A Break Even Point Calculation With an Example

A busy month can easily feel like a profitable one. Orders keep coming in, payments go in and out, and you often only see how the month went once it’s over.

Your break-even point gives you a target to check against while the month is still going.

It’s the amount you need to sell to cover all your costs, so the business makes no loss and no profit. Once you have the number, decisions about prices, suppliers and new costs get much easier to think through.

What goes into a break even point calculation

You need three numbers:

• Fixed costs. What the business pays each month: rent, insurance, software subscriptions, salaries.
• Selling price per unit. What a customer pays you for one product or one job. If your business is VAT-registered, use the price without VAT.
• Variable cost per unit. What each sale costs you to make or deliver. If you reclaim VAT on these, use them without VAT too.

Some costs also sit somewhere in between.

An energy bill usually goes up in busier months, but part of it stays even when nothing sells. For a first calculation, put each cost in the group it’s closest to.

If you pay yourself a salary through the company, it belongs in fixed costs. Leave it out and the break-even point looks lower, but it describes a business that covers its bills while you work for free.

A salary also usually costs the company more than the gross figure once employer National Insurance and pension contributions are added. Ampere’s UK salary calculator shows the total employer cost for a given salary.

Dividends are paid out of profit, so a month that only breaks even adds nothing new to pay them from.

Break-even point = fixed costs ÷ (selling price per unit minus variable cost per unit)

Take a small company that imports ceramic plant pots from Portugal and sells them in the UK.

Each pot sells for £40 without VAT and costs £25 to buy, pack and deliver, so every sale leaves £15. With £3,000 of fixed costs each month, the company needs to sell 200 pots to break even. Every pot after that adds to its profit.

If you sell services, or hundreds of different products, it’s easier to work in pounds.

Take the percentage of each sale you keep after variable costs and divide your fixed costs by it. If you keep 40% of each sale, divide by 0.4. The answer is how much you need to sell each month to break even.

A consultancy with almost no variable costs keeps nearly all of every sale, so its break-even figure ends up close to its monthly fixed costs.

The result only holds while your three numbers stay the same, and in real life they move around.

When a supplier raises their price, each sale leaves you with less, and you need more sales to cover the same bills. Paying a supplier in euros can push your costs up even if they never change their price, because a weaker pound makes the same euro invoice cost more.

Any fee you pay to convert currency counts as a variable cost too, so add it to what each sale costs you.

An Ampere business account gives you a GBP and a EUR account. You see the final fee before you approve each exchange, so you can add the real cost of your euros to your break even point calculation. View exchange rates

Raising your own price brings your break-even point down.

Run the formula with the new price before you change anything.

You’ll see how many fewer sales you’d need, so you can judge whether the extra margin is worth losing a few customers over.

New fixed costs are just as easy to test. A new hire, a bigger workspace or a pricier software plan all push your fixed costs up.

Divide the extra monthly cost by what each sale leaves you, and you’ll see how many extra sales it takes to pay for itself. A monthly profit target works the same way and shows how many sales you need on top of your break-even point.

When to run it again

A break-even point is a snapshot.

It assumes every sale goes at the same price with the same costs, and real months come with discounts, refunds and the slow week now and then. Use it as a guide and run it again whenever one of the numbers changes, like a new supplier price, a rent review or a price change of your own.

You could run it every quarter, or every month if your costs move around a lot.