging
- Commissions
- Hourly wages or freelancer fees
- Utility costs linked to production
How to Calculate Your Break-Even Point
The basic formula for the break-even point in units is:
Break-Even Point (Units) = Fixed Costs ÷ (Selling Price per Unit – Variable Cost per Unit)
This formula tells you how many units you need to sell to break even.
Example:
Let’s say you run a business selling custom-made notebooks:
- Fixed costs: £10,000 (per year)
- Selling price per notebook: £20
- Variable cost per notebook: £8
Using the formula:
Break-Even Units = £10,000 ÷ (£20 – £8)
Break-Even Units = £10,000 ÷ £12
Break-Even Units = 834 notebooks (rounded)
You’d need to sell at least 834 notebooks just to cover your costs.
