Finding the Break-Even Point

Updated: Feb 26

While facilitating the Money and Metrics module of the Goldman Sachs 10,000 Small Businesses Program this week, I had a few business owners ask me how to calculate a multi-product or multi-service break-even point. An online search gave me several good explanations, but nothing I thought was comprehensive enough. As I started to write out something to answer these business owners’ questions, I realized I had enough to make a blog post. Here we go…

Understanding the break-even point in any business is critical. While setting ambitious levels for metrics such as ROA (Return On Assets), ROE (Return On Equity), and EVA (Economic Value Added) will yield better performance for your business, understanding the point at which your business can sustain itself without losing money is critical. Break-even can be calculated on a profitability or cash basis. We’ll address profit break-even here, but you can easily turn this into a cash break-even by including only cash items in your calculations.

Regardless of whether you are selling one product or service, or multiple products and services, you start with two simple steps:

1. The first step is to run through your income statement and classify each line item as variable or fixed. Expenses that vary with the amount of revenue will be variable and those that don’t vary with the amount of revenue should be classified as fixed (even if they vary for other reasons).

2. Next look at the last few months of quantity sold data for your business and use it to figure out the price per unit and variable cost per unit the business has been experiencing.

Single product or service Break-even

Once you’ve done this, the basic formula for figuring out break-even for a single product or service is simple enough.

Break-even = Fixed Costs / (Price Per Unit – Variable Cost Per Unit) = Fixed Costs / Contribution Margin

If your fixed costs in a month are $200,000 and you sell your items for a price of $300 each at a cost of $200 each then your break-even number of units will be:

Break-even = 200,000 / ($300 - $200) = 2,000 units. And because the units sell for $300 each, the break-even amount of revenue is $300 x 2,000 units = $600,000