Guide

How to Calculate Your Break-Even Point

Your break-even point is the number of sales that covers your bills. Below it you are paying to be in business. Above it, every sale is profit.

Two kinds of cost

Fixed costs arrive every month whatever you sell: rent, storage, software, insurance, subscriptions.

Variable costs rise with each sale: the product itself, its packaging, postage you pay and selling fees.

What each sale puts toward the bills

Take the price of one unit and subtract its variable cost. What is left goes toward your fixed costs. A product that sells for $9.00 and costs $4.20 puts $4.80 toward the bills.

The sum

Divide your fixed costs by that amount, and round up. With fixed costs of $850 a month, $850 divided by $4.80 is 177.1, so you break even on the 178th sale.

In revenue, that is 178 times $9.00, or $1,602 a month.

What to do with the number

Compare it with what you sell now. If you sell 250 a month you are 72 sales past break-even, and those 72 sales earn you about $350 in profit.

If you are below it, there are three ways to close the gap: cut a fixed cost, raise the price, or lower the cost of each unit. A small price rise often moves the number more than you expect.

Check it every few months

Costs creep. A new subscription or a supplier price rise moves your break-even point without any change in your sales. Work it out again whenever a cost changes.