Break-Even Calculator

How to use the break-even calculator

1. Fixed costs per month: add up what you pay even in a month with no sales, such as rent, software, insurance, loan payments and salaries, including your own pay if you take one.
2. Price per unit: enter what one customer pays for one sale. A unit can be a product, a subscription month, a billable hour or a job. If you sell several things, use your average sale.
3. Variable cost per unit: enter what one extra sale costs you, such as materials, packaging, shipping, payment fees and sales commission.
4. Units you sell per month now: optional. Add it to see your profit or loss today and how far you are from break-even. Enter 0 if you have not started.

The result updates as you type. All figures are per month, so keep every input monthly. If you only know a yearly cost, divide it by 12 first.

The break-even formula

The part in brackets is the contribution margin: what each sale leaves over to pay your fixed costs after it has paid for itself. It is close to gross margin but counts every cost that rises with each sale, not only the cost of making the product.

The calculator also shows two extra figures when you enter current sales. Profit or loss is units sold x contribution margin - fixed costs. Margin of safety is (units sold - break-even units) / units sold, which tells you how far sales could fall before you start losing money.

Because you cannot sell part of a unit, break-even units are rounded up to the next whole number. Break-even revenue is not rounded, so it can be slightly lower than rounded units x price.

A worked example

Say you sell candles online for $25 each. Wax, jar, box, shipping and payment fees come to $10 a candle. Your fixed costs are $4,500 a month, and you currently sell 360 candles a month.

So the first 300 candles each month only pay the bills, and profit starts with candle 301. If you raise the price to $28, the contribution margin becomes $18 and break-even drops to 250 units, or $7,000 in revenue.

How to read your break-even point and lower it

A break-even number means little on its own. Compare it with demand you can actually reach. If you need 300 sales a month and your serviceable market is a few thousand people, you would need a large share of them to buy every month, which is a warning sign. If the number looks small next to the market, the idea has room.

There are only three ways to lower break-even:

• Raise the price. Every extra dollar goes straight into contribution margin, so a small increase can remove a lot of required sales. In the example, $3 more per candle cut break-even by 50 units. Test it with real buyers first, because a higher price can also mean fewer sales. A pricing strategy based on what the customer gains often supports a higher price than one based on your costs.
• Lower the variable cost per unit. Negotiate with suppliers, change packaging or shipping, or drop the products with the thinnest margins. The profit margin calculator shows the margin on each one.
• Lower fixed costs. Delay the office, the hire and the annual software contracts until sales justify them. Lower fixed costs also mean your cash lasts longer while you build up sales.

Run the numbers before you commit money, not after. If you are still testing the idea, use the price people told you they would pay in customer interviews, not the price you hope for. Break-even is also a number readers of a business plan expect to see. Fonda's business plan has 10 chapters, with sources and an appendix, and you can read example plans there without an account.

What the calculator leaves out

• One product, one price. If you sell several products, the result depends on the mix. Use a weighted average price and cost, or run each product separately.
• Costs that change with volume. Real fixed costs jump in steps, such as a second employee or a bigger space, and suppliers often give discounts at higher volume. The model treats both as constant.
• Money spent before launch. Equipment, stock and setup are not monthly fixed costs. Add them up with the startup cost calculator and think about how many months of profit it takes to earn them back.
• Taxes and timing. Break-even is about profit, not cash. You can break even on paper and still run short if customers pay late or you buy stock months ahead. See cash flow.