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Break-Even Point Explained for Small Businesses

Calculate how many units you need to sell to cover fixed costs, with a worked example.

Break-even is the point where sales cover costs and profit is zero. It helps answer a pricing question: at this price and cost, how many units must I sell before the business starts earning? It is an estimate, not a promise that demand will reach that level.

Separate fixed and variable costs

Fixed costs, such as rent, stay broadly similar over the period. Variable costs, such as materials or packaging, rise with each unit sold. Subtract variable cost per unit from selling price to get the contribution per unit. Divide fixed costs by that contribution and round up to a whole unit.

Work through the numbers

With fixed monthly costs of 1,000, a selling price of 20 and variable cost of 12, each sale contributes 8. You need 1,000 ÷ 8 = 125 units to break even. Selling 124 leaves costs uncovered. If the selling price is no higher than variable cost, selling more cannot cover fixed costs.

Use the estimate carefully

Check whether 125 units is realistic, then test a lower price, higher cost or slower month with the break-even calculator. Include all relevant fixed costs and use the same time period throughout. For several products, a single-unit estimate may be too simple; use a representative sales mix instead.