Break-Even: How to Calculate When Your Business Starts Making Money
Most owners know their revenue but don't know when they cross break-even. That number changes every pricing and marketing decision.
By Ligal Frish
Break-even is the revenue level where income covers costs exactly. Above it - profitable. Below - losing. Owners who don't know this number make pricing and marketing decisions in the dark.
Break-even formula: monthly fixed costs ÷ (average price per unit - variable cost per unit). Result: how many units to sell to cover costs. In service business, replace units with billable hours or projects. Calculation takes 30 minutes and changes every management decision.
What break-even actually is
The monthly moment where revenue covers all expenses. Before it - the business burns cash. After it - every additional dollar is gross profit.
A business with $9,000 monthly fixed costs and 50% gross margin breaks even at $18,000 in monthly revenue. Up to there - losing. Above - profitable.
Service vs product business
Product: measured in units (how many products to sell).
Service: measured in billable hours or projects per month.
An attorney with $6,000 monthly costs and $150/hour average rate breaks even at 40 billable hours. Below that, working for free.
Common calculation mistakes
3 mistakes we've seen in 60% of businesses we've diagnosed.
1. Forgetting owner salary in fixed costs (even if not actually drawn).
2. Ignoring seasonal expenses (annual insurance, licensing, subscription renewals).
3. Calculating on list price instead of actual average price after discounts.
Mistake 1 is most common and most dangerous - it creates the illusion the business is profitable when it's actually subsidizing itself and the owner.
What to do if you're far from break-even
Three actions in priority order. First: reduce fixed costs (rent, licenses, unused subscriptions, non-productive employees). Second: raise prices in product groups where the market will absorb. Third: improve gross margin (negotiate with suppliers, operational efficiency).
Growing sales isn't always the answer - sometimes it just grows the monthly loss.
Using break-even for pricing
Break-even is the floor. Price must be above it.
Once you know the number, you can price strategically: how many customers needed this year? What conversion rate must marketing deliver? What should close rate be?
A business that doesn't know its break-even prices in the air. One that knows - prices strategically.
Break-even vs cash flow
Break-even is based on profitability - accounting. Cash flow is based on bank balance. A business can be above break-even but cash flow negative (because customers pay in 30 days while vendors collect in 7). Both numbers matter.