How to Apply a Break-Even Analysis to Your Business

What is a break-even analysis?

A break-even analysis is a calculation that determines the number of products or services a business must sell to cover its expenses, especially fixed costs. It is expressed by this formula:

Fixed Costs / (Average Price – Variable Cost) = Break-Even Point

A break-even analysis helps determine when your company will generate enough revenue to cover its expenses and begin earning a profit. It could also be run on a single product or service, rather than an entire business.

According to the U.S. Small Business Administration, a break-even analysis is crucial for limiting business decisions made on emotions and helps potential businesses avoid failure by providing realistic analysis of potential outcomes. The SBA notes that this analysis is usually a requirement when seeking investors or debt funding for your business.

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How to run a break-even analysis

Let’s work through a comprehensive example using sample cost figures for a software-as-a-service (SaaS) startup:

Step 1: Identify Fixed Costs (Monthly)

• Office rent: $8,500 per month
• Software licenses: $2,200 per month
• Insurance: $1,800 per month
• Base salaries: $45,000 per month
• Marketing/Advertising: $12,000 per month
• Utilities and internet: $800 per month
• Professional services: $2,500 per month
  
  
• Total Fixed Costs: $72,800 per month

Step 2: Calculate Variable Costs per Unit

• Payment processing fees: $3.50 per unit
• Customer support time: $8.00 per unit
• Server costs: $4.20 per unit
• Sales commissions: $15.30 per unit
  
  
• Total Variable Cost: $31.00 per unit

Step 3: Set Pricing

Monthly subscription price: $149 per customer

Step 4: Calculate Break-Even Point

Run your break-even analysis using the formula. Using the figures above, the equation would look like:

$72,800 ÷ ($149 – $31) = 617 customers

Result: This SaaS company needs 617 paying customers to break even each month. At 618 customers, they begin generating profit of $118 per additional customer (this is the difference of the parenthetical equation of $149 – $31.)

Revenue at Break-Even: 617 customers × $149 = $91,933 monthly revenue

Benefits of a break-even analysis

A break-even analysis gives you a clearer path forward and supports informed decision-making around budgeting, price setting and future planning.

It helps you focus on profitability

A break-even analysis helps you set a clear target for covering costs, and also identifies the threshold at which your business becomes profitable. When you know how many units you need to sell, how many subscribers you need to sign up or how many hours you need to bill in order to being turning a profit, it becomes easier to devise strategies to do so and measure whether or not you’re on track. 

It helps you set prices correctly

When most people think about pricing, they primarily consider how much their product costs to create (fixed costs), and they fail to take into account variable costs. This leads businesses to underprice their products. Finding your break-even point will help you price your products correctly, taking into account both fixed and variable costs.

It helps you plan for the future

Using your break-even analysis, you can create a strategy for the future. Knowledge of your break-even point helps you determine whether it’s realistic, as well as ways to reach it sooner. These include taking steps like reducing your overall fixed costs, lowering the variable costs per unit, improving the sales mix by selling more of the products that have larger contribution margins, and increasing prices.

When to use a break-even analysis

You should use a break-even analysis to answer the following questions about your business:

• How much of my product or service do I need to sell per month?
• How much volume do I need to sell?
• What price allows me to generate a reasonable profit? 

“It’s much easier for people to decide whether they can beat that minimum than guessing how many sales they may make,” said Rob Stephens, founder of CFO Perspective.

Here are three times you should consider performing a break-even analysis.

1. Before you launch a new product or location

Stephens suggested using a break-even analysis to assess how long it will take for any planned investments or changes in your business to become profitable.

“These investments might be a new product or location,” Stephens said. “I’ve done break-even calculations many times for modeling the minimum sales needed to cover the costs of a new location.”

2. When you change prices

This analysis is also helpful when you’re lowering your prices to beat a competitor or increasing prices to keep up with inflation.

“The most common use of break-even analysis in my career has been modeling price changes,” Stephens said. “You can … use break-even analysis to determine how many more units you need to sell to offset a price decrease.”

3. When you are overwhelmed by choices

When making changes to your business, you may be bombarded with various scenarios and possibilities, which can be overwhelming when you’re trying to make a decision. Stephens suggested using a break-even analysis to narrow down your choices to scenarios with straightforward yes-or-no questions. 

For example, “Can we do better than the minimum needed for success?”

Examples of a break-even analysis in action

These hypothetical examples of break-even analyses demonstrate how the formula could apply to real-world businesses. 

Example 1: Retail Clothing Boutique

Sarah’s Boutique, a women’s clothing store in Denver, used break-even analysis to determine whether opening a second location was viable. 

With monthly fixed costs of $18,500 and an average gross margin of 65% on clothing items, Sarah calculated she needed $28,462 in monthly sales to break even ($18,500 ÷ 0.65). 

By analyzing foot traffic data and competitor performance, she determined the new location could realistically generate $35,000 monthly, providing a $4,238 monthly profit margin. This analysis gave Sarah confidence to expand, and the second location became profitable within four months.

