1. What Is Break Even Calculation?
Break even calculation is a financial method that tells you the exact point where your total costs equal your total revenue. At this point, your business isn’t making a profit, but it also isn’t losing money.
2. Why Use Break Even Calculation?
This helps you:
- Know how many units you must sell to avoid losses
- Set accurate pricing and sales targets
- Assess the feasibility of a business idea or product
- Manage risk before investing or scaling
It’s a key decision-making tool for any business owner.
3. The Basic Formula
To calculate the break even point in units:
Break Even Point (Units) = Fixed Costs ÷ (Selling Price – Variable Cost per Unit)
To calculate it in revenue:
Break Even Point (Revenue) = Fixed Costs ÷ Contribution Margin Ratio
Where:
Contribution Margin Ratio = (Selling Price – Variable Cost) ÷ Selling Price
4. Example of a Break Even Calculation
Imagine you sell handmade candles:
- Fixed Costs (monthly): £2,000
- Selling Price per Candle: £20
- Variable Cost per Candle: £8
Break Even Point = £2,000 ÷ (£20 – £8) = 167 candles
So, you need to sell at least 167 candles a month just to cover all your costs.
5. Break Even in Revenue
Using the same example:
- Contribution Margin Ratio = (£20 – £8) ÷ £20 = 0.6
- Break Even Revenue = £2,000 ÷ 0.6 = £3,333.33
You need to generate about £3,334 in monthly sales to break even.
6. Components You Need
- Fixed Costs: Costs that do not change with sales (e.g., rent, insurance)
- Variable Costs: Costs that change with sales volume (e.g., materials, shipping)
- Selling Price per Unit: What you charge the customer
- Units Sold: Quantity of product/service to calculate against
7. How to Use Break Even Analysis
- Test pricing scenarios
- Set realistic sales targets
- Evaluate the cost-effectiveness of marketing campaigns
- Assess financial impact before launching new products
8. How to Lower Your Break Even Point
- Reduce fixed or variable costs
- Increase your product’s selling price (carefully)
- Improve sales mix to focus on higher-margin products
- Automate or streamline operations
9. Break Even Calculation for Services
If you offer services (e.g., coaching or consulting), swap “unit” for “billable hours”:
- Fixed Costs = £1,000/month
- Hourly Rate = £50
- Variable Cost per Hour = £10
Break Even Hours = £1,000 ÷ (£50 – £10) = 25 hours
You need to work at least 25 billable hours per month to cover costs.
Frequently Asked Questions
What’s the difference between break even units and break even revenue?
Units refer to quantity sold; revenue refers to the amount of sales in money needed to break even.
How often should I recalculate break even?
Recalculate when your costs, pricing, or sales strategy changes.
Can I do break even analysis without a business?
Yes, it’s useful for testing side hustles, freelance gigs, or project feasibility.
What is a good break even point?
A lower break even point is generally better—it means fewer sales are needed to become profitable.
Can fixed costs ever change?
Yes, over time they can (e.g., rent increases), so review them periodically.
What happens after break even?
Every sale beyond the break even point contributes to profit.
Conclusion
Break even calculation is a powerful tool that gives clarity to your financial strategy. Whether you run a product or service-based business, knowing when you’ll start making a profit helps you plan smarter and grow confidently. Always keep your figures up to date for the most accurate results.