Break-even analysis: the number that tells you whether the price works

A break-even analysis works out how much you have to sell before you stop losing money. It needs three numbers: your fixed costs, your price per unit, and the variable cost of producing one unit. Everything else follows from one division, and the arithmetic takes ten minutes on the back of an envelope.

That simplicity is worth stressing, because break-even is treated as a piece of formal finance and skipped by exactly the businesses that most need it. A price set by looking at competitors, without checking what it has to cover, is a guess that takes a year to disprove.

The calculation

1. Add up fixed costs for a period — rent, salaries, software, insurance, anything you pay whether or not you sell. Monthly is the most useful period for a small business.
2. Take your selling price per unit, excluding sales tax.
3. Work out the variable cost of one unit: materials, packaging, payment fees, delivery, any labour that scales with volume.
4. Subtract variable cost from price. That is contribution per unit — the amount each sale contributes to covering the fixed costs.
5. Divide fixed costs by contribution per unit. That is your break-even volume: the number of units you must sell in the period to cover everything.
6. Multiply by price to get break-even revenue, which is usually the figure that makes the situation feel real.

A worked example. Fixed costs 40 000 a month. Price 500. Variable cost 300. Contribution is 200 per unit, so break-even is 200 units a month, or 100 000 in revenue. If you currently sell 120 units, the price or the cost structure has to change — and knowing that now is worth more than discovering it across four quarterly reviews.

Contribution per unit is the number worth carrying in your head, more than the break-even volume itself. It tells you instantly what a discount costs: at a contribution of 200, a ten per cent discount on a 500 price removes 50 from contribution — a quarter of it — and you need a third more volume to stand still. That arithmetic is why casual discounting damages small businesses so reliably.

Where it gets misleading

• Treating a mixed product range as one unit. Break-even on an average product is a number about a product you do not sell; do it per line, or per obvious group.
• Forgetting payment fees, returns and delivery in variable costs. In online retail these are the difference between a healthy contribution and none.
• Leaving your own salary out of fixed costs. A business that breaks even only because the owner works free has not broken even.
• Assuming fixed costs stay fixed. They step: another person, another van, more space. Break-even after the step is a different number, and the step is usually taken before the arithmetic is redone.
• Using it as a target. Break-even is the floor, not the goal.

What to do with the answer

Three levers, in the order they usually pay. Raise the price, which lifts contribution directly and is the change small businesses resist most — the ground covered in value-based pricing. Cut variable cost, which needs supplier work or volume. Cut fixed cost, which is slow and finite. A fourth option, selling more at the current numbers, is the one everybody reaches for first and the only one that does not change the underlying position.

Where to do the arithmetic

Ettex Sheets is the right home for it, because break-even is a model you want to change and rerun — what happens at a five per cent price rise, at a new rent, at a bigger order. The costs behind the inputs come out of Ettex Books, and the longer-horizon version is covered in financial projections template and cash flow forecast.

To be clear: there is no break-even wizard here, and there does not need to be. The value is in the three inputs being honest, and no software can make them so — the variable cost people forget is the one that would have changed the answer.