Example 2: Manufacturing Company

TechParts Manufacturing produces electronic components with fixed costs of $180,000 monthly. Each component costs $22 to produce and sells for $58, creating a $36 contribution margin per unit. Their break-even point is 5,000 units monthly ($180,000 ÷ $36). 

When a major client requested a 15% price reduction, the company used a break-even analysis to determine they would need to sell 6,923 units monthly to maintain the same profit level. This analysis helped them negotiate alternative cost reductions with the client instead of accepting the price cut.

Example 3: Professional Services Firm

Mountain View Consulting, a business advisory firm, has monthly fixed costs of $42,000 and charges clients an average of $275 per hour. With variable costs of $85 per billable hour (primarily consultant wages and overhead), their contribution margin is $190 per hour. 

They need to bill 221 hours monthly to break even ($42,000 ÷ $190). This analysis helped them realize they needed better utilization rates and led to implementing project management software that increased billable efficiency by 18%.

Limitations and Assumptions of Break-Even Analysis

While break-even analysis is a valuable tool, it’s important to understand its limitations:

Key assumptions that may not hold true

• Linear Cost Behavior: The analysis assumes all costs increase or decrease proportionally, which may not reflect reality.
• Constant Pricing: Real markets often require dynamic pricing strategies based on competition and demand.
• Single Product Focus: Most businesses have multiple products with different margins and break-even points.
• Static Market Conditions: The analysis doesn’t account for changing market dynamics, seasonal fluctuations or economic cycles.

When break-even analysis may not be appropriate

• Highly Volatile Industries: Businesses with rapidly changing cost structures or pricing.
• Long Development Cycles: Software or pharmaceutical companies with multi-year development timelines.
• Complex Pricing Models: Businesses with subscription tiers, volume discounts or dynamic pricing.
• Regulatory-Heavy Industries: Where compliance costs can change unexpectedly.

Common Mistakes in Break-Even Analysis and How to Avoid Them

1. Underestimating variable costs

Many businesses fail to include all variable costs such as payment processing fees, shipping costs or sales commissions. If some variable costs are not included, the break-even analysis may not be accurate.

2. Misclassifying fixed vs. variable costs

Semi-variable costs (like utilities that have both fixed and variable components) are often incorrectly categorized. The SBA recommends separating the fixed portion from the variable portion of these mixed costs. 

3. Ignoring tax implications

When calculating break-even for target profits, many forget to account for taxes. As noted by ICAEW, “profits are derived post tax, so we need to gross up the target figure by (1 – tax rate).”

4. Neglecting market factors

Failing to consider seasonal changes, competitor actions or market demand fluctuations can lead to unrealistic break-even projections.

5. Using outdated data

A break-even analysis requires current, accurate data. Using historical pricing or cost information without adjusting for inflation or market changes reduces accuracy.

Financial analysis tools to use with a break-even analysis

Break-even analysis works best when combined with other financial planning tools. We recommend incorporating the following.

Cash flow projections

While break-even analysis shows profitability, cash flow projections reveal when money actually enters and leaves your business. This timing difference is crucial for maintaining operations.

Sensitivity analysis

Test how changes in key variables (price, costs, volume) affect your break-even point. This helps identify which factors have the greatest impact on profitability.

Scenario planning

Create best-case, worst-case and most-likely scenarios to understand the range of possible outcomes and prepare contingency plans.

Financial ratios

Combine break-even analysis with key financial ratios like gross margin, operating margin and return on investment for a comprehensive financial picture.

Burn rate analysis

Particularly important for startups, burn rate analysis shows how quickly you’re spending cash and when you’ll need additional funding.

Implementing Break-Even Analysis: Your Next Steps

Getting Started with Your Analysis

1. Gather Complete Financial Data: Collect 12 months of expense data to identify all fixed and variable costs.
2. Categorize Costs Accurately: Use the SBA’s break-even calculator as a starting framework.
3. Calculate Initial Break-Even Point: Start with a simple calculation, then refine as needed.
4. Validate Assumptions: Compare your results with industry benchmarks and competitor analysis.
5. Create Multiple Scenarios: Develop conservative, optimistic and realistic projections.

When to Seek Professional Help

Consider consulting with financial professionals when:

• Your business has complex cost structures or multiple revenue streams.
• You’re seeking investment or loan funding (lenders often require professional analysis.)
• You’re planning major business changes like expansion, new products or acquisitions.
• Your initial analysis reveals concerning profitability challenges.
• You need to integrate break-even analysis with broader strategic planning.

Maintaining Your Analysis

Running a break-even analysis isn’t a one-time exercise:

• Monthly Reviews: Update with actual performance data and adjust projections.
• Quarterly Deep Dives: Reassess all assumptions and cost categories.
• Annual Strategic Planning: Incorporate break-even analysis into broader business planning.
• Trigger Events: Recalculate when launching products, changing prices or facing market disruptions.

Julie Thompson and Julianna Lopez contributed to this article. Source interviews were conducted for a previous version of this article.