Before you launch a product, sign a lease or take on staff, there is one number worth knowing above almost any other: how much you need to sell before you stop losing money and start making it. That number is your break-even point, and the simple calculation behind it — break-even analysis — is one of the most useful tools in business. It tells you whether an idea can realistically pay its way, helps you set prices and targets, and shows how sensitive your profit is to changes in costs or sales. This guide explains the costs involved, the formula, and works through clear examples.
What break-even analysis is
Break-even analysis is a calculation that finds the level of sales at which total revenue exactly equals total costs — the point where a business makes neither a profit nor a loss. Sell less than that and you make a loss; sell more, and every extra sale starts contributing to profit.
The break-even point can be expressed two ways:
- In units — how many items you need to sell (for example, 500 coffees a month).
- In revenue — how much sales income you need to bring in (for example, £6,000 a month).
Both answer the same question from different angles. The calculation rests on splitting your costs into two types — fixed and variable — so we need to be clear on those first.
Fixed and variable costs
Every cost in a business behaves in one of two broad ways as your output changes.
Fixed costs stay the same regardless of how much you produce or sell, at least in the short term. They exist whether you sell one unit or a thousand. Typical examples:
- Rent and business rates
- Salaries of permanent staff
- Insurance premiums
- Software subscriptions and equipment leases
Variable costs rise and fall with how much you produce or sell. Each additional unit brings additional variable cost. Typical examples:
- Raw materials and ingredients
- Packaging
- Payment-processing fees per sale
- Commission per item sold
Some costs are semi-variable — they have a fixed base plus a part that varies with use, such as a phone plan with a fixed line rental and per-minute charges. For break-even purposes you split these into their fixed and variable elements. Getting this classification roughly right matters, because the whole calculation depends on it. If you are unsure where a cost sits, it helps to look at how it appears on your accounts and to understand what a balance sheet and your wider numbers show.
Fixed costs are the bills that arrive whether or not you make a sale. Variable costs only appear when you do. Break-even is about how many sales it takes for the variable side to finally cover the fixed side.
The break-even formula
The key concept linking it all together is contribution.
Contribution per unit = selling price per unit − variable cost per unit.
Contribution is the amount each sale "contributes" toward covering your fixed costs (and, once those are covered, toward profit). If a product sells for £10 and costs £4 in variable costs, each sale contributes £6.
From there, the break-even formula is simple:
Break-even point (in units) = total fixed costs ÷ contribution per unit.
In plain terms: divide the bills you must pay regardless (fixed costs) by how much each sale chips in (contribution per unit), and you get the number of sales needed to cover everything.
To find break-even in revenue, you have two options:
- Multiply the break-even units by the selling price, or
- Divide fixed costs by the contribution margin ratio (contribution per unit ÷ selling price).
Worked examples
Numbers make this concrete. Here are two examples.
Example 1 — a small coffee shop.
- Monthly fixed costs (rent, salaries, insurance): £4,800
- Selling price per coffee: £3.00
- Variable cost per coffee (beans, milk, cup): £1.00
Contribution per coffee = £3.00 − £1.00 = £2.00.
Break-even in units = £4,800 ÷ £2.00 = 2,400 coffees per month.
Break-even in revenue = 2,400 × £3.00 = £7,200 per month.
So the shop must sell 2,400 coffees — about 80 a day in a 30-day month — just to cover its costs. The 2,401st coffee is the first to make a profit, contributing £2 to the bottom line, as does every coffee after it.
Example 2 — a maker selling a £40 product.
- Monthly fixed costs: £3,000
- Selling price per item: £40
- Variable cost per item (materials, packaging, fees): £24
Contribution per item = £40 − £24 = £16.
Break-even in units = £3,000 ÷ £16 = 187.5, which rounds up to 188 items (you cannot sell half an item, and you must clear the line).
Break-even in revenue = 188 × £40 = £7,520.
Notice how much the contribution margin matters. In the second example, contribution is 40% of the price (£16 ÷ £40). If the maker could cut variable costs to £20, contribution would rise to £20 and break-even would fall to 150 items — selling fewer to reach profit. This is exactly why how you price your product and how you control variable costs are so powerful.
Using break-even in decisions
Break-even analysis is not just an accounting exercise — it directly informs real choices:
| Decision | How break-even helps |
|---|---|
| Pricing | Shows how price changes move the break-even point and contribution |
| Viability | Reveals whether the required sales volume is realistic for your market |
| Target-setting | Gives a concrete minimum sales goal for the team |
| Cost control | Shows the profit impact of cutting fixed or variable costs |
| Planning | Helps model "what if" scenarios before committing money |
A vital caveat: break-even tells you when you stop making a loss, not when you have enough cash in the bank. Timing of payments, stock bought in advance and tax all affect your actual position, which is why break-even should sit alongside good cash flow management. It is also a snapshot based on your current costs and price — revisit it whenever those change. And if the break-even volume looks unachievable for your market, that is valuable early warning, the kind of reality check worth having before you commit serious money to starting or growing a business.
The bottom line
Break-even analysis answers a fundamental question: how much must you sell before you make money? Split your costs into fixed and variable, work out the contribution each sale makes (price minus variable cost), and divide your fixed costs by that contribution to find the break-even point in units. As the worked examples show, the calculation is simple but revealing — it sharpens your pricing, sets realistic targets, and flags unviable ideas early. Use it as a planning tool, refresh it when costs or prices change, and pair it with cash flow awareness, and you will make far better-informed decisions about your business.