Break-Even Analysis: Know When You Start Making Money

Every business has a moment when revenue finally covers all costs. Before that point, you're losing money. After it, every additional sale generates profit. That tipping point is your break-even point — and knowing it is essential for pricing, planning, and survival.

What Is Break-Even?

Break-even is the point where total revenue equals total costs. At break-even, profit is exactly $0. Below it, you lose money. Above it, you profit.

The Formula

The Break-Even Chart

Plotting cost and revenue lines against units sold shows the break-even point visually. Loss happens to the left of the crossing; profit to the right.

Understanding the Components

• Fixed costs — Rent, salaries, insurance, software subscriptions (don't change with sales volume)
• Variable costs — Materials, shipping, payment processing fees (scale with each unit sold)
• Contribution margin — Selling price minus variable cost per unit (how much each sale contributes to covering fixed costs)
• Contribution margin ratio — Contribution margin ÷ selling price (percentage of each dollar that goes toward fixed costs)

Example: SaaS Business

Target Profit Analysis

Want to make $5,000/month profit? Add it to fixed costs:

When to Recalculate

• You change your pricing
• Your supplier raises costs
• You add new fixed expenses (hire, office, tool)
• You enter a new market with different costs

The Bottom Line

1. Break-even = fixed costs ÷ contribution margin per unit
2. Lower fixed costs or increase contribution margin to break even faster
3. Always include ALL costs — missing expenses gives a false break-even
4. Use target profit analysis to set realistic sales goals

Disclaimer: This guide is for informational purposes only and does not constitute financial advice.