Quick answer
Your break-even point is the level of sales at which total revenue exactly covers total costs, so profit is zero. Calculate it by dividing fixed costs by your gross margin percentage to get break-even sales in dollars, or by dividing fixed costs by gross profit per unit to get break-even units. Anything above break-even is profit; anything below is a loss.
Key points
- Break-even sales ($) = fixed costs ÷ gross margin %.
- Break-even units = fixed costs ÷ gross profit per unit.
- Include your own wage in fixed costs, or the answer will flatter you.
- Use it before every big decision: a hire, a lease, a price change.
Break-even is the most useful number most owners never calculate. It answers a simple question — how much do we have to sell before we make a cent? — and once you know it, pricing, hiring and lease decisions get much easier.
What is a break-even point?
It’s the sales level where revenue covers every cost and profit is exactly zero. Below it, you lose money. Above it, each extra sale contributes its gross profit straight to the bottom line.
To calculate it, you need to sort your costs into two piles.
Fixed costs don’t change much with sales: rent, insurance, salaried wages (including yours), software, vehicle leases, loan repayments, accounting.
Variable costs move with each sale: materials, stock, direct labour, merchant fees, packaging, freight, commissions.
It’s also one of the numbers lenders like to hear. An owner who can say how far sales could fall before the business stops covering its costs has clearly thought about risk — and that makes any conversation about funding a hire, a lease or new equipment far more straightforward.
How do you calculate break-even sales in dollars?
- Work out your gross margin percentage: (sales − variable costs) ÷ sales.
- Divide fixed costs by that percentage.
| Illustrative item | Figure |
|---|---|
| Annual sales | $900,000 |
| Variable costs | $540,000 |
| Gross profit | $360,000 |
| Gross margin | 40% |
| Annual fixed costs (incl. owner wage) | $300,000 |
| Break-even sales | $300,000 ÷ 0.40 = $750,000 |
| Safety margin | $150,000 above break-even (about 17% of sales) |
The figures are illustrative. That “safety margin” is worth watching: it tells you how far sales can fall before you slip into a loss. Here, a drop of about one-sixth wipes out the profit.
How do you calculate break-even in units or hours?
If you sell a defined product or bill by the hour:
Break-even units = fixed costs ÷ gross profit per unit.
A mobile mechanic charging $140 an hour with about $20 of direct cost per billable hour makes $120 gross profit per hour. With fixed costs of $132,000 a year, break-even is 1,100 billable hours a year — roughly 24 hours a week over 46 working weeks. Everything beyond that is profit. (Illustrative figures.)
How can break-even guide real decisions?
This is where the number earns its keep.
Pricing. A small price increase lifts gross margin and drops break-even immediately. In the first example, lifting the margin from 40% to 42% cuts break-even sales from $750,000 to about $714,000. See raising your prices.
Hiring. A new employee adds to fixed costs. Divide their total annual cost by your gross margin to see how much extra revenue they must generate just to pay for themselves. Our guide to hiring your first employee goes further.
Leases and new sites. A second location has its own fixed costs and its own break-even. Knowing it tells you how long the site might take to stand on its own — covered in opening a second location.
Discounts. A discount lowers margin and raises break-even. Our piece on the true cost of discounts shows how sharply.
If break-even analysis shows a growth move is sound but needs capital to get started, see what funding might be available — it’s a no-credit-check enquiry.
What are the common break-even mistakes?
- Leaving out the owner’s wage. The single most common error.
- Using sales including GST. Exclude GST from both sides.
- Treating all labour as fixed. Casual or job-specific labour is usually variable.
- Forgetting loan repayments. They’re a real, fixed cash commitment even if only the interest shows in the profit and loss.
- Calculating once and never again. Break-even moves every time costs or prices do.
How does break-even work for a seasonal business?
An annual break-even figure can hide a lot. A landscaper, a ski-hire shop or a beachside café might clear break-even comfortably across the year while losing money for four straight months. For seasonal businesses, work out a monthly break-even and lay it against each month’s expected sales.
| Illustrative month | Expected sales | Monthly break-even | Above or below |
|---|---|---|---|
| January | $98,000 | $62,500 | +$35,500 |
| April | $61,000 | $62,500 | −$1,500 |
| June | $44,000 | $62,500 | −$18,500 |
| October | $83,000 | $62,500 | +$20,500 |
The figures are illustrative. The months below the line tell you how much cash the good months must set aside — or how large a seasonal facility would need to be — to carry the business through. Put the same months into a 13-week cash flow forecast as the quiet season approaches and you’ll see exactly which week gets tightest.
A useful habit is to track your safety margin — actual sales minus break-even — every month. When it narrows three months in a row, it’s time to look at prices, costs or both before it turns negative.
Break-even is where confident borrowing starts
Lenders like businesses that know their numbers. Being able to say “we break even at $750,000 and we’re trading at $900,000” is a strong starting point for any funding conversation, whether it’s for equipment, a hire or a new site.
When you’re ready, we’d like to hear from you. We consider trading businesses for unsecured facilities typically from $5,000 to $500,000, and property-secured loans from $20,000 to $5,000,000. You won’t face a credit check to enquire, you won’t be passed to a string of lenders, and a real person will call to understand your plans. Please complete the form carefully and accurately — it’s the fastest way to the right answer.
Frequently asked questions
What's the difference between fixed and variable costs?
Fixed costs stay roughly the same whatever your sales — rent, insurance, salaried wages, software, loan repayments. Variable costs rise and fall with sales — materials, stock, merchant fees, casual labour, freight.
Should I include my own wage in the break-even calculation?
Yes. If you leave it out, the break-even point tells you when the business covers its costs while you work for free. Include a fair owner's wage to get a true answer.
How do I calculate break-even for a service business?
Use billable hours as your unit. Divide fixed costs by the gross profit per billable hour — your rate minus any direct cost per hour. The answer is the number of billable hours you need each year or month to break even.
Does break-even include tax?
Break-even is usually calculated before income tax, because income tax only applies once there's a profit. GST should be excluded from both sales and costs.
How often should I recalculate break-even?
Whenever a major cost changes — a new lease, a hire, a price change — and at least once a year. It's quick once you've done it the first time.