Break-even
Also called: break-even point · breakeven analysis
The level of revenue at which a business covers all of its costs and makes neither a profit nor a loss — the point where everything above it starts to be worth something.
Break-even divides costs into two kinds. Fixed costs are paid whether or not anything is sold: rent, insurance, salaried people, software, loan interest. Variable costs move with each sale: materials, consumables, commissions, merchant fees. What is left of a sale after its variable costs is the contribution — the part that goes toward covering the fixed costs. Break-even is reached when the contributions have covered them all.
The most useful thing about the number is not the number. It is that break-even can be lowered in three completely different ways, and they are not equally available to every business: raise price, reduce the variable cost of delivering, or cut fixed costs. Owners under pressure reach for the third almost automatically, when the first is frequently the one with the most room in it.
Break-even is a monthly reality, not an annual one. A business can break even comfortably across a year and still be unable to pay its bills in February, because costs arrive on a schedule and revenue does not. Seasonal businesses in particular need the monthly view; the annual figure will tell them everything is fine right up until it isn't.
One caution: break-even is not the target. It is the floor. A business planned to break even has planned to have nothing left for tax, for the owner, for the next piece of equipment, or for the month that goes wrong.
How it's worked out
Break-even revenue = fixed costs ÷ contribution margin ratio
Contribution margin ratio = (revenue − variable costs) ÷ revenue. Run it monthly rather than annually, and put the owner's own wage in the fixed costs — otherwise you have calculated the point at which the business survives and the owner doesn't.
What it tells you
What has to happen before a month is worth anything at all — and which of price, delivery cost, or overhead is the lever with room in it.
Work out yours with the free break-even calculator →See also
Wages percentage
Total wages expressed as a percentage of revenue over the same period — the standard measure of what a business spends on people to earn what it earns.
EBITDA
A measure of profit that strips out interest, tax, depreciation and amortisation, in order to show what the trading operation earns before financing and accounting decisions are applied to it.
Business health check
A short structured review of a business across its main areas — money, customers, team, owner load and direction — used to locate where a problem sits before committing to deeper work.
A definition tells you what the word means. It can't tell you whether it's your problem — that takes a look at the actual business.
Take the free health